Eurozone economy gathering pace

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The eurozone economy is now expanding at its fastest rate since the turn of the century, according to the latest figures from the European Commission.

Raising its forecast, the Commission now expects that economic growth across the 12 nations that share the euro will grow by an average 2.6% in 2006.

Revised up from its previous estimate of 2.5%, it is a marked improvement on the 1.4% growth seen in 2005.

The economic expansion is helping states reduce their public deficits.

'Growth continuing'

Brussels said it was increasing its eurozone growth predictions after a surprisingly strong economic performance in the first half of the year.

After growing 2.6% this year, it expects eurozone economic growth to continue next year, only at the slower pace of 2.1%.

For the 25-nation European Union region as a whole, it expects growth to be 2.8% this year and 2.4% in 2007.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said the good figures brought to an end "years of disappointing results".

Brussels' latest half-yearly economic forecast predicts that Germany and France will see their budget deficits shrink to below the eurozone ceiling of 3% of GDP in 2006.

This repeats comments made by Mr Almunia last month.

The Commission's latest report says that the German deficit will fall to 2.3% this year, 1.6% in 2007 and 1.2% in 2008; while France will drop to 2.7% this year, 2.6% in 2007 and 1.2% the year after.

Falling inflation

The 3% rule was designed to ensure the euro is not undermined by overspending states.

Yet as eurozone economic growth has struggled in recent years, a number of member state governments have found it difficult to control the gap between their revenues and expenditure.

It is only this year, with economies again growing strongly, that nations have been able to get their deficits in order.

The Commission added that while Italy should manage to reduce its deficit from 4.7% this year to 2.9% in 2007, it could rise again in 2008 unless the Italian government takes extra measures.

Yet the report added that Portugal was expected to be the most persistent budget offender, with its deficit rising to 4.6% this year, 4% next year and 3.9% in 2008.

As for eurozone inflation, the Commission sees it standing at 2.2% this year, before easing to 2.1% in 2007 - both just above Brussels' 2% target.