An official is quoted as saying that right now, it would take a "major earthquake" to stop the ECB's next rate hike, while a senior Eurozone political official who meets regularly with the ECB said a June hike looks likely, bar a foreign exchange shock. - - Trichet signals rise in ECB's key interest rate to 4% in June.

So far the understanding from the ECB was that it would raise rates one more time, and the signals suggested June," this official was quoted by Market News as saying. "But if the euro keeps rising, they would probably wait."

Last week the euro reached a new record high against the U.S. dollar of $1.3683 and it has risen 5 per cent against the dollar in the past three months. The euro is trading at $1.3665 Thursday afternoon. 

Another unnamed senior official was quoted as saying that the recent rise of the euro had reduced the prospect for further rate increases beyond the summer. "Market expectations for a June hike could be correct. But if the European currency strengthens, then reasons for further rate increases would be diminished," the source said.

More budgetary consolidation and structural reforms

The robust growth performance last year, combined with the consolidation efforts of Member States, particularly those with excessive deficits, led to a greater than expected fall in the Eurozone's budget deficit. The average deficit was 1.6% of GDP in 2006, down from 2.5% in 2005.

The Commission said it welcomes the recent agreement by the Eurogroup finance ministers to build on the better-than-expected budgetary outcomes in 2006 by pursuing more ambitious budgetary targets than those set in the Stability Programmes. Eurogroup ministers have committed to avoid expenditure overruns and use unexpected revenues to reduce government deficit and debt. They also agreed to carefully design fiscal policy plans for 2008 so as to accelerate adjustment towards their medium-term budgetary objectives,^[1] for those that have not reached yet them, and for those which have reached them to avoid fuelling macroeconomic imbalances. By honouring these commitments, most Eurozone members that have not yet reached their medium-term budgetary objectives would do so by 2008 and 2009 and all members should aim to do so by the end of the decade.

The Commission said that there are growing signs that reforms by Eurozone members are bearing fruit. The employment effect of recent growth has been particularly intense. In December 2006, the unemployment rate dropped to 7.5%, its lowest level in 15 years. These signs of progress notwithstanding, there is a need for further structural reforms to raise the area's growth potential and ensure the smooth functioning of EMU. Raising the growth potential is important in view of the challenge posed by an ageing population in Europe.

"In the next half-century, we will have only two persons of working age for every senior citizen. If the current trends and policies continue, potential growth in the Eurozone will be reduced from above 2% in the period up to 2010 to around 1% on average over the period 2031-2050," the Commission said.

There is increasing awareness that being a member of the Eurozone means confronting common challenges and responsibilities. At this year's Spring European Council, EU leaders endorsed a new set of Eurozone specific recommendations in the context of the renewed Lisbon Strategy. The recommendations emphasise the need for prudent fiscal policies, improvements in the quality of public finances and greater adaptability in the markets for goods and services. They also call for a better alignment of wage and productivity developments and an accelerated pace of financial-market integration. Progress in all these areas is essential to improve the functioning of EMU and the smooth adjustment of the Eurozone as a whole and of individual Member States to economic shocks and trends.

Eurozone enlargement

On the 1^st of January, Slovenia became of the 13^th member of the Eurozone and the first of the 10 countries that joined the European Union in 2004 to adopt the euro. In February, Cyprus and Malta asked the Commission to carry out an assessment on their readiness to join the Eurozone in 2008. Slovakia wants to adopt the euro in 2009. Regardless of when Member States plan to adopt the euro, policy makers should maintain macroeconomic stability while sustaining the growth necessary to increase living standards. Pursuing policies in line with the economic framework of the Maastricht Treaty and the Lisbon guidelines will allow Member States to adopt the euro and to prosper in the longer run within the Eurozone.

Showing leadership on global issues

The European Commission said that the euro now accounts for a substantial share of foreign-exchange transactions and acts as a reference currency in the managed exchange rate regimes of about 50 countries. The share of the euro in the gross issuance of short-term international debt securities also reached 38.3% in the third quarter of 2006, thereby surpassing the share of the US dollar.

As the euro's global weight grows so too must its role in global economic governance. Eurozone representatives have actively participated in the IMF's multilateral consultation process on global imbalance, along with those from the USA, China, Saudi Arabia and Japan. This process of consultation on global imbalances has delivered positive outcomes and there is a now a broad consensus among policy makers on the policy agenda required to tackle the problem of global imbalances. The priority now is for the relevant actors to implement the agreed policy agenda in a timely manner in line with the IMF's multilateral and bilateral consultations.

Full Annual Statement on Eurozone document available here.

^[1] Medium-term budgetary targets for Eurozone members and for those in ERM2 range between – 1% of GDP and balance or surplus, in cyclically adjusted terms, net of one-off and temporary measures. Most Member States aim for a position of balance.