Soaring euro puts question mark over eurozone recovery outlook

05 Jan, 2004

Hopes that the long-ailing German economy this year will finally put behind it three long years of stagnation - and help pull the entire eurozone with it - could soon fizzle if the euro continues to soar, experts warn.
Last year, like the two years before it, has been pronounced by economic commentators as the "annus horribilis" for the German economy, the biggest but worst-performing of the 12 countries that share the single currency.
The picture of Germany in 2003 was as dim as it had been in the preceding two years, characterised by zero growth, soaring unemployment, runaway public deficits, tumbling consumer confidence and a record number of corporate bankruptcies.
However, the new year has begun with promises that things can only get better.
"There are increasing signs that, in the fourth quarter (of 2003), the German economy finally managed to shake off the stubborn stagnation of previous years and is back on the path of growth," Chancellor Gerhard Schroeder wrote in a guest column in the business daily Handelsblatt last week.
Economy and Labour Minister Wolfgang Clement had sung the same tune in a newspaper interview published a few days earlier.
"Economic growth will be between 1.5 and 2.0 percent in 2004, and by all means better than in 2003," Clement insisted.
And this time around, the politicians did not seem to be alone in their optimism.
"At last, an upturn is in sight," proclaimed the mass-circulation daily Bild recently and quoted a whole range of economic experts as predicting that growth would pick up to 2.0 percent this year from zero percent last year and unemployment would fall to of seven or eight percent in 2004 from 10 percent in 2003.
Such optimism was already firing up the stock markets.
The blue-chip DAX 30 index ended 2003 at the year's high and then breached the key psychological level of 4,000 points on Friday for the first time since July 2002.
"The international stock markets have bid farewell to 2003, the last of three very disappointing years, by popping open the champagne and setting off fireworks. The markets are going into 2004 with optimism," Commerzbank analysts wrote in their weekly stock market round-up.
Even the high-brow financial daily Boersen-Zeitung observed in its leader column that "with the stock indices at their year's highs, a stable currency and favourable economic perspectives - could 2003 have ended on a more conciliatory note?"
But amid the fizz of euphoria, some cautionary voices were also beginning to be heard.
The president of the German DIHK association of chambers of commerce, Ludwig Georg Braun, warned against getting too excited about the scope of the anticipated recovery this year.
"We're predicting growth of 2.0 percent for 2004. Of this, half a percentage point will result solely because there will be four more working days this year than there were last year," Braun said.
"And the rising euro could also mean that growth comes at less than 2.0 percent," Braun added.
Indeed, the speed with which the euro was rising was one of the major headaches facing the heavily export-orientated German economy - and with it the eurozone as a whole - some experts believe.
The chief economist of the Organisation for Economic Co-operation and Development (OECD), Jean-Philippe Cotis, warned that the euro, which surged to a new record of 1.2648 dollars on Wednesday, could soar into an exchange-rate "danger zone".
The stronger euro makes eurozone exports more expensive for foreign buyers, particularly in the United States.
Even the European Central Bank seems to be getting uneasy about the exchange rate and fears the euro could move still higher and jeopardise recovery, the Financial Times quoted an unnamed senior ECB official last week as saying.

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