Euro changeover date set for 1st January 2008
the euro has been set at 1 Euro = Lm 0.429300
Monetary conditions in the euro zone remain accommodative, the European Central Bank's (ECB) board member Lorenzo Bini Smaghi said yesterday, adding that the current level of interest rates was not a brake on growth.
"Using the most varied methods of measurement, monetary conditions continue to be accommodative," Bini Smaghi said in a speech to an economic forum in Milan.
The ECB's key interest rate is 3.50 per cent after a tightening campaign that began in December 2005. Markets expect a further hike to 3.75 per cent in March.
Will the upswing in the eurozone continue?
Bini Smaghi added that in 2007 and 2008 economic growth in the euro zone could be at or above potential, and that in the medium term inflation should fluctuate around two per cent after a recent dip to 1.9 per cent due to lower oil prices. Potential growth is the non-inflationary growth rate or the cruising speed of the economy which does not generate price pressures.
Yes, albeit at a slightly lower pace. Restrictive fiscal policies in Germany and Italy will dampen economic growth from the very strong (Germany) and robust (Italy) pace in 2006. The rest of the euro-area is not in a position to make up for this growth slowdown. In France, problems in the manufacturing sector will continue and French fixed investment will continue to be comparably weak. Moreover, the interest rate hikes of the ECB will dampen economic activity all over the eurozone. Overall, an EMU GDP growth rate of slightly above 2 percent seems like a sensible forecast for 2007, after slightly less than 3 percent in 2006. As long as the US economy avoids an outright recession and the dollar does not crash, spill-overs to the EMU economy can be expected to be limited.
Is the ECB going to raise interest rates towards 4.8 percent?
Yes. The strong growth outlook will push the ECB to raise its interest rates to 3.75 percent in the first half of the year and by a further 25 basis points later on. As inflationary pressure is still limited, the ECB will refrain from tightening much faster. Risks to this call are, however, a stronger than expected US downturn or a strong appreciation of the euro. In these cases, the ECB might delay a further hike beyond 3.75 percent.
Will the euro further gain value in 2007? If so, what are the consequences? Who will suffer most?
The euro will most likely further gain in value. There is a significant risk that it rises above 1.40 $ in 2007. Two factors are supporting the young currency: With further interest rate hikes by the ECB, investment in the Eurozone will become more attractive. Moreover, the possibility of a rate cut by the US Federal reserve still remains. Finally, there is a risk that central banks in Asia and from OPEC countries continue to diversify their portfolios and buy euros.
As long as the euro appreciates only gradually and does not overshoot strongly over 1.40 $, the euro economy seems well prepared to weather a stronger currency. However, if the appreciation comes amid news of a strongly decelerating US economy, the tripple shock (together with fiscal tightening) might become a danger for the upswing in the euro-zone.
Country-wise, a further appreciation of the euro is set to hurt those countries most which compete mainly with Asia, such as Italy or Portugal. Countries which have weak domestic demand will also be hurt, as in those cases, internal demand cannot make up for the shortfall in external demand.
The ECB's most recent staff forecasts in December projected growth at 2.2 per cent in 2007, down from 2.7 per cent in 2006. The forecast for 2008 is 2.3 per cent.
Many economists estimate the euro zone's potential growth rate at about two per cent