the euro is just amazing.. especially on the euro/Yen Cross.
But mounting evidence of declining growth and escalating inflation
suggests that not only is Europe joining in the global malaise but
also that a rapid remedy in the form of an interest-rate cut is
increasingly unlikely.
The region's dimming prospects punished the euro Wednesday for
a second straight day, driving it below 86 U.S. cents for the first
time in six months. The currency's swoon comes after weeks of
steady trading in the belief that Europe was relatively immune to
the worldwide downturn.
"We are already observing the sharp slowdown in Europe," said
Peter Saake, an economist who covers the single-currency zone
for Merrill Lynch. "You do not have to wait any more to see it. It
is here right now."
The latest signs of Europe's troubles emerged in Germany and
France, both of which on Wednesday reported a sharp slowdown
in growth. Several investment banks also abruptly downgraded
their economic forecasts for the 12-country currency bloc.
In Germany, the gloom was heightened by a report showing that
consumer prices in May rose at a 3.5 percent rate, the fastest
growth since December 1993.
With inflation on the rise even as growth slows, the European
Central Bank had no choice Wednesday but to hold firm on
interest rates as its governing council met to assess economic
conditions.
"There are clear signs that the global slowdown has had a serious
effect on the European economy," said Steven Bell, chief global
economist for Deutsche Asset Management. "You can see it in the
industrial production; it is in the leading indicators; it is in the
exports; it is in the orders."
Germany's Federal Statistics Office said German growth slowed
to 2 percent in the first quarter, the slowest pace since the third
quarter of 1999, from 2.6 percent in the final quarter of last year.
Measured against the previous quarter, Europe's biggest economy
expanded 0.4 percent, slower than the German Bundesbank had
forecast.
In France, the statistics office Insee said the economy grew only
0.5 percent in the January-March period from the final quarter of
last year. It was the slowest pace of French growth in more than
two years and lower than many expected. Faltering demand in the
United States, Japan and Germany have begun to take their toll,
economists said.
Germany and France jointly account for more than half the
economic activity in the 12 countries that have adopted the single
currency.
Until recently, the central bank routinely described the European
economic outlook as "robust." In March, the ECB's president,
Wim Duisenberg, said: "At this juncture, there are no signs that the
slowdown in the U.S. economy is having significant and lasting
spillover effects on the euro area."
The central bank's perspective gave rise to a belief that Europe
had assumed the role of global economic leader and sparked hope
that its common currency would become a counterweight to the
dollar, diminishing the economic dominance of the United States.
But independent voices soon questioned Europe's imperviousness
to global conditions. Among the first was Horst Koehler, managing
director the International Monetary Fund.
"We should be aware of linkages between the slowdown in the
U.S., the slowdown in Asia, and, of course, the slowdown in
Europe," Mr. Koehler said in April. "These are linkages not only
via trade. The linkages are via financial and corporate connections,
stock prices and business confidence."
Lately even Mr. Duisenberg, the ECB president, has hedged his
rosy views. At his most recent news conference two weeks ago,
he spoke of a "limited" impact: "We remain convinced that the
U.S. slowdown and the subsequent slowdown across the world,
which this entails, has an impact, but only a limited impact on the
euro area prospects for growth, and we remain of that conviction."
Like a host of other banks and analysts, Merrill Lynch revised
downward its forecast for German growth this year. Mr. Saake,
the Merrill economist, said Germany's gross domestic product
would most likely expand just 1.5 percent in 2001, half of its 2000
pace and well below the rate of 2.7 percent predicted until
recently by the Berlin government.
Because Germany accounts for 35 percent of the total output in
the euro zone, a German slowdown is certain to translate into a
lower overall rate of growth in the bloc.
Private economists had forecast 2.4 percent for the zone, down
from 3.4 percent last year. Now those estimates are likely to be
lowered to about 2 percent, economists said.
Euro Loses Ground
The euro continued to fall Wednesday after the European Central
Bank left its interest-rate policy on hold, Reuters reported from
New York. In 4 p.m. trading, the euro fell to 85.68 U.S. cents
from 86.49 cents on Tuesday.
Though no one was expecting a rate cut, said Paul Mackel,
currency strategist at Dresdner Kleinwort Wasserstein, the
short-term outlook for the euro is "bleak."
"The euro zone is potentially facing a greater slowdown than
previously anticipated," Mr. Mackel added.
While the dollar was gaining against the euro, it was falling against
the yen. The dollar was at ¥119.81, well down from ¥122.72 late
Tuesday. Traders said the yen's rise resulted from heavy euro
sales by Japanese investors.
"When the currency starts to go down, Japanese investors start to
get nervous again," said Steven Saywell, currency strategist at
Citibank.......... |
