Is the European Commission Too Optimistic?

The European Commission has said that the nations in the European Union will continue to flourish in 2006, as people continue to spend.

 “The recovery in the euro area is gaining momentum,” Klaus Regling, head of the commission’s economics department, said. “We are more optimistic about the outlook for growth.”

 Personally, I think this outlook is a little too optimistic, ignoring many of the current problems some EU nations are experiencing.

 Last month, the Commission reported that growth will increase to 1.9 percent, up by 0.6 from 1.3 in 2005. This might be revised based on new reports, according to Regling. A new model that the Commission is using is made up of timelier data and leads to more favorable results than the older model.

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 “There are now signs that domestic demand is at last strengthening with a marked recovery in business confidence contributing to a strong acceleration in investment growth,” the report noted.

 It is anticipated that Germany’s economy will also grow quickly, as confidence improves in that country. I don’t know what this report’s sources are, but last I heard, the confidence in Germany, especially among the leaders themselves, has almost never been lower.

 These new findings have also resulted in an increase in the European Central Bank’s benchmark interest rate to 2.25%.

 The cost of oil, however, is a definite damper on the economy. Higher fuel costs could see price increases in other areas as well, such as goods and services, not to mention home heating bills.

 I think it’s a little premature for the European Commission to conclude that a “recovery… is gaining momentum.” Unemployment, high oil prices, cuts in aid, and low consumer confidence all stand in the way of a recovery really gaining ground.

 If you speak to the consumers in Europe, I think they’d tell a different story than the talking heads. The EU isn’t out of hot water just yet.