The Hindu : Rising euro threatens euro zone recovery

Online edition of India's National Newspaper
Thursday, Jan 22, 2004

Business

Business

Rising euro threatens euro zone recovery

By Batuk Gathani

BRUSSELS, JAN. 21. The 12 Euro-zone finance ministers' meeting here has failed to agree on a consensus strategy to peg the dramatic rise of Euro against the U.S. dollar. The Euro, which has now emerged as the world's second biggest currency after the dollar, is now more than 50 per cent higher than its low against the dollar less than two years ago. Many Europeans now worry that this is threatening the Euro zone's nascent recovery, which could even report negative economic growth by the end of the year, if the current trend in the rise of the value of euro continues unabated by the end of the year. The Group of Seven (G-7) or world's richest countries finance ministers are meeting in February, and it remains to be seen what strategy they recommend to ensure financial stability in the international currency markets.

The latest statement of the finance ministers is rated as "too mild and timid'' to cool the euro which has surged 20 per cent over the past year. The projected Euro zone export led economic growth could suffer a major reverse with the falling dollar and rising Euro in the international market place, where U.S. manufactured goods and services now enjoy a special advantage.

The consensus perception is that further rise in the current value of the euro against the dollar may stifle economic upturn in the Euro zone region. In their final communique last night the 12 Euro zone finance ministers stressed the need for stability and expressed "concern over excessive exchange rate moves.'' Otmar Issing, the widely respected senior German economist of the European Central Bank also warned against "excessive exchange rate volatility'' but his comments had little effect on the markets with eerie nervousness, which has greeted the unwelcome rise of Euro.

The German Finance Minister, Hans Eichel, also wonders how long will the modest economic upturn in the Euro zone region will last and agreed that the stability of economic growth in the euro zone region remains volatile.

Senior European officials have argued that the euro "must keep its value in the medium and long term along with economic fundamentals and have stressed on stability and warned against "excessive exchange rate'' moves. This policy shift highlighted by rhetoric about stability and consistency, has yet failed to impress the markets and according to current market trends, the rise in value of the euro continues unabated. It remains to be seen if the present trend may force the European Central Bank to intervene to check further rise in the value of the Euro against the dollar.

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