Section III. Prospects for the Euro Area

In this section we initially discuss developments in Europe as a whole, and present a forecast for the Euro Area for the first time in Table 10. With inflation subdued in the Euro Area, there is a case for potential further reductions in interest rates in the short term, and we investigate the potential effects from such a monetary relaxation in Box A. This allows us to say something about potential asymmetric national reactions to a given monetary policy change, and also about the effects of faster growth on fiscal positions. There had been fears that the birth of the Euro would be accompanied by some loosening of the fiscal stance, but there does not appear to be much risk of this at present. We also discuss fiscal prospects in the EU, and highlight key developments in each country.