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Thursday June 14, 3:17 pm Eastern Time
Monetary policy can do little for growth-Welteke
(UPDATE: Adds details)
By Nick Antonovics
BRUSSELS, June 14 (Reuters) - Bundesbank President Ernst Welteke said on Thursday that monetary policy could not do a lot to counter the current slowdown in growth in the 12-nation euro zone that has adopted Europe's single currency.
``Monetary policy cannot do much in this respect,'' Welteke said when asked to comment after a speech on recent weak first-quarter gross domestic product data (GDP).
In his speech to an audience at Belgium's central bank, Welteke had said current European Central Bank monetary policy was ``appropriate at the present juncture.'' In a departure from his prepared text he added, ``But present means present.''
The ECB on Thursday published its latest staff projections, putting euro area growth in 2001 in a 2.2 percent to 2.8 percent range, down from a 2.6 to 3.6 percent in December.
Welteke declined to comment on whether the latest projections were too optimistic, but added ``it's true...we have a problem with domestic demand,'' blaming high inflation caused by a spike in energy and food prices.
``This reduces domestic demand and therefore domestic demand is not yet fueling growth and we have to reduce our (forecast) growth rates. However, you should not forget that last year in the euro area we had the best growth for 10 years,'' he said.
EURO WEAK DUE TO CAPITAL FLOWS
Separately, Welteke said he did not believe the euro exchange rate had been greatly influenced by the recent rejection of the European Union's Nice treaty by Irish voters.
``I have not seen any certain influence of the Irish 'no' on the exchange rate. The underlying factor for the exchange rate development is the outflow of capital from the euro area to the United States,'' Welteke said.
``This is due more or less to globalisation. European firms do now in strategic aspects what American firms did 30 years earlier,'' he said, citing cross border deals such as Deutsche Telekom's recent buy of VoiceStream of the United States.
Deutsche Telekom said on June 1 it had completed its purchase of Voicestream, which was acquired for $20.7 billion in stock and $4.2 billion in cash.
``There are a lot of events in the euro area that create uncertainty among international investors...one of these events is the 'no' of Ireland in the referendum but this is not a situation which we can make responsible for the development of the exchange rate,'' Welteke added.
SEES INFLATION DECLINING
Asked about past calls for policymakers to create target zones for the world's major currencies, Welteke said he would appreciate more stable exchange rates but did not know how to achieve that goal.
Fixed exchange rate regimes may sometimes bring short-term, macro-economic benefits but ``mostly they are very costly,'' he said, citing Argentina and ``the kind of problems they face.'' Argentina's peso is currently pegged to the dollar.
Separately, Welteke said current divergence in inflation rates between euro area countries had created problems for policy makers.
On inflation divergence, he said: ``We should be very careful when we enlarge economic and monetary union to other areas where real convergence is less than between Ireland and Europe'' -- a clear reference to European Union plans to take in new members, mainly from Eastern Europe.
But he saw euro area inflation as a whole falling below the ECB's two percent tolerance ceiling.
``I believe that we, in the first half of next year, will be below two percent, but one never knows,'' he said.
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