EU leaders warn on euro, euro zone growth forecast

A woman shows Maltese-designed euro coins in Valletta December 31, 2007.

VALLETTA/ST. JULIAN'S, Malta (Reuters) - The euro zone economy could slow more than previously forecast, a policymaker said on Saturday, as other EU leaders voiced worries about the weak U.S. economy and the strong euro currency.

Speaking on the sidelines of ceremonies to mark Malta's January 1 adoption of the euro, Luxembourg's Prime Minister Jean-Claude Juncker told reporters: "The European Commission is considering we could have (euro zone) growth of 1.8 or 1.9 percent."

The Commission's latest forecast, in November, was for 2.2 percent growth in 2008.

Juncker, who chairs the Eurogroup of euro zone finance ministers, declined to be drawn on the strength of the euro.

Some companies and politicians say the currency's appreciation is making it harder for the region's exporters to compete, adding to the drag on growth from a sharp U.S. economic downturn.

But France's EU affairs minister Jean-Pierre Jouyet told Reuters the euro was rallying too fast, and came close to renewing French criticism of interest rate hikes from the European Central Bank's last year which have increased the attractions of buying the currency.

Despite the rate rises, global food and fuel price increases have pushed euro zone inflation above the ECB's target ceiling, and Jouyet suggested the Eurogroup of EU finance ministers should "see if the (ECB's) inflation target is appropriate in the euro zone".

Although a global credit crisis has persuaded the ECB to keep interest rates on hold at 4 percent since last June, hawkish comments from ECB policymakers have spurred the euro's long-running rally against the dollar, especially since the U.S. Federal Reserve began to cut its benchmark rate in September.

The euro EUR= is not far off record highs it reached against the dollar last year and has hit record highs against sterling EURGBP= since the Bank of England joined the rate cutting cycle in December.

U.S. WORRIES

Jouyet's latest comments mark an adaptation of earlier calls from French President Nicolas Sarkozy to make growth part of the ECB's mandate -- proposals that fell on deaf ears in Europe and met with a particularly strong rebuff from Germany.

However, Jouyet also said he would not comment on the policy of the ECB, which defends its independence from politicians fiercely.

Andrej Bajuk, finance minister of Slovenia which currently holds the rotating presidency of the EU, said euro strength "is a concern to all of us because the exchange rate should reflect the economic fundamentals of different parts of the world."

But he defended the ECB's emphasis on fighting inflation as its 'raison d'etre', while EU Commission President Jose Barroso said the main risks to euro zone growth came less from the strong euro than from the United States.

"I appreciate the euro's strength causes problems and concerns to some sectors," Barroso told a news conference, but added that German export strength showed the euro zone economy remained competitive.

"The euro's strength EUR= reflects ... confidence in the European economy," Barroso said. "Our concern now is more on the crisis situation coming from the United States."

U.S. mortgage defaults have highlighted a collapse in the housing market there, exposing banks to losses on high-risk debt and pushing up borrowing costs for consumers and companies around the world.

Italian Prime Minister Romano Prodi made comments implying he urged against further official rate rises when he met ECB President Jean-Claude Trichet in Malta, despite a surge in energy and food prices that has pushed euro zone inflation above the ECB's 2 percent target ceiling.

"There is great uncertainty. There could even be falls (in prices) but the dominant feeling is the uncertainty of the markets," Prodi said. "In a situation of uncertainty, it is clear that central banks must act with caution to minimize risks."

Trichet, speaking separately, said he had had a fruitful discussion with Prodi, and noted in passing that there were "deep, deep challenges" for the ECB in the year to come, which marks its 10th anniversary.

FX CONCERNS

EU Economic and Monetary Affairs Commissioner Joaquin Almunia warned reporters that the euro's strength needed close attention.

"The present exchange rate of the euro in effective terms is close to historical limits so we need to be very vigilant."

France's Jouyet also said the strength of the euro zone economy was buoying the euro but added: "The problem is the speed of this appreciation, and the fact that the three other major currencies are too weak, the yuan - you know that -- the yen and the dollar."

But Dutch European Affairs Minister Frans Timmermans said the Netherlands was not very concerned about the strength of the euro, and rejected any talk of watering down the ECB's 2 percent inflation target.

"From the Dutch side we will never cooperate in watering down those criteria," he told Reuters.

(Writing by Ruth Pitchford, Editing by Peter Blackburn and Silvia Aloisi)