Euro rise unnerves business

24th November 2003, Comments 0 comments

24 November 2003 , Berlin - Europe's soaring common currency has provoked renewed concerns that the euro's recent rise will hit the 12-member eurozone's key export machine and result in a setback to the region's hopes of an economic rebound. Indeed, the first signs of nervousness about the impact of the strong euro on exports and economic growth could emerge this week with the release of key monthly business confidence surveys for the eurozone's third biggest economies - Germany, France and Italy. The sur

24 November 2003

Berlin -  Europe's soaring common currency has provoked renewed concerns that the euro's recent rise will hit the 12-member eurozone's key export machine and result in a setback to the region's hopes of an economic rebound.

Indeed, the first signs of nervousness about the impact of the strong euro on exports and economic growth could emerge this week with the release of key monthly business confidence surveys for the eurozone's third biggest economies - Germany, France and Italy.

The surveys, which also include Germany's closely watched Ifo index have been pieced together against the backup of a surging euro with the currency charging ahead to hit briefly an all-time high of 1.20 dollars last week, in part propelled by terrorist worries following the two devastating Istanbul bomb blasts.

This followed a surge in the euro earlier in the week on the back of continuing concerns about the US's so-called twin trade deficits and an emerging trade dispute between the US and China.

Analysts are now talking about the single currency reaching 1.25 dollars or even 1.30 dollars in the coming 12 months.

"A rate of 1.20 dollars would very, very worrisome," said Michael Rogowski, the president of the Federation of German Industry earlier this week as the common currency rocketed past its previous record high of 1.1932 dollars which it hit earlier this year.

Rogowiski's vews were echoed by French Finance Minister Francis Mer, who said that an euro trading at above 1.20 dollars would be a problem.

Indeed, the euro's strength during the first half of the year is seen by many economists as contributing to the eurozone's economic slump with several of the currency bloc's leading exporters revising down their sales forecast for the year as a result of the euro.

Also expressing worries about the euro's rapid rise by German Chancellor Gerhard Schroeder, who told Bloomberg TV during a visit to New York last week that a rebound in the dollar would benefit Europe. "Nobody has an interest in a weak dollar," he said.

The euro entered the new European trading week hovering around 1.18 dollars after having gained about 10 percent in value against the greenback since the start of the year.

But as a measure of the major role played by exports in helping the eurozone to remain on a growth path, official data released last week showed exports as the key force behind Germany's move out of recession.

German exports stormed ahead by 3.2 percent quarter-on-quarter in the three months to the end of September with Europe's biggest economy turning in a third-quarter growth rate of 0.2 percent after slumping into recession during the first half of the year.

But despite the nervousness caused by the euro's strength and the concerns about more terrorist attacks, economists believe that next week's business confidence surveys, which include the business sentiment report for the eurozone drawn up by the European Commission, will post further rises.

After rising to 94.2 points in October from a revised 92 points in September, economists expect the closely watched Ifo index, which is based on the responses of 7,000 executives, to edge up again to 95 and to post its seventh consecutive monthly gain in November.

"It's too early for the euro to have a negative impact," said Rainer Guntermann, European economist with the investment house Dresdner Kleinwort Wasserstein adding that he believes the focus of those responding to the Ifo survey will be on the pickup in the global business cycle.

"There is little reason not to be optimistic at the moment," he said, noting the signs of strong economic growth that have emerged in the United States and that Europe's leading indicators often trailed their US equivalents by one to two months.

But while Guntermann believes that the risks to current economic growth forecasts are still currently on the upside, he does not rule out jitters about the euro and terrorism starting to feed through into the Ifo index's expectations component.

However, despite expressions of concern by business leaders about the prospects of a stronger euro weighing on exports, the European Central Bank is likely to be happy about common currency's current solid performance.

In particular, as ECB President Jean-Claude Trichet told reporters at the bank's monthly press conference that amid signs that consumer prices were not falling as fast as previously expected one of the bank's current principal concerns was the "stickiness of inflation".

Indeed, many economists believe that as a result of renewed pressures from oil prices and a round of tax hikes, notably rises in tobacco taxes and increased charges under Germany's health reform plans, that inflation could edge up in the coming months.

But over the longer term, the strong euro could spark fresh speculation in European financial markets about another rate cut in Europe as the ECB seeks to ease the tighter monetary conditions caused by the surging common currency.

DPA
Subject: German news

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