ECB calls for reforms to ease economic crisis

By Batuk Gathani

BRUSSELS, AUG 12. For the first time in its monthly newsletter, the European Central Bank (ECB) has expressed concern about the health of the eurozone economies. The ECB makes a bold case for liberalising European markets and argues that such structural reforms will reduce the severity of the current economic crisis.

According to economists, the ECB comments have ``increased the uncertainty'' and markets are interpreting such sentiments as a positive signal to reduce interest rates in the near future or even by the end of August. Although the ECB says that the current level of interest rate is ``appropriate'' for price stability, it also adds that there is ``a need to monitor developments closely.'' All this is not academic rhetoric as indicators show that there is no progress in many areas of the European economies. The more worrying aspect is that evidence is piling up about flagging business, investment and consumer confidence and rising unemployment. Forecasts indicate that economic growth in EU economies may not exceed 1.9 per cent.

Germany, the euro-zone area's biggest economy and the world third largest economy, after the U.S. and Japan is in bad shape. The country's prospects look depressing with some economists even suspecting that the economy may have even shrunk. France, Italy, Benelux and Britain also have their problems. The silver lining in an otherwise gloomy situation is that inflation is expected to continue to fall throughout the current year and next and hence the threat from it is fading.

European investors hope that the U.S. economy's projected ``soft landing'' will lift the markets. Many feel that the dollar may be losing its strength against the euro. The slowdown in the U.S. economy has taken the annual growth rate from five per cent in 1999 to about 2.5 per cent or 50 per cent down in the second half of 2000. The figures for 2001 have not improved much. The spillover effect of the U.S. economic slowdown on the euro-zone economies could be catastrophic. Investors on both sides of the Atlantic are hence understandably nervous about the volatile stock markets and uncertain currency values.

Since December 2000, the dollar has dropped below eight per cent in value against the euro and prominent analysts predict that over the next 12 months, the euro may trade at 95 cents or 7.8 per cent above its current value. It is currently trading at just below 90 cents. There is also much uncertainty about the behaviour of oil prices and the majority view is that they may slide, further compounding the present confusion.

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Section  : International
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