E.U. economy still troubled

By Batuk Gathani

BRUSSELS, JAN. 7. The latest decision by the European Central Bank (ECB) to leave its main interest rate unchanged has helped neither the falling European stock markets nor the euro, which continues to display much weakness and volatility. In response, the ECB has sent signals that it stands ready to tighten European monetary policy over the next two to three months due to persistent rising inflationary pressures in the euro-zone.

The situation is no different in the jittery non-euro-zone markets. In Britain, house prices have risen by 13 per cent in 1999, and mortgage lending has soared to a record high because of cheap money. Analysts forecast a sudden rise in interest rates, as the pound sterling is likely to shadow the U.S. dollar and the euro. The general perception is that a modest rise of 0.75 to one per cent in the interest rate cannot be ruled out in the next few weeks.

Nevertheless, two recent interest rate hikes in Britain in the last quarter of 1999 have done little to dampen the enthusiasm of house buyers, and in December, house prices rose two and a half per cent in the U.K. In the euro-zone markets, where the concept of house ownership is fast catching on, the prices of properties are likewise seen rising.

But the widespread disenchantment with current monetary policies is reflected in the euro-zone and non-euro-zone stock markets, which have been steadily falling, following the latest trends in the U.S. and Japan. This nervousness recently triggered a fall of six per cent in key East Asian stock markets. In Britain, the market is seen to be melting, as some Rs. 190 crores equivalent has been knocked off the overall value of British shares. In the euro-zone financial and stock markets, many wonder if the age of a ``great bear market'' has descended on Europe after a bullish decade and a half. Nevertheless, the world economy has seldom looked healthier, if the current health of the robust American economy is any viable indicator. The U.S. accounts for 35 per cent of the wealth of the 29 member-states of the OECD, which represents the world's richest nations.

The president of the ECB, Mr. Willem Duisenberg, said it ``was not time'' yet to raise interest rates, but stated that the ECB would remain vigilant, and closely monitor economic developments in the euro-zone area. Mr. Duisenberg also warned that it was essential that upward price pressures in the early part of this year do not translate into general inflationary pressures, which could trigger excessive wage claims by trade unions. Hence, moderation is urged in what he called ``stability-oriented behaviour.''

The ECB has hence resolved not to tamper with the low target interest rate of base three per cent. The gesture has still made little impression on key euro-zone stock markets, however, and last night, the 30 key blue-chip German stocks declined by nearly two per cent. There is no change in the value of the euro, which now hovers at parity level with the dollar.

The euro has depreciated by 16 per cent since its launch on January 1, 1999.

The economic growth in the euro-zone region remains below two per cent, and it remains to be seen if the growth will gain momentum in the new year. There is concern about rising oil, food, and commodity prices in the current year, but a weak euro may indeed boost exports with better terms of trade in East Asian markets.

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Section  : International
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