Caution not panic on inflation

Ecofin stays cool, but rising oil and raw materials prices send Greek industrial costs up sharply in December

France’s Minister of Finance Christine Lagarde with Greek counterpart Giorgos Alogoskoufis in Brussels yesterday.

European Union finance ministers meeting in Brussels yesterday expressed certainty that the current economic blues will not lead to a recession but also reiterated the need for vigilance against inflation.

Concurring, Commission President Jose Manuel Barroso, who took part in the Ecofin meeting, said the real danger would be the adoption of measures (against inflation) in a state of panic, without this meaning that vigilance was not required.

Inflation, which was the main topic of the meeting, remains somewhat threatening but is expected to start receding later in the year, along with the anticipated slowdown in the economies of member states.

Greece’s Giorgos Alogoskoufis said the threat of inflation, which is fed by rising oil and raw materials prices, had to be tackled resolutely in all its aspects, particularly in the marketplace and the labor markets (to prevent the so-called spiral of wage and price rises), but also as regards indirect taxes.

France demanded and was tacitly granted the right to a two-year extension of the period for achieving a balanced budget, which all member states have pledged to do by 2010, but only on condition of a serious economic slowdown. Nevertheless, German Finance Minister Peer Steinbrueck hastened to emphasize that all members of the eurozone, including France, continue to be bound by the agreement for 2010, but acknowledged that the vow applies on the condition the European economy faces no serious problems.

No minister appeared to expect any serious problem but, as Alogoskoufis said, any forecast is risky.

Regarding Greece, the Commission’s report due next week on the country’s updated Stability and Growth Pact is expected to be one of the most positive in recent years.

The report on France, by contrast, argues that serious efforts are required for the consolidation of public finances.

Separately, Greece’s National Statistics Service (NSS) yesterday released data showing that the country’s economy continues to remain under strong imported inflationary pressures.

In December, the industry’s import price index was up 8.4 percent year-on-year, against just 0.2 percent a year earlier. The average for 2007 was 3 percent, against an overall inflation average of 2.9 percent.

In December, crude oil and natural gas prices were up 32.9 percent and those of other petroleum fuels 21.1 percent. Meat and dairy product prices rose 7.6 percent. Price rises are expected to continue as oil remains above $90 a barrel. In January, inflation remained at 3.9 percent for the third month and is not expected to recede before the second half of the year.

Alogoskoufis has urged employers and unions to show restraint in their collective pay pact negotiations. According to sources, the government will announce at the end of the month its incomes policy for 2008, with pay raises of around 3 percent, slightly above the projected rate of inflation.