Euro Could Bring About a Jolt in Interest Rates
IMF slams European monetary arrangements
BRUSSELS - The head of the European Central Bank, Wim Duisenberg, predicted Tuesday that European interest rates would be brought into line in the 100 days remaining before the introduction of the European single currency.
He ruled out joint action with the United States to lower interest rates.
At the same time, the International Monetary Fund warned that the single currency could result in financial instability and a banking crisis for which European governments were ill-prepared. The IMF said the new currency, the euro, would put pressure on the European banking system at a time when it might be difficult to close banks or reduce costs.
''In such an environment, inefficient and unprofitable institutions may continue to operate, engaging in increasingly risky activities,'' the IMF said in its Capital Markets Report.
The ease with which banks will be able to make unsecured loans across borders could mean a ''higher risk of contagion,'' it added, as neither governments nor central banks would be responsible for ensuring market stability throughout the euro zone. It said the European Central Bank had no authority to address a liquidity crisis.
Mr. Duisenberg told the monetary committee of the European Parliament that the central bank would prefer to see interest rates - which range from 3.2 percent in Austria to 6.19 percent in Ireland - fall gradually into line rather than experience ''a steep fall in a single day.''
But he said he feared that the movement among the 11 countries adopting the single currency Jan. 1, 1999 would be ''a rather forced one, a rather quick one.''
Analysts expect interest rates in the currency zone to settle around the current German rate of 3.3 percent.
Mr. Duisenberg said that because interest rates in Europe were ''significantly lower'' than in the United States there was neither need nor room for coordinated rate action with Washington. Nor, he said, was he convinced that reducing interest rates was the right way to tackle the global economic crisis.
Without referring directly to the IMF warning, Mr. Duisenberg appeared to agree with at least part of it. He said he wished the European Central Bank had been given greater supervisory powers from the beginning.
Mr. Duisenberg said that the crisis in Russia and recession in Asia would slow down growth in the euro region by ''some percentage points.''
The European Commission predicted in March that the economies of the 11 nations would grow by 3.2 percent next year. A revised estimate from the commission, the executive body of the European Union, is expected next month.
Yves-Thibault de Silguy, the commissioner in charge of monetary affairs, told the parliamentary committee that economic growth in the euro zone was likely to be 2.8 percent next year, about the same as this year.
But Mr. de Silguy said the prospect of the euro had turned the currency zone into a ''pole of stability'' that was drawing in investments from the rest of the world. The prospect of the single currency, he said, made it unlikely that the EU - and those countries in Eastern and Central Europe that are awaiting membership - would be greatly affected by the crises in Asia, Russia and Latin America.
He said that the reduction of public deficits and debts would free up 120 billion to 150 billion European currency units ($175.2 million) for investment.
Mr. de Silguy added that volatility on financial markets was out of proportion with economic conditions. But he expressed concern over an 8 percent drop in the value of the dollar against the currencies that will become the euro. He said the dollar's fall was due to political uncertainty in the United States, confidence in the European economies and the expectation of a cut in U.S. interest rates.
Figures released Tuesday by Eurostat, the EU's statistical office, showed a slowing of the economy in the single currency area, which includes Germany, France, Italy, Spain, Finland, Belgium, the Netherlands, Luxembourg, Austria, Ireland and Portugal. It said the economy in the zone grew by 0.1 percent in the second quarter of this year compared with the first quarter. The increase in the previous quarterly period was 0.6 percent.
Eurostat said gross domestic product in the euro zone increased by 1.8 percent in the second quarter from the comparable quarter a year earlier. Corresponding figures were 2 percent for the 15-nation EU as a whole, 3.6 percent for the United States and negative 1.8 percent for Japan.
The president of the European Commission, Jacques Santer, said that although the euro had insulated its prospective members from currency turbulence, he was concerned that a shortage of venture capital could have a dampening effect on the economy.
''The United States has 5,400 companies quoted on Nasdaq, capitalized at around $2 trillion. We only have 170 companies on the EURO-NM and Easdaq markets,'' he said, referring to stock exchanges dedicated to smaller companies. ''More than one third of U.S. venture capital is devoted to start-ups. In Europe barely 10 percent. Although venture capital is developing in the EU, it is at far too slow a rate to significantly dent the employment problems we have.''
International Herald Tribune, September 23, 1998 |
