Europe Bourses Lose Around 5% Mon
By Charlene Lee
Of DOW JONES NEWSWIRES
LUXEMBOURG (Dow Jones)--Stock markets in Europe are in a phase of correction
rather than in a panic mode that would require action from policymakers,
according to European Central Bank Governing Council member Yves Mersch.
"From the European point of view, I would say that we have experienced more
an adjustment rather than already a worrisome overshoot," said Mersch, who is
also governor of Luxembourg's central bank, in an interview Friday, as U.S. and
European stock markets dropped heavily. Monday, those losses were deepened,
with most exchanges in Europe shedding up to another 5%.
The question, according to Mersch, is at what stage a healthy market
correction warranted by economic fundamentals becomes a case of panic and
overshooting. "I think it is extremely delicate to draw the line," he noted.
Mersch downplayed the negative toll of plunging stock markets on the euro
zone's economic recovery, noting that the issue is a more important one for the
U.S., where the wealth effect created by stock holdings plays a large role in
private consumption. The U.S. also saw heavy over-investment in the technology
sector in recent years.
That, Mersch added is why "we feel more confident about the growth forecasts
in Europe," where a recovery, according to most forecasts, is expected to gain
momentum in the second half of the year.
Volatile market conditions shouldn't discourage companies from making
investments. "Investment is also driven by order books," Mersch pointed out,
adding that encouraging data have recently emerged pointing to a revival in
orders.
"I think there is too much alarm-bell-ringing at this time," he also said,
dismissing some suggestions that the sharp erosion in equity values may lead to
deflationary conditions. "I do not see, at this point in time, any reason for a
panicked reaction in monetary policy decision-making."
He acknowledged that should turmoil in markets persist, then "monetary
conditions, yes, to some extent they have tightened a little bit, but by and
large, do not forget that monetary conditions inside Europe are still
accommodating. We also do not see broad signals of a credit crunch or whatever
you might associate with such a situation."
Euro Rise Not An Inflation Cure-All
While the euro's sharp appreciation of around 16% against the dollar since
the beginning of April will help contain inflation pressures, Mersch cautioned
against the assumption - especially held in financial markets - that the
stronger euro has eliminated any need to raise interest rates. The euro last
week traded at parity with the dollar for the first time since February 2000
and is now quoted around $1.01.
The ECB's minimum bid rate has stood at 3.25% since last November, and
recently, economists have begun pushing back rate-hike forecasts. They argue
that the euro's appreciation amounts to a tightening of 25 or 50 basis points,
making a rate hike in the remainder of this year or even beyond that
unnecessary.
"The exchange rate is not a pure substitute for monetary policy," Mersch
warned, noting that reasoning to the contrary implies that the euro's exchange
rate has become an objective for the ECB rather than one of several indicators
it weighs in determining inflation risks.
There are, after all, certain domestic inflation risks that can't be fixed by
a stronger euro.
"If core inflation were to continue (rising), then of course, the exchange
rate will not be sufficient to counteract these developments," he noted.
Headline inflation in the euro zone fell to 1.8% in June, retreating below
the ECB's 2% ceiling for the first time in two years. The overall inflation
rate, which benefitted from favorable statistical base effects, masked more
troubling inflation signs. Inflation, excluding energy and unprocessed food
prices, was unchanged in June at 2.6%.
"Yes, core inflation is something that seems to be persistent and sticky and,
therefore, unwelcome," Mersch said. "However, do not forget our strategy is
forward-looking, and if we look ahead, all that inflation forecasts that we
have at hand do not point to an overshooting of our self-defined objective of
price stability of 2% over the medium term."
Some recent wage developments, according to Mersch, are "unwelcome," but more
in terms of timing and their implications for job creation than in terms of
inflation pressures.
Competitiveness Not Dependent On Euro Alone
Mersch also said he's "very amused" by the consensus that's emerged among
market participants, economists and politicians that puts the euro's fair value
around $1.10. An appreciation beyond that, they stressed, would seriously
damage the export competitiveness of euro-zone businesses.
"Life is a little more complicated that that," he noted.
"All those companies that were shielded by an undervalued euro - they will
feel it already now, and I think rightly so. Other companies are price makers.
They can live with $1.20," Mersch said.
"It would be artificial to keep companies alive by steering an external value
objective, and that's why we do not have such an objective. And that's why we
also believe this objective is not good policymaking for an economic zone as
large as the euro area, because it would imply that we know what is the precise
equilibrium exchange rate," he added.
On the Stability and Growth Pact, recent comments suggesting a looser
interpretation "come from people coming newly into office," Mersch said.
Portugal's recently-elected government has said the country's deficit is
likely to come in around 4% of gross domestic product this year, well in excess
of the 3% limit. An audit of France's public finances ordered by its recently
elected government revealed a deficit that's likely to come in around 2.6% of
GDP this year, more than percentage point above the deficit projection made by
the preceding government.
"There is one element where I am a little bit surprised, and that is how far
accounting was able to get out of hand before alarm bells started," Mersch
noted. "The fact is that we only react according to figures that are
communicated by governments."
-By Charlene Lee, Dow Jones Newswires; (49 69) 297 25 500;
charlene.lee@dowjones.com
(END) Dow Jones Newswires 22-07-02 |
