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Upswing in Europe

The 12 countries that share a common currency, the euro, in the European Union (comprising 25 states) are in the midst of an economic upswing, and the 0.9 per cent GDP growth for the second quarter ended June — the strongest output in six years, surpassing the United States and Japan — is already being seen as the peak in the current cycle of growth. The European Central Bank, which recently announced its fourth upward revision in interest rates (now at three per cent) since December 2005 to head off inflationary pressures, compounded by rising prices of oil, may feel vindicated in its decision against the backdrop of earlier criticism that it was aiming for monetary tightening despite the evident risk of stalling a fragile recovery. Underlying the overall acceleration in the eurozone economies is a progressive rise in household and business borrowing in the bloc's biggest economies, Germany and France, and the relative success of structural and labour market reforms in states such as Spain and the Netherlands. However, there are fears that the current economic revival may be halted, with Chancellor Angela Merkel's grand coalition comprising her Christian Democratic Union and the Social Democrat Party set to implement a 3 per cent increase in Value Added Tax from 2007. Conversely in France, where manufacturing has gathered momentum in recent months, sweeping reforms are not likely to be high on the agenda of Jacques Chirac's centre-right coalition.

Given the large dependence of the eurozone economies on the access to overseas markets for their technological goods and services, there is bound to be an enormous stress on achieving competitiveness in terms of costs. But a strong and comprehensive component of social protection that is built into their public policies, especially in the major industrial states, could pose a challenge to the implementation of structural reforms that are consistent with their current stage of economic development. The prospects for long-term growth are thus predicated upon the capacity of the political leadership to balance these competing priorities.

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