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Healthy euro puts recovery at risk
Updated: 2003-11-25 08:06
BRUSSELS: With the euro reaching record highs against the US dollar, some
European officials are beginning to worry that the strong single currency will
take a toll on the otherwise improving euro-zone economy.
France's
Finance Minister, Francis Mer, is one of them.
"A lasting euro rate of
around US$1.20 could cause a problem for our economy," Mer told reporters early
Wednesday, after the euro climbed to around US$1.1979, the highest level since
it was introduced in 1999.
The euro's rise "is one of the negative
factors," he said. "If the euro was to stay for some time at the current level,
that would offset positive economic factors."
Compared to the sluggish
economy, the 12-nation common currency has been performing fabulously in recent
years. It is up 45 per cent from the currency's low in 2000 and 26 per cent from
the average rate last year.
A strong euro can hurt the euro-zone's
exports by making European goods relatively more expensive in the international
market. It might also swallow up profits when sales in foreign currencies
overseas are converted back into euros.
What's more, the euro-zone
countries are relatively more vulnerable to the fluctuation of the currency as
exports of goods and services account for about 17 per cent of the region's GDP
(gross domestic product), which is significantly higher than the 10 per cent or
11 per cent in the United States and Japan respectively.
Meanwhile,
export has been counted on to get the euro-zone economy out of its two-year long
stagnation, as it did during the recession in the 1990s.
In its autumn
economic forecast last month, the European Commission (EC), the European Union's
executive body, said the growth of the euro-zone economy would be led by
increases in consumption and exports.
In spite of a marginal increase of
0.1 per cent this year in the euro-zone, the EC said the exports of goods are
expected to recover significantly and the growth rate would be 5.2 per cent in
2004 and 6.7 per cent in 2005.
But the rapid development of the euro
might put the EC's prediction at risk. After the euro surged to a record level
on Wednesday, European stocks fell immediately and exporters were particularly
hurt.
German carmaker Volkswagen was down 1.76 per cent at 42.53 euros
(about US$46.78). Siemens, one of Germany's largest exporters that generates one
quarter of its sales in the United States, fell 1.14 per cent to 58.88 euros
(about US$64.76).
And according to the latest GDP data available last
week, the euro-zone expanded by a larger-than-expected 0.4 per cent in the third
quarter compared with the previous quarter. Although the expansion was faster
than expected, the recovery is still relatively tame.
The data also
showed the recovery was caused by an improved demand for euro-zone exports
prompted by a recovery of the global economy, not by a rebound in domestic
demand.
Germany, which accounts for one third of the euro-zone's output,
is particularly dependent on exports, which jumped 3.2 per cent in the third
quarter. Its domestic demand, which includes private consumption and business
investment, dived 1.6 per cent, the biggest drop since early 1993, when the
economic giant slipped into deep recession.
Many economists expect the
dollar to fall further as investors have not yet restored their confidence in
the US economy. As the growth in the euro-zone economy is heavily reliant on the
external demand, the strength of the euro is clouding the nascent
recovery.
"A level of US$1.20 is very worrying and we are also concerned
that the end is not yet in sight," said Michael Rogowski, president of the BDI,
Germany's leading industry federation.
In other words, he seems to agree
that the long-awaited euro-zone recovery could be choked off by a further
appreciation of the euro.
Xinhua
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