A number of unusually large uncertainties cloud the prospects for the global economic outlook. The geopolitical situation in the Middle East is exacerbating the weaknesses in the major economies that have been exposed by the rapid deceleration in global economic growth. In the current economic and political climate, it is of crucial importance that the confidence of all actors is restored. Policymaking should therefore be both credible and consistent with medium term priorities, and international co-operation should be promoted.

The euro area remains free of large macro-economic imbalances, although unemployment is at unacceptably high levels. Growth momentum faded in the second half of 2002, with economic growth at 0.9% last year. Slower job creation, the equity market slump, weak confidence and slow growth in international trade weighed on output growth. Global uncertainty and concerns about corporate balance sheets have also constrained demand and restrained investment. The Commission's spring forecast assumes that geopolitical tensions will abate in the second half of 2003, leading to lower oil prices, an end to the stock market slump and a return of confidence. Average euro area growth should be 1% this year, with a gradual recovery expected during the year, bringing the average growth rate to about 2¼% in 2004. Headline inflation in the euro area is expected to remain just above 2% in 2003, only falling to below 2% in 2004.

While there is uncertainty surrounding future economic developments, fiscal policy should not add to that uncertainty. The Stability and Growth Pact provides a robust and flexible framework within which any additional strains on public finances should be addressed. Budgetary policies continue to aim at achieving and maintaining budgetary positions close to balance or in surplus in the medium term, while letting automatic stabilisers work freely over the cycle. Member States that have not yet reached the medium term budgetary objective should pursue an annual improvement of the cyclically adjusted budget balance. This allows for a continuation of the adjustment, while taking account of the impact of the economic cycle.

The European Union continues to make progress with its structural reform strategy. Five million new jobs have been created since 1999, with around 500,000 jobs added last year. More determined action is, however, needed on the structural front. EU Heads of State and Government recently agreed to intensity their efforts to push the Lisbon reform agenda forward by giving priority to four actions: raising employment and social cohesion; stimulating innovation and entrepreneurship; strengthening the Internal Market, especially in services and in financial markets; and increasing environmental protection. The EU has also recognised the case for stronger economic policy co-ordination and is streamlining its internal surveillance mechanisms.

Successive European Councils have affirmed the political commitment to an integrated EU financial market and further progress has been made towards this objective. Implementation of the Financial Services Action Plan (FSAP), the blueprint for an integrated EU financial sector, is already underway. Adoption of the "Lamfalussy framework" for all financial sectors will further facilitate implementation of the FSAP, by ensuring more flexible and consistent regulation, and by providing a framework for achieving greater convergence in supervisory practices. The FSAP is to be fully implemented by 2005.

Even before the recent wave of corporate scandals, the FSAP had identified a number of corporate governance issues, such as the need for common accounting standards and for tackling insider trading and market abuse. Responding to the more recent scandals, the Commission will issue Communications on fundamental questions of corporate governance and audits in May 2003.

The recovery in the United States has been losing momentum lately. Recent economic indicators have been disappointing, including the data on consumer confidence, retail sales, durable goods orders, manufacturing activity and the labour market. It is not yet clear to what extent the slowdown in the recovery process over the past six months has been due to heightened geopolitical uncertainties. It is a concern that the slowdown to a large extent reflects fundamental economic adjustments. The household saving rate is still relatively low. The considerable amount of unused capacity in the economy and the growing US trade deficit are causes for concern. Hopefully, the supportive macroeconomic policy in combination with strong underlying productivity growth will soon be able to consolidate the recovery.

The large and growing deficits in the current account and in the federal budget give rise to concern. A current account deficit which has surpassed 5% of GDP and continues to grow is unlikely to be sustainable in the longer term. The fiscal deficit of general government has surpassed 3% of GDP and is rising rapidly, raising questions about the sustainability of the present path of public finances. The priority of macroeconomic policy should be to strike a balance between supporting the recovery and steering towards a reduction of the internal and external imbalances in the medium term.

Japan needs to press ahead with structural reform, with the most urgent task to end the current deflation. Since problems in the Japanese economy are interrelated, concerted policy actions are called for. An acceleration of restructuring is required in both the corporate and banking sectors. In the corporate sector, balance sheets should be consolidated and nonviable companies closed down. In the banking sector, disposal of the large stock of non-performing loans is necessary. Since these processes take time, monetary policy is required to intensify efforts to address the deflation. The rapidly expanding public debt must be reigned in, and government finances put onto a sustainable path. The demographic situation exacerbates the need for these measures.

EU enlargement has entered into a final stage. Accession negotiations have been concluded with ten countries, with the signing of the Accession Treaty scheduled to take place on April 16 2003. Bulgaria and Romania are expected to enter the EU by 2007 and the EU will commence negotiations with Turkey, once the political criteria for accession have been fulfilled. Enlargement will change the political institutions, the geographical size and the economic weight of the Union. It will change the shape of EU relations with countries on the new external border. The Commission has recently launched the Wider Europe initiative to strengthen relations with neighbours in the East (Russia and Western Newly Independent States) and South (Mediterranean Partner countries). The neighbouring countries would be offered a stake in the internal market, ultimately enjoying a status resembling that of the European Economic Area. This new framework would enhance and strengthen the relations with those countries.

