European Union growth is expected to remain near potential this year and next but high oil and commodity prices have sharpened downside risks, a document to be discussed by EU finance ministers next week said.
"Real GDP growth for the EU in 2007 reached 2.9 percent and is expected to remain near potential for 2008-2009. Financial turmoil and continued high oil and commodity prices have sharpened downside risks and external imbalances are emerging in some member states," the document obtained by Reuters said. "However, overall world growth remains resilient and the EU is benefiting from improving fundamentals," the document said.
The document is a draft that ministers will discuss next Tuesday as part of their contribution to the March summit of EU leaders, which traditionally focuses on economic matters. "Despite a hump in inflation in recent months largely owing to oil and food price increases, it is important that inflation expectations remain well anchored and broad-based second round effects should be avoided," it added.
The draft said more subdued growth recently in labour productivity suggested a more dynamic improvement in productivity growth remained a key challenge for the 27-nation bloc.
There was a need to sustain reform efforts, and EU states that have not yet reached their medium-term deficit and debt reduction objectives should speed up their attempts, it said. The draft said EU finance ministers were "committed to ensuring full implementation of the stability and growth pact" - EU rules aimed at underpinning the euro and economy.
States that have not reached their medium-term debt and deficit reduction targets should "ensure an improvement of their structural balance of at least the 0.5 percent benchmark a year". The European Commission has identified France and Italy in particular as key economies lagging medium-term targets. French President Nicolas Sarkozy said on Thursday the conditions were in place to allow a return to balanced public finances, although he gave no dates.
There was a need to identify fully the underlying causes of financial turmoil sparked by problems in the US market for mortgages to people with poor credit histories, the draft said.
"Structural reforms and close co-ordination of policies play an essential role in helping economies adjust to and cope with the shocks and pressures that sparked the recent financial turbulence and heightened economic uncertainty," the draft said.
Making the EU's single market work better should be a core priority, the draft said, such as implementing new rules on a single market in services properly.
"Due attention needs to be paid to achieving well-functioning and integrated product and labour markets as well as better managed immigration policies, taking fully into account its costs and benefits for the economy," the draft said.