Europe worries about euro's recent rise

Demand for exports, inflation rate affected

February 18, 2003|By BLOOMBERG NEWS

European Central Bank President Wim Duisenberg said the increase in the value of the euro may hurt demand for the region's exports and slow the rate of inflation.

"The appreciation of the euro over recent months may contribute to damping export growth," Duisenberg said in a speech to the European parliament.

Combined with "subdued" economic growth, the currency's gains against the dollar will help push inflation below the bank's 2 percent ceiling, he said.

The ECB kept its benchmark interest rate at a three-year low of 2.75 percent on Feb. 6. Since then, policy-makers have said the region's $7 trillion economy may expand less than they expected.

The euro has risen 23 percent against the dollar in the past year. The currency fell to 1.0723 per dollar at 3:45 p.m. in Frankfurt from 1.0792. Companies from Alcatel SA to Siemens AG say the increase is hurting demand for exports by making their products less attractive to customers overseas.

Gross domestic product in the dozen euro nations probably grew 0.8 percent in 2002, the slowest pace in almost a decade, and may have contracted in the first quarter, the European Union said.

Germany's economy, which is Europe's largest, probably shrank last quarter, the Bundesbank said.

Slower export growth "should be counterbalanced by the assumed recovery of the world economy," Duisenberg said, adding that the "most likely scenario" is for growth to gather pace in the second half of the year.

So far, the ECB still foresees a "gradual" acceleration to growth "close to" between 2 percent and 2.5 percent toward the end of the year, the bank said last week in its monthly report.

"There are still downward risks to the outlook," Duisenberg said. Interest rates remain "appropriate to preserve a favorable outlook for price stability in the medium term," he said.

Inflation slowed to 2.1 percent in January from 2.3 percent in December.

Tame inflation means "there can be room for monetary policy decisions and measures which can help support economic activity," Lucas Papademos, vice president of the European Central Bank, said Feb. 7 at a conference in Athens.

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