Tuesday, October 28, 2003

Eurozone Companies Will 'Have to Learn to Cope'

ECB board member Matti Vanhala comments on the rising euro. Euroland companies will have to learn to live with it he says. It seems attempts at structural reform may be pursued more vigourously by the central bank here than it has been in Japan. If that is the case then we could be in for a real 'battle of the titans' between the bank, the Commission and the National Governments.

European Central Bank board member Matti Vanhala said companies ``will have to cope with'' the euro's appreciation against the dollar and that exchange rates aren't the ``main risk'' to an economic recovery. Nokia Oyj, the world's largest handset maker, said last week sales may drop this quarter following the euro's 20 percent appreciation against the dollar in the past year. PSA Peugeot Citroen, Europe's No. 2 automaker, on Monday cut its full-year profit forecast, partly because of the stronger currency. "The euro's appreciation is perceived by the corporate sector as a burden,'' Vanhala, 57, said in an interview in Helsinki. ``But on the other hand, the kind of movements we have seen from the euro should be regarded as perfectly normal in a global set-up where the exchange rate is a safety valve with an element of flexibility.'' The comments from Vanhala, who is the head of Finland's central bank, suggest the ECB is less concerned about the euro's increase than executives and politicians. German Chancellor Gerhard Schroeder said last month the euro is one of the ``dangers'' to growth. "I don't think the euro is the main risk'' to growth, Vanhala said. ``Much more important is whether confidence in economic policies can return.''

The euro climbed after Vanhala's comments and bought $1.1702 at 8:56 a.m. in Frankfurt, 2 percent below its May record, from $1.1667 late yesterday. The euro's ascent contributed to a contraction in the $8 trillion economy of the 12 nations sharing the euro in the second quarter by choking exports.

Vanhala's comments chime with recent remarks from ECB colleagues. ECB President Wim Duisenberg, who retires this month, said Oct. 13 that the stronger euro won't change the bank's growth forecasts and Bank of Portugal Vitor Constancio said late yesterday the shift in currency values doesn't ``fundamentally'' alter the outlook for euro region exports. Vanhala and other ECB council members are instead putting pressure on governments to adhere to budget deficit rules designed to protect the euro and pass laws making their economies more attractive to investors and employers. Duisenberg in July said that governments can ``no longer hide'' behind the ECB ``cover up their failure to enact the structural reforms that are so urgently required.''

Interest rates across the euro region are ``appropriate,'' Vanhala said, echoing comments by other ECB policy makers such as Duisenberg and Chief Economist Otmar Issing. Focus Money today reported Issing as saying that rates are low enough to help spur ``much stronger growth.'' The ECB confirmed the comments. Europe's growth prospects may be curtailed in coming years if governments don't seek to meet challenges posed by countries in Eastern Europe or Asia where labor and production costs are cheaper, Vanhala said. "It may be that our assumptions about growth potential are too optimistic,'' said Vanhala, whose office is adorned by oversized brandy and wine glasses from the Czech Republic. The ECB defines ``potential growth'' as between 2 percent and 2.5 percent. Labor laws in some European countries help ``create a rather rigidly moving economy'' that's less attractive to investors than economies such as China, said Vanhala. Euro region unemployment touched a 3 1/2 year high of 8.8 percent in July and may rise further this year, the European Union forecasts. Vanhala also cited the need to link together financial markets and tackle price differentials across the region.

German proposals to cut jobless benefits, approved last week by the country's parliament, won't be enough to revive growth prospects for Europe's largest economy, said Vanhala. "It won't change the nature and workings of the economy,'' he said. ``I'm sure no one in the political arena in Germany would claim that it goes anywhere near far enough.'' Vanhala is still forecasting a recovery across the euro region, though evidence from recent economic reports isn't enough to ``fire the imagination,'' he said. While German business confidence climbed last month to the highest in 2 1/2 years, executives' assessment of current conditions slipped. "There will be a sort of wobbly turn for the better'' next year that will be helped by a recovery in the U.S., said Vanhala, who expects growth in the euro region of about 1.5 percent in 2004. ``The likelihood is that we will get a modest, gradual rise in the GDP growth rate.'' Inflation will slow below the bank's 2 percent limit next year, even though higher oil prices represent a ``risk,'' said Vanhala. Crude yesterday traded at $28.63 per barrel.
Source: Bloomberg

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