BRIGHT FUTURE WITH CERTAIN RISKS

    The positive mood is set to spread over the next two years. Looking ahead, economic activity in the euro zone is projected to moderate to 2.1 percent growth in 2007 and 2.2 percent in 2008.

    The economic sentiment indicator (ESI), based on business and consumer surveys, leapt from 109.3 in September to 110.3 in October, the highest level since February 2001. This shows that manufacturers and consumers are both positive about the economy.

    However, economists fear the euro-zone economy may hit turbulence in 2007 as the German value-added tax hike hits growth,

    the effects of higher interest rates feed through and further oil price hikes can not be ruled out.

    The impact of the U.S. slowdown also remains uncertain. A more marked slowdown in the United States may have a negative impact on

    the euro-zone growth, which could be seen from the recent rise of the euro against the dollar.

    With the euro hitting a 20-month high against weakening dollar earlier this month, many euro-zone countries are worrying a stronger euro will hurt their exports. It is concluded from experience that a 10 percent appreciation of the euro, on a trade-weighted basis, knocks roughly a percentage point off growth in the following year.