Rising concern over falling euro

By Batuk Gathani

BRUSSELS, JUNE 3. The euro has now fallen to a new low against the dollar amid a spate of bad news of slow economic growth and stubborn inflation in the 12 euro-zone member-states. The crisis is compounded by the widening communication gap between investors and the European Central Bank (ECB). The ECB President, Mr. Wim Duisenberg's latest comments are interpreted by markets as a signal that the Bank is not likely to intervene in the currency markets to support the euro.

The euro was launched in January 1999 at $1.17 and now hovers at fewer than three U.S. cents above the all-time low of 0.82 cents in November. The more pessimistic perception in the markets is that the fall below the sensitive psychological barrier of 0.80 would push euro-zone inflation to four per cent.

The ECB's guideline to euro-zone countries is to keep below two per cent but none of the 12 euro-zone countries has been able to abide by it and the current rate of euro-zone inflation is 2.9 per cent. The more pessimistic view is that the countries could experience the dreaded stagflation, but the silver-lining is that some forecasters predict that inflation may fall below two per cent by the end of the year. The euro has also hit a record low against the Japanese yen. This prompted a Japanese financial diplomat to say that the recent sharp fall of the euro against the yen was ``undesirable''.

The spectre of Europe's economy slowing fast and its currency hitting an all time low against world's major currencies have prompted a prominent banker to say that ``the euro is being punished for ECB's perceived lack of competence''.

Though Britain has chosen to remain out of the eurozone, London banks and financial institutions have made preparations for euro currency trading when euro coins and currency notes will be in circulation in January. London is still the world's major foreign currency capital after New York, Frankfurt and Tokyo. The 12 euro nations represent a population of some 303 millions with an economic output closely approaching that of the U.S., the world's largest or $-8 trillion plus economy.

The global financial landscape has changed dramatically, since euro unleashes a seismic shift in global asset values. European asset managers in euroland's countries have a free choice of asset investment in the member-states. For example, an Italian insurance company can now invest in German companies and hence investment choices have suddenly multiplied from Athens and Rome to Helsinki and from Lisbon to Berlin.

In coming decades, more European countries from the formerly communist-ruled European region will also join the E.U. in the shadow of the European Monetary Union and the euro. The expanded E.U. has all the potential to be the world's second or even first biggest economic and fiscal superpower, which can be either an ally or rival of the U.S.

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Section  : International
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