After a sharp recession in 2001, the Turkish economy performed relatively favourably in 2002, with strong growth, falling inflation and a balanced current account. Besides the pursuit of sound macro-economic policies, a coherent and credible long-term policy orientation is needed for tackling underlying structural problems, including financial sector reform. The perspective of ultimate accession to the EU will provide an anchor for stabilisation and reform efforts.

The EU continues to support the process of stabilisation, transition and democratisation in the Western Balkans. The recent tragic assassination of PM Djindjic in Serbia reminds us that a number of these countries continue to face internal political tensions. However, this will reverse neither the authorities' commitment to reforms, nor the EU's strong support for these candidate countries. The EC is supporting the Western Balkan countries with reconstruction and technical assistance, and is providing macro-financial assistance, generally in the context of IMF programmes.

Despite the weakened global environment, economic growth in Russia has been satisfactory, thanks notably to high energy prices. Despite progress on the economic reform programme at the legislative level, the investment climate has not improved sufficiently for long-term development. The Commission is supportive of the government's policy orientation, a rapid Russian accession to the WTO, and closer integration with the EU in the Common European Economic Space.

Latin America is slowly recovering from its worst economic performance since the debt crisis of the eighties. The Commission welcomes the policies announced by the new administration in Brazil, which should contribute to re-building confidence. Both Argentina and Venezuela need to implement a comprehensive programme which tackles the key structural problems, and should also advance their negotiations with private creditors.

EC development policy aims to foster sustainable development, eradicating poverty in developing countries, and integrating them into the world economy. The EC and EU member states together provide about a half of world aid, with the EC alone providing 10 percent of world aid. The Commission is monitoring the EU increases in official development assistance (ODA) announced at Monterrey, with concrete results already visible in 2003. The EU is also working towards achieving the Millennium Development Goals, with important examples in the Water and Energy initiatives.

The EU is committed to the PRSP approach, believing that enhanced country ownership of policies and focusing on results are crucial to its success. The EC has also supported the HIPC Initiative, pledging about €1.3 billion in addition to contributions from individual EU Member States. €946 million has already been disbursed. The EC is examining how it could contribute its fair share in filling the identified financing gap of the HIPC Trust Fund. The issue of debt sustainability after HIPC relief is crucial and the EC is committed to covering, on a fair burden-sharing basis, the potential cost of topping-up, both as a creditor and as a donor to the Trust Fund.

The Commission supports the IMF and World Bank work on strengthening the voice of developing countries, through the exploration of various avenues, including increasing the size of delegations of the largest multi-country constituencies, increasing basic votes, and devoting more time to issues affecting low-income countries.

The EC continues to play a leading role in the WTO Doha Development Agenda negotiations. Further trade liberalisation and improved multilateral trade rules would boost global growth prospects and improve the economic situation in developing countries. The IMF membership should continue to support a timely and successful conclusion to the Doha Round. Firm political commitments to the objectives of the Doha Round will help to ensure that temporary negotiating setbacks do not detract from overall progress. The EC is committed to supporting developing countries' efforts to integrate into the trading system. The EC is delivering improved trade-related technical assistance, and is seeking to broker a compromise solution on developing countries' access to essential medicines. The Everything But Arms initiative for LDCs, agreed in 2001, means that LDCs have tariff and quota-free access to the EU market.

All sources of financial abuse must be tackled to guarantee a fair and efficient international economic system. Close international cooperation among supervisory, judicial, tax and policy authorities is necessary to close loopholes and enhance incentives for compliance with internationally agreed codes and standards. Combating the financing of terrorism is particularly challenging. EU measures freezing the funds and assets of terrorists have been in place since March 2001, with direct legal effect across all EU Member States. The Commission supports third countries, including accession candidates, in their efforts to put in place and strengthen the necessary administrative and judiciary capacities, and welcomes the progress made by the Fund and the Bank through enhanced assessments and the provision of technical assistance as well as in terms of coordination with the FATF and the UN.

Surveillance is central to the Fund's role in promoting sound economic policies and financial stability and in helping prevent crises. Progress has been made in broadening the coverage of surveillance, with initiatives including financial sector surveillance and standards and codes. However, further efforts are needed to enhance effectiveness.

The European Commission strongly supports the ongoing efforts to develop a more orderly and predictable crisis resolution framework. Progress has been made on access policy, with the IMF Board agreement to strengthen criteria and procedures for exceptional access to IMF resources. But the agreement must swiftly be made operational. The SDRM could make an essential contribution to the crisis resolution framework, and the IMF should therefore continue with its work to develop the mechanism. There has been good progress on Collective Action Clauses (CACs), with the publication of the G10 model CACs, and the Mexican decision to include CACs in a recent bond issue. The Commission intends to follow EU Member States' decision to lead by example on CACs, by incorporating CACs into the Communities' international bonds. The Commission believes that the proposal for a Code of Good Conduct on sovereign debt re-negotiation should be seen as supportive of CACs and the SDRM, and not as an alternative.

The build-up to the war in Iraq has caused significant tensions in the international political system. The IMF membership must be ready to guard against international political differences undermining support for multilateral economic approaches. Indeed, economic policymakers should seek to provide leadership by emphasising and demonstrating the value and effectiveness of multilateral approaches in their areas of competence. In this context, work towards the objectives of the Doha Development Agenda, in addition to the ongoing work of the multilateral institutions and fora, such as the Bretton Woods institutions, deserve the full support of the international community.