Economists hope for euro-dollar parity

By Batuk Gathani

BRUSSELS, DEC. 24. There is edgy nervousness in global markets as the European Union, the U.S. and Japan, report decline in economic growth rates. According to analysts this may herald an onset of mild recession in the coming weeks. Last week saw a global gloom on international stock markets, after the U.S. Federal Reserve warned that a weakening of the U.S. economy overshadowed any threat of inflation. Technology stocks dipped to their record lows in major European Union financial markets generally and the U.S. particularly, which has scored its all time record low.

The silver lining in an otherwise gloomy economic and fiscal scenario is that the euro is displaying newly found health. It has appreciated by ten per cent against the dollar from its record low in October. The general perception in the markets is that the euro may reach a parity level - one dollar to one euro - within a year. The euro broke through the rate of one euro to 90 cents barrier last week. This turnaround in euro's fortune has been triggered by prospects of a modest surge in economic growth rate in major EU markets.

Today analysts also concede that any dramatic shift in the relative fortunes of the euro and the dollar could have significant impact on the global economy. A weaker dollar, like the weaker euro - so far particularly in the case of Germany and ten euro-zone economies - could boost American exports to narrow U.S. trade deficit. Both investment dollar and investment euro, backed by massive U.S. and European investments on both sides of the Atlantic divide, has gone a long way to internationalise euro-Atlantic economic relations. Major European and American companies have invested heavily on both sides of the Atlantic. Hence, most economists are today hoping for a healthy equilibrium between the euro and the dollar in the New Year.

Many economists on both sides of the Atlantic divide, are not too optimistic about prospects of a healthy overall global growth rates amid signs that major economies are slowing together. The latest economic projections from the European Central Bank indicate that inflation and economic growth in the euro zone will slow in the next two years as oil costs decline and the world economic growth loses momentum. The euro zone comprises 11 EU countries which have joined the European Monetary Union and adopted euro as a common currency.

It is also argued that a great deal about future economic growth in the euro zone region of the EU could depend on Germany, often described as the locomotive economic power of the EU. In Germany, Chancellor Schroeder's Government is seen pressing ahead with bold economic and tax reforms. It is now revealed that the German economy has grown by around three per cent this year. There is also slow but sure decline in the level of German unemployment rate which continues to hover around the nine per cent mark. If Germany can either sustain or improve on its growth prospects next year, this will be reflected in the fortunes of the EU economies. Chancellor Schroeder came to power two years ago and he has forced through an impressive tax-cutting package coupled with cut in government spending and overhauling Germany's archaic pension system.

Chancellor Schroeder has proved to be a shrewd political tactician and has been able to strike a balance between Germany's right and Left political parties with some boldness and panache. With more fire power in Germany's economic engine, the country is also beginning to wield political influence in the EU forums that reflect German's unique logistical position in the heart of Europe. This is now backed by Germany's economic weight.

European observers note that this was visible at the summit of the 15 European Union States in Nice earlier this month. This prompts many Europeans to feel that as the EU begins to expand from 15 to 25 or 30 members within a decade or two, Germany will be more firmly at the heart of the new reshaped EU. More ambitious German politicians may be inclined to rule the waves in European policymaking procedures but Chancellor Schroeder may instead prefer a consensus approach. So far, the close proximity of German-Franco relationship has been dominant in the European affairs. However, a great deal about this may depend on changing domestic political scenario in France. Germany's current relations with France are at their worse and Chancellor Schroeder and President Chirac have agreed to hold a special summit in January. The German economy is at least a third bigger than France's and is the third largest in the world after the U.S. and Japan.

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