Commission insists euro will get stronger

Date: 06/05/1999

By Tim Jones

TENTATIVE signs that pessimism is bottoming out in manufacturing industry, tight control of public finances, and low inflation should combine to reinvigorate the euro on the world currency markets, according to European Commission economists.

An analysis being prepared for a meeting of Euro-11 finance ministers next Monday (10 May) will support Economics Commissioner Yves-Thibault de Silguy's claim that there is no fundamental reason for the euro to be weak.

De Silguy was one of six EU policy-makers who spoke out in support of a stronger euro last week, in response to a fall in the exchange rate below $1.06 - 10% below the high the new currency reached in the first week of January.

At next week's Euro-11 meeting, the Commissioner will point out that the fall in the euro reflects market sentiment in favour of the dollar after eight years of consecutive economic expansion in the US. Last week, it was revealed that US gross domestic product had grown by 4.5% in the first three months of the year; the ninth time in the past ten quarters that growth has exceeded 3%.

By contrast, the level of euro-zone growth is expected to stabilise this year and next at close to 2%, while interest rates on overnight deposits stand at 4.8% for dollars and just 2.5% for euro.

" It is hardly surprising that the dollar is strong when you look at this background," said an official. "Nevertheless, the fundamentals for the euro area are exceptionally good and that will eventually be felt."

Inflation remains low, with minimal risk of a significant acceleration of price rises. The euro zone's harmonised index of consumer prices (HICP) was just 1.0% in the year to March, and the Commission sees little risk of a challenge to the European Central Bank's annual 0-2% limit even if the current upward trend in oil prices continues.

Although the ECB and the Commission are concerned about recent pay settlements in Germany, the general outlook for euro-zone wages remains subdued. Moreover, with industry still using only 82.8% of

its capacity and corporate profitability at record highs, there is little risk that inflation-plus wage hikes will translate into across-the-board price rises.

Although De Silguy and ECB Vice-President Christian Noyer will restate their mantra that governments should be more aggressive in cutting public spending, the Commission acknowledges that budget deficits are likely to be kept close to their 1999 targets despite economic slowdown.

The main cloud on the Commission's horizon remains the gloom in the German and Italian manufacturing sector, which started to spread into Spain and France in February, largely because of lost export markets in Asia, Latin America and Russia.

However, the Commission agrees with the International Monetary Fund that the worst of the emerging markets crisis is over.