ECONOMY

Garganas says we’ll have to learn to live with higher oil prices

European Central Bank Governing Council member Nicholas Garganas believes eurozone economic growth in 2005 will be nearer the lower end of the ECB’s forecast range after this year’s spike in oil prices, Market News International reported yesterday. Garganas also said higher oil prices did not necessarily mean higher inflation. The ECB had no new inflation forecast but remained vigilant as a great deal of uncertainty surrounded the outlook. «It is likely that growth will be in the lower part of the range than in the higher part of the range,» Garganas, who is also Bank of Greece governor, told MNI in an interview in Athens. MNI said he was referring to the latest ECB staff forecasts published in September, which projected 2005 eurozone growth in a range of 1.8 to 2.8 percent, with a mid-point of 2.3 percent. «It would be nearer the lower part of the range than nearer the upper part of the range,» Garganas said. «The downside risks have increased since higher oil prices could lower foreign demand for euro area products as well as reduce purchasing power at home.» In the interview, Garganas also spoke about eurozone inflation prospects, the future of the dollar and Greece’s hopes of bringing its budget deficit under control. Impact on inflation uncertain He suggested the world would need to live with higher oil prices and their fallout for the foreseeable future. Garganas said higher oil prices did not necessarily mean higher inflation because of compensating factors such as food prices and labor costs. «We have no new forecast (on inflation) but we are vigilant, we are following developments, we are watching the situation,» he said. «This statement (of an unchanged inflation forecast for 2005) holds for today (but) I don’t know what could happen tomorrow because there is a great deal of uncertainty.» Garganas listed an uncertain geopolitical situation – he said prospects of improvement were «limited» – and the US presidential election as among reasons driving up oil prices. Other factors were uncertainty about oil supply from key producers such as Russia, Nigeria and Venezuela as well as the growth of Asian economies which needed more oil. Garganas also said he did not see the recent fall in the dollar as a trend. «It’s very difficult to make predictions but so far we have seen no evidence of the likelihood of a hard landing for the dollar, we have seen a smooth depreciation,» he said. In the MNI interview, Garganas said he believed the Greek government’s aim to bring its budget deficit back below 3 percent of GDP next year was «feasible.» Speaking ahead of the publication of a Eurostat report into whether Greece actually met the conditions to join the euro before its entry in 2001, Garganas said the EU decision to allow Greece into EMU was right. «What should be emphasized is that Greece’s meeting of the Maastricht Treaty criterion for budget deficits at its time of entry is not in doubt and hence the episode has not, I think, reduced the credibility of the mechanism for euro area entry,» Garganas said.