EU Leaders Worried by Inflation, See No Quick Fix

Surging food and fuel prices are a key concern of European Union citizens, but EU leaders must be honest that there are no quick fixes to the problem, European Commission President Jose Manuel Barroso said.


"The issue of the rising food and oil maybe the most important concern now for our citizens in Europe. They expect answers on the rising food and oil prices," Barroso told a news conference after initial discussions of EU leaders.

Inflation in the 15 countries using the euro jumped to a record high of 3.7 percent year-on-year in May, driven by food and energy costs. This is well above the target of the European Central Bank which wants to keep it just below 2 percent.

The rise in the cost of living and doing business has sparked protests from farmers, truckers, taxi drivers and fishermen across the 27-nation bloc, pressuring politicians.

Barroso said that while in the short-term governments were free to cushion the impact of expensive oil on the poorest via excise tax cuts or special taxes on oil firms, there was no escaping major changes in energy use in Europe and globally.

The heads of state and government of the 27-nation bloc will continue discussions of the record high food and oil prices later on Friday, Barroso said, but some conclusions already emerged after the first day of talks.

"We concluded, those are provisional conclusions, that these are short-term measures, that they do not replace the need for a change of paradigm of energy consumption in Europe and in the world and basically what is important is to be less dependent on oil and fossil fuels," he said.

"So there will not be a quick fix, there will not be a magic solution. We have to be honest and objective with our citizens," Barroso said. He noted that while the EU was ready to participate in a global push to curb price rises, it could not solve the problem alone.

Governments are Concerned

The chairman of the euro zone's finance ministers Jean- Claude Juncker said on Thursday that governments as well as the European Central Bank must equally fight high inflation.

"Inflation is a serious problem not only for the ECB but for all the governments and all the governments must fight it," Juncker said.

The ECB has said it may raise interest rates on July 3 by a small amount from the current 4.0 percent to anchor inflation expectations as it believes prices will stay higher for longer than previously thought.

"We trust the ECB as much as ever," Austrian Finance Minister Wilhelm Molterer told reporters. "The ECB is a wise and independent body and it is conducting the right policy."

Despite their concern with rising prices, EU leaders will take no broad steps to cushion their impact because they believe that doing so would artificially uphold demand, draft conclusions of the meeting obtained by Reuters showed.

Over the last 12 months oil prices have almost doubled to $136 per barrel.

After protests in France, President Nicolas Sarkozy proposed to cap sales tax on fuel in the EU if oil prices continued to rise -- an idea that failed to gain wide support in the bloc.

Italy's government on Wednesday approved a rise in tax on oil company profits to 33 from 27 percent with the intention of spending the extra cash to help poor families buy food and fuel.

Another initiative came from Austrian Chancellor Alfred Gusenbauer, who was seeking support for the idea of a tax on speculation on commodity markets, which he blamed partially for surging consumer prices.

"We will not accept that our consumers are paying for the speculators all around the world," he said. EU leaders are expected to welcome the European Commission's plan to monitor food prices for signs of speculation.

The oil price increases, driven by rapidly rising demand from the fast-developing economies of India and China, also boost food prices as production and transport costs rise.

Prices of many staples have doubled in the last two years and economists forecast they will stay high for the next decade.

The main drivers of higher food prices are demand from China and India as well as the use of grains for bio fuel production and weaker harvests.