EU report upbeat on growth, warns on house prices

Eurozone economic growth is gaining pace as domestic demand joins exports as an engine of growth but some countries need to watch soaring house prices, the European Commission said on Monday.
In its quarterly assessment of the economy in the 12 nations using the euro, the EU executive kept its 2006 growth forecast of 1.9 percent, compared with an estimated 1.3 percent in 2005, saying private investment and consumption should strengthen.
"Exports remain positive and, more importantly, domestic demand is expected to strengthen further pointing to a recovery of private investment and a revival of private consumption," the Commission said in a statement.
High oil prices, current account imbalances, a sudden depreciation of the US dollar and possible geopolitical shocks pose threats to the outlook, it said.
The Commission also said monetary conditions had remained accommodative in recent months despite the European Central Bank's interest rate rises, most recently to 2.5 percent in March.
"The impact of the exchange rate depreciation and the increase in short-term interest rates have cancelled each other out," the report said,
It urged eurozone governments to stimulate growth by boosting employment through reforms that helped innovation rather than by raising wages under pressure from trade unions and others.
"A policy of artificial wage rises may lower private consumption due to its negative effects on employment," it said. The Commission, focusing its report on house prices and household indebtedness, said some countries should monitor the situation in the real estate market closely, although no overall concern existed for the eurozone.
Spain, France and Ireland have recorded the strongest increases in house prices while Belgium and Finland have experienced more modest price developments and Germany, Austria and, to a lesser extent, Portugal saw falls.
"An early policy response to an emerging housing market boom is the best approach as it averts a build-up of risks," the Commission's Director-General for Economic and Financial Affairs Klaus Regling wrote in a note accompanying the report.
Governments should keep on reminding private sector agents of housing market risks, potential buyers should be warned of possible overvaluation of the market and mortgage providers encouraged to be prudent, he said. "Fiscal policy should, as far as possible be neutral towards the housing market. All policy incentives to purchase housing... should be progressively withdrawn," he said.