Economic slowdown in euro zone continues

By Batuk Gathani

BRUSSELS, MAY 23. In a new setback for the German economy which is already marked by plunging business confidence and surging inflation, the `euro' - the 12-nation common currency - hit a six-month low against the dollar on Tuesday after France and Italy produced disappointing economic results.

As Germany's economic prospects look depressing, senior economic advisers to the centre-left Government of the Chancellor, Mr. Gerhard Schroeder, also cast doubts whether Germany could reach its target of two per cent economic growth this year. Germany, rated as the euro-zone's ``locomotive'' economy, is reeling under the impact of the U.S. economic slowdown. The crises are further compounded by the current depression in Germany's construction industry, which is laying off workers.

It is also becoming obvious that the recent reduction in interest rates effected by the European Central Bank (ECB) has not had any significant impact. Two weeks ago, in a surprise move, the ECB cut euro-zone interest rates by 0.25 per cent for the first time in more than two years. The decision was taken amid lacklustre economic data in the 12 euro zone countries, which showed signs of slowdown. The ECB called its decision to lower the interest rate as a strategy to boost business confidence in the euro zone.

But the strategy has so far not worked if last night's economic data is any criterion. The ECB's policy-making council met today to review the situation with the continuing trend of pessimism among businesses in Germany. The ECB's current focus is to keep the euro-zone's inflation rate in check. The policy of lowering interest rates is described as an ``adjustment'' rather than ``change in direction'' of the bank's policy.

The ECB has joined the ranks of the U.S. Federal Reserve, Bank of Japan and Bank of England in reacting to a visibly slowing global economy. The ECB's decision this month coincided with Bank of England's decision to cut the interest rate by 0.25 per cent. The current British interest rate is 5.25 per cent. According to the speculation in financial markets, the Federal Reserve may again cut the interest rate and if so, this will be the fifth such time measure by it this year.

The ECB's key rate now stands at 4.5 per cent. The bank justified its decision to lower inflation pressures as the economic growth in the euro-zone region slows. The silver lining on the otherwise gloomy horizon is that European wages remain stable. But the inflation for the whole of Germany has risen this

month to 4.1 per cent from 3.3 per cent in April. This is much higher than the inflation rate of below 2 per cent, required by the ECB.

Today's reality is that the much-heralded and long- awaited interest rate cut by the ECB has yet failed to support the `euro' which has fallen to a record low against the dollar. The euro currently trades around 86 cents (U.S.), which represents a significant depreciation in value against the dollar. The euro was launched at the rate of 1.17 to the dollar in January 1999.

Independent observers point out that the ECB rate

cut has raised more questions about the bank's ability to communicate with markets and understand its sentiments. Some are even accusing it of ``sheepishly'' following dictates by the International Monetary Fund and the Organisation for Economic Cooperation and Development which have consistently pressed the ECB to cut the interest rate.

Not all European businessmen, bankers and industrialists share the ECB's perception that business confidence can be boosted by cut in interest rates. This is widely rated as a strategic ``grey'' area.

Many Europeans also feel that this interest reduction strategy may create new uncertainties about the conduct of pan- European monetary policy. It remains to be seen how the ECB can continue to assert and consolidate its much cherished independence from politicians and business lobbies.

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Section  : International
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