Euro and oil values threaten EU development

European Central Bank council member John Hurley said the euro's appreciation against the dollar and higher oil prices are threatening to slow growth in the dozen nations using the currency.

"The balance of risks to growth are now clearly to the downside," said Hurley in Dublin. "We're disappointed that growth, particularly in the euro area, is not as strong as we would have wished. Sudden movements in exchange rates are damaging to economic growth" , reported China Daily Thursday.

The euro region's US$9 trillion economy is slowing as the currency's appreciation to a record against the dollar hurts earnings prospects for exporters including Siemens AG and higher energy costs cool foreign demand and consumer spending. The economy grew 0.3 per cent in the third quarter, the slowest pace in more than a year.

ECB President Jean-Claude Trichet, Hurley and their colleagues on the ECB's governing council are seeking to curb the euro's 10 per cent rally against the dollar in the past year. On November 8, Trichet said "brutal" shifts in exchange rates are "not welcome."

"Experience suggests that exchange rates can overshoot and this lies behind the very strong view we have that we need to avoid excessive volatility and disorderly movements," said Hurley, who flew to Frankfurt yesterday to attend a regular meeting of the ECB's 18-member governing council.

Trichet failed to keep the euro from rising above US$1.30 for the first time since its introduction almost six years ago. The currency climbed as high as US$1.3005 on November 10 and climbed to US$1.2982 at 7:06 am in Dublin from US$1.2965 on Tuesday night.

Infineon Technologies AG Chief Operating Officer Andreas von Zitzewitz said on Tuesday the euro is "a very big headache" for the chipmaker. Siemens, Germany's largest engineering company, on November 11 said it could not give a specific 2005 earnings forecast partly because of uncertainty about currency effects.

Economists including Goldman Sachs Group Inc's Jim O'Neill say the ECB may struggle to rein in the euro.

Goldman forecasts it will climb to US$1.35 in three months on expectations US President George W Bush's administration will not protest a dollar decline to narrow the record current-account deficit.

Michael Rogowski, president of Germany's BDI industry group, said on November 8 that a rate between US$1.35 and US$1.40 "would be almost intolerable" for exporters.

For now, European finance ministers are not demanding the ECB sell euros to shore up exports, which have fueled the region's economy over the past year. Dutch Finance Minister Gerrit Zalm said on November 15, after chairing a meeting of euro-region colleagues in Brussels, that they "did not ask the ECB anything."

Hurley said the ECB is not trying to steer the euro towards a specific level.

"Targeting the exchange rate is not a part of the monetary policy strategy" of the ECB, said Hurley. "The pace of the move is what poses adjustment difficulties."

With oil prices almost 45 per cent higher from a year ago and the stronger euro clouding export prospects, Hurley said the ECB has become more concerned about the region's growth outlook in the past month.

"I would expect the recovery to continue with less momentum than we saw in the first half of the year," said Hurley. Trichet said on October 15 that growth would "continue" at the 2.1 per cent annual rate averaged over the previous four quarters.

The ECB is scheduled to revise its 2005 economic growth forecasts next month after saying in September it expects a rate of around 2.3 per cent. Hurley declined to comment on the projections.

The European Commission expects the economy's performance to lag the United States and Japan. The commission on October 26 forecast the euro region to expand 2 per cent next year, down from a previous forecast of 2.3 per cent, compared with rates of 3 per cent in the US and 2.1 per cent in Japan.

Investors are reining in expectations for higher rates by the middle of next year as euro-region growth stumbles, futures trading suggests. The yield on the three-month Euribor contract for June settlement closed at 2.39 per cent on Tuesday, down from 2.46 per cent nine days ago.

The contracts settle to the three-month euro-area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the euro's launch in 1999. The Euribor rate was 2.17 per cent.

Hurley also said he is optimistic that inflation will slow below the ECB's 2 per cent ceiling "in the course of" 2005. While Trichet said as recently as on November 4 the inflation outlook was "worrisome" after oil prices rose to records in October, Hurley said the medium-term outlook "remains favourable."

"The evidence does not suggest that underlying inflationary pressures are building," said Hurley, who ran Ireland's Finance Ministry before taking charge at the central bank in 2002.

Source: China Daily