The European Commission said on Wednesday that economic recovery in the eurozone was "still in its infancy" and could be jeopardised by higher oil prices - considerations that could make the European Central Bank less likely to increase interest rates.

In its first quarterly report on the economy of the 12 single-currency countries, Brussels said that, although the last quarter of 2001 saw the first fall in seasonally-adjusted gross domestic product for nine years, "recent data releases point to a nascent recovery of economic activity" in the manufacturing sector as well as in services.

But it added that consumer confidence had yet to really recover from the trough it reached in November - in contrast to a rebound in the US. This means that the eurozone is likely to recover only gradually in the fist half of this year. Nevertheless, Brussels is worried about the sustainability of US consumer expenditure because of the high levels of debt of many US households.

"If [US] private consumption becomes unsustainable and declines, a W-shaped scenario, in which an initial recovery is followed by a renewed slowdown, cannot be excluded," said Pedro Solbes, Europe's economic and monetary affairs commisisoner. He added that "the rather positive outlook for the euro-area economy may [also] be more clouded" if political risks drove up oil prices.

Mr Solbes also argued that the introduction of euro notes and coins can now be expected to lead to downward pressure on consumer prices, reinforcing the effects of ongoing structural economic reforms.

While noting wage demands increasingly take account of the 2 per cent European Central Bank price stability objective, Mr Solbes warned high wage demands could jeopardise price stability and job creation in some member states and must be reined in.

In another sign of the current improvement in sentiment in the eurozone, French industrial confidence improved for the second consecutive month in March, according to Insee, the official French statistics institute.

Earlier this week, Germany's March Ifo index - the key marker of Germany's business confidence - finally climbed back above the lows of last September.

Insee's index of French industrial sentiment in March moved to 95 from 93 in February. The index touched a low point of 89 in November.

The survey revealed moderate rises in industrial production and, more importantly, that individual business people saw prospects in manufacturing improving over the next three months. However, overall order books remained weak and the level of stocks was stable.

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