The euro currency's surge this year is alarming, Europe's employers said on Thursday, but they endorsed the European Central Bank's interest rate policy that fuelled it as key to bringing inflation under control.
"Current inflation rates are a major concern to European companies," BusinessEurope, which represents some 20 million companies, said in a twice-yearly report on the economy. Inflation hit a record high of 3.6 percent in annual terms in March, well above the ECB's price stability target of just below 2 percent.
"It is essential that inflation returns to levels consistent with price stability, allowing the ECB and other European central banks to address downside risks to growth in a timely manner," BusinessEurope said.
It forecast that inflation in the 15 countries using the euro would be 2.6 percent this year, up from 2.1 percent in 2007, but would decelerate to 2.2 percent next year. Economic growth in the eurozone would slow to 1.7 percent this year from 2.6 percent in 2007 but accelerate to 1.8 percent next year, it forecast.
"Despite the numerous headwinds, BusinessEurope so far remains cautiously optimistic and sees no risk of a recession on this side of the Atlantic," it said in a statement. It said the resilience of the European economy had been bolstered by relatively strong growth over the last two years, labour markets had improved and companies' balance sheets were sound despite an expected fall in profits.
Furthermore, demand for European exports was fuelled by emerging and oil-producing economies, compensating for a decline in demand from developed countries. BusinessEurope said the strong euro also helped limit the negative impact of expensive oil and commodities, which are priced in dollars, but said the exchange rate was a big concern for businesses. "The strong euro is alarming and in particular the speed of its appreciation since the start of 2008 is a key concern for European companies," it said.
The euro has been appreciating fast, reaching a record high against the dollar above $1.6 on Tuesday, because markets expect the interest rate differential between the eurozone and the quickly slowing United States economy to widen further.
Even though the eurozone economy is seen slowing too, the ECB is unwilling to cut rates because of high inflation. "In the context of persistently high inflation rates and rising consumer inflation perceptions, the business community understands the ECB's hesitation to reduce interest rates," BusinessEurope said.
"Yet, a majority of member federations consider that in current circumstances the ECB should not lose sight of important downside risks to growth and exchange-rate developments," it said.
Companies, representing two thirds of euro zone gross domestic product, considered ECB policy to be tight, it said. "It is therefore all the more important that the ECB and other European central banks regain room to manoeuvre in coming months. This calls for a rapid containment of inflationary pressures and in particular for great caution in upcoming wage settlements."
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