Strong euro 'could enter dangerous waters'

Luxembourg Prime Minister Jean-Claude Juncker, who is also the country’s finance minister, sounded unworried yesterday about the strength of the euro - which traded at $1.2820 yesterday – but said if it rises much higher “we could enter dangerous waters”.

Juncker, who leads the panel of 12 European Union finance ministers, said he “had some concerns” about the currency’s rise but did not think it had reached a dangerous level.

But he added, “We could enter dangerous waters if the level would further rise.” He appeared to refer to the psychologically important level at which a euro would cost $1.30, but told reporters: “I have no level in mind.”

The finance ministers were meeting to address the European Central Bank’s expected interest rate increase this week, look at how governments manage their public debts and, perhaps, agree on common rules for sales tax.

They also met a senior IMF official who issued a so-so report card on the economic performance of the eurozone nations.

Michael Deppler, the IMF’s European Department Director, said the eurozone had a “reasonably good year” thanks to some reforms, but added it was unclear if its recovery can hold through 2006.

The European Commission expects the economy of the 12-nation euro area to expand by 2.1% in 2006, up from 1.3% in 2005. The IMF is more cautious.

“The baseline scenario for is for real GDP growth to remain around 2%,” its report stated. It said a sustained pickup was unlikely due to higher oil prices, a strengthening euro and a decade-long sluggishness of productivity and the decline in the area’s population beginning in 2010.”

Deppler said eurozone inflation was rising too fast.

The EU has predicted it will hit 2.5% in May, well above the guideline of just under 2% of the European Central Bank. Inflation has been driven up by soaring oil prices and increases in the services sector.

Trichet has said the bank needs to be vigilant on rising prices.

The ECB could raise its key lending rate by a quarter of a percentage point to 2.75% or even by half a point to 3% in a bid to counter inflationary risks in the coming months.

Juncker would not comment on an interest rate increase except to say he was confident the ECB would “not harm economic growth in the European Union”.

Across Europe, manufacturing has grown at its fastest pace since 2000 while consumers and businesses are more optimistic about the future than they have been in five years.

Ministers will also talk about budget deficits. Five euro countries - Portugal, Italy, France, Germany and Greece – failed to keep their public debt under the 3% of gross domestic product limit set by European Union treaty rules and intended to keep euro economies stable.

All eyes are on Italy’s new finance minister, Tommaso Padoa-Schioppa, who is due to outline how Italy plans to bring its growing budget deficit under the 3% limit. Italian Prime Minister Romano Prodi promised last week that Italy would cut its public debt by more than 1.6% of gross domestic product, or some €21.5bn, by the end of 2007.

Ministers will also discuss the two euro-candidates – Lithuania and Slovenia - which have asked to adopt the EU’s common currency next January. Slovenia received the European Commission’s backing last month.

However, the commission said it could not allow Lithuania to join the euro, saying its inflation was too high.

Today, all 25 EU finance ministers meet to try to agree on a package of new rules on sales tax designed to ease a tax headache for companies doing business across borders.