E.U. hopes to resolve trade disputes with U.S.

By Batuk Gathani

BRUSSELS, JAN. 26. Although the European Central Bank (ECB) has left euro interest rates unchanged, many economists and financial analysts are predicting a 4.5 per cent base or refinancing interest rate for the euro in the second quarter of this year, from the current rate of 4.75 per cent. It is argued that a weak global economy, a stronger euro and falling oil prices are reducing inflationary pressures in the 11 euro-zone countries. Hence, ECB officials concluded at their routine fortnightly meeting that the bank need not follow the U.S. Federal Reserve in slashing interest rates.

There is concern about the future outlook for euro- zone and global economies in the wake of the U.S. economic growth slowing. This is highlighted by falling profit forecasts of major U.S. companies and massive build-up of inventories in the warehouses of manufacturers and wholesale distributors. In the euro-zone region, such trends are still not pronounced and the ECB has toned down its concern about inflation and domestic recession.

Senior ECB officials feel that euro-zone countries can still withstand economic slowdown in the U.S. This became more obvious in January when the U.S. Federal Reserve suddenly cut interest rates by half a per cent. Current forecasts by European banks indicate that economic growth projection this year in the E.U. may slide to 2.4 per cent from the earlier forecast of 3 per cent. Much about the strategy of cut in the interest rate could depend on what the Governor of Bank of England, Mr. Eddie George, calls ``balance of risks'' facing the European economies in the coming months.

With the advent of the Bush administration in the U.S., the European Commission is keen to mend its diplomatic and trade fences with the new administration. The Euro-American relationship is currently highlighted by a spate of trade disputes ranging from imports of beef to bananas. Last week, Europeans breathed a sigh of relief and welcomed the nomination of Mr. Robert Zoellick as the new U.S. Trade Representative. Mr. Zoellick is not only a well known and admired figure in European circles but has close personal rapport with senior European Commission officials.

Trade has become the most important link between the U.S. and the E.U. If both sides resort to retaliation, there is much at stake. For example, annual trade in goods and services between the two sides is now approaching half a trillion dollars. The current two-way investments are more than $ 700 billions and some six million Americans and Europeans work in the E.U./U.S. companies. The world's two leading economic super powers account for more half of world's gross domestic product and almost half of world's exports and more than half of global foreign investments. Hence, both the Europeans and Americans are paying special attention to their economic relationship.

As the euro is fast emerging as a major global reserve and trading currency, it is tempting for observers to note that the ECB and the Federal Reserve may follow identical interest rate policy. The latest ECB observations would indicate that authorities are preparing the euro-zone financial markets for a cut in interest rates, perhaps in the second quarter.

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Section  : International
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