Dollar’s slip is not all good news for Europe
European finance ministers were playing down the euro’s rise when they met at one of their regular meetings in Berlin yesterday.
In their view, the key to the transition was to avoid too much volatility and they were less concerned that some analysts are forecasting a resurgence in the euro to €1.40 before long.
“I don’t see any particular reason to be excessively concerned (about the rise)”, Luxembourg’s Prime Minister Jean-Claude Juncker said as he arrived to head the meeting of eurozone finance ministers.
At this point the euro is close to historic highs and the last time the euro hammered the dollar, Europe paid a high price.
That was in late 2004 and early 2005, as its strength helped derail a slow economic recovery in Europe.
It has taken Europe until now to recapture that momentum and to move closer to its trend growth potential of 3% per annum.
We have to go back to 2001 to find the last peak in European growth of just over 4.5% and it has been downhill ever since.
From an Irish perspective the more immediate worry is the continuing threat to interest rates.
Part of the dollar’s slump to near historic lows against the euro is based on the expectation that the outlook for European rates is still negative. US rates meanwhile have stopped rising due to the slowness of the US economy as the housing crisis starts to spread to the broader economy and on consumer sentiment.
Against that, slower than expected growth in the US makes an interest rate from the Federal Reserve Bank less likely and the dollar is getting caught in the crossfire.
At a time when the Central Bank here has revised its growth projections down a full 1% from its January forecast, uncertainty around interest rates and the state of the euro is the last thing this economy needs right now.
Consumer sentiment has turned negative in recent months and the numbers keeping their SSIA money banked reflects that growing unease.
However, the doom and gloom may be overdone and the Central Bank took a very steady line in the quarterly bulletin this time out.
While it acknowledged concerns about construction, there were no warnings of dire consequences and the bank’s senior executives said the economy had the potential to grow at between 4% and 5% in the medium term.
However there could still be a few wobbles along the way if Europe, and not the US, starts to provide the steam that drives global economic growth .
If that happens, then pressure on ECB rates is likely to stay pretty firm and it certainly looks as if Europe has left its historically low interest rates well behind it at this stage.
Bundesbank President Axel Weber was unambiguous about where the ECB stands on the interest rate question.
“In the current economic environment, we can’t yet sound the all-clear from a monetary policy point of view”.
Weber sits on the ECB’s decision-making governing council and made his comments to the German business daily Handelsblatt.
He was making the point that there are increased price risks in Europe.
If we go back a few months, most economists were firmly of the view that the ECB rates would not go beyond 4%.
That sentiment has changed and it is getting difficult to avoid the view that increasing numbers of borrowers will face difficulties with repayments going forward.
