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Europe's Economy on Upswing, says EU - 2003-10-29

The European Union says what it calls Europe's disappointing economy is starting to pick up, but that unemployment is expected to get worse next year. The EU's executive commission is also warning France and Germany that they risk violating the bloc's budget deficit limits for a fourth straight year in 2005 unless they change policies.

The EU's Stability and Growth Pact requires the 12 members of the bloc that use the euro single currency to keep their public deficits under three percent of gross domestic product.

But France and Germany have flouted those rules for two straight years, announced that they will do so again next year and, according to the European Commission, are on track to do so in 2005.

The Commission's semi-annual report on the euro-zone economy says Portugal, too, is likely to go over the deficit limits next year, and that Italy will do so in 2005.

The French and German governments have argued that the EU's budget rules should be more flexible in hard economic times, when job creation and economic pump-priming should take precedence over belt-tightening.

But the Commission says short-term economic stimulus plans should not come at the expense of long-term structural reforms designed to make the euro-zone more competitive with the United States.

The Commission is taking particular aim at France and, theoretically, could recommend that the French government be fined for breaching the limits. But EU finance ministers have to approve such a move and are not likely to do so.

Looking at the euro-zone economy as a whole, the Commission's report says growth will be no more than 0.4 percent in 2003. When Britain, Denmark and Sweden - the three countries that do not use the euro - are included, that figure rises to 0.8 percent.

The report blames the EU's weak economic performance on uncertainties about the price of oil stemming from the war in Iraq, the decline in stock markets and worries about jobs and pensions.

And even though it says the euro-zone and the EU as a whole should return to average growth next year, thanks in part to encouraging signals from the U.S. and Asian economies, the Commission warns that joblessness will probably increase next year and not improve until 2005.

It also warns that the euro's rise this year against the dollar poses risks for the competitiveness of European goods on world markets.