Euro to be a success amid strong growth-US banker
By Svea Herbst-Bayliss
NEW YORK, Sept 23 (Reuters) - Europe's new currency, the euro, should strengthen against the dollar after its launch as the currency union stimulates growth across the region, Barton Biggs, global market strategist at Morgan Stanley Dean Witter, said on Wednesday.
With 99 days to go before 11 European nations adopt the euro next January, Biggs predicted the project would succeed, turning European equity markets into particularly hot investment opportunities.
''We are convinced (monetary union) will work and as a result European equities will be the place to be,'' Biggs told a conference about European monetary union and sponsored by the Foreign Policy Association.
''I bet in the next two to three years, European stock markets will be the best in the world.''
Economic growth in the region, now commonly called Euroland, was forecast to be around 2 percent before monetary union, and Biggs said monetary union could add about half of a percent.
''That is not a minor event,'' Biggs said, noting however that European growth will likely be dented modestly by the current global economic crisis. He cut his short-term growth forecast to 2.2 percent from 2.7 percent.
Biggs said growth would increase as fiscal austerity programs, implemented to help nations qualify for monetary union membership, may ease.
Germany, France, the Netherlands, Belgium, Luxembourg, Finland, Ireland, Austria, Italy, Spain and Portugal met strict entry criteria on interest rates, deficits and debt and will be the first to join the union.
Growth will also be fueled as European governments trim high tax rates, push through ambitious restructuring programs and foster an equity culture among sometimes timid investors.
And growth, Biggs said, would not be inconsistent with a stronger currency.
''The euro may appreciate between 5 and 10 percent against the dollar over the next 12 to 18 months,'' gaining support from tough monetary policies as well as a shift in central banks' reserve holdings, Biggs said.
''The new European central bank (ECB) wants a strong currency and they will want to build confidence,'' Biggs said, adding ''The dollar is overowned by central banks and they should be big buyers of euros.''
But Biggs also predicted the ECB will be more concerned with growth as inflationary pressures have been relatively subdued recently. Instead, he said Europe might become more worried about deflation and act to stimulate growth.
While founding members enjoy new growth, Biggs predicted nations that either failed to qualify or chose to stay out, like the ''UK will lag behind in growth.''
One possible danger for Euroland however might be the chance of a systematic global recession where banks would be particularly vulnerable because of their large exposure to emerging markets around the world, Biggs said.
For example, European banks have loaned some $425 billion to emerging markets while U.S. banks have loaned about $117 billion to emerging markets, he said.
But even in case of any setback, Biggs predicted Europe could bounce back relatively quickly because the region is only in the early part of its growth stage as compared with the U.S. which is in its eighth year of robust expansion.
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