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Euro plunge is `of no concern' says ECB

News Analysis: Chief policymakers say they will not intervene
THE EUROPEAN Central Bank (ECB) was forced to deny rumours it had called an emergency meeting yesterday after the euro hit a new lifetime low against the dollar.

Speculation swept the markets that the ECB was considering intervening to prop up the fledgling currency.

The euro plummeted to a new lifetime low of $1.0407 yesterday after breaking through the $1.05 barrier on Wednesday for the first time since its launch in January.

Analysts started pencilling in a further fall to parity with the dollar, a move that would be taken as the final sign of the currency's perceived failure.

The euro's latest bout of weakness is a direct result of exactly the kind of political fudge that the Stability and Growth Pact was intended to rule out.

The problems started after it emerged on Tuesday that Italy had won permission to increase its 1999 deficit from 2 per cent to 2.4 per cent of GDP.

This followed a series of fudges that allowed it to satisfy the Maastricht target of 3 per cent last year. These included a temporary tax and some clever accounting.

Although it should therefore be no surprise that Italy will now be unable to meet its 1999 target of 2 per cent, the blatantly political nature of the decision alarmed the financial markets.

The ECB's chief economist, Otmar Issing, admitted last night that he was worried by the deficit issue. "Changes in plans in the wrong direction are of course not encouraging," he said during a visit to London. He added that it was "important" that Germany reached its current budget deficit target.

Faced with the prospect of a euro being worth $1, Europe's chief policymakers united to insist they were unconcerned.

European finance ministers and ECB executives lined up to insist that they were unconcerned by the euro's slump and were not considering intervention. They were led by Yves de Silguy, European commissioner for monetary affairs, who said the euro had room to rise against the dollar.

"The euro has a real and definite margin for appreciation, as shown by long-term rates," he told a business conference.

"The ability of European political and monetary authorities to prevent excessive swings in the euro in the years to come will be decisive to ensure the credibility of the currency."

Wim Duisenberg, ECB president, said the bank's policy towards the currency was one of "neglect" and ruled out any intervention to support its level.

"If you see us intervening in the market in a big way, you'll see something is worrying us. I refuse to give any indication about what rate I would be worried [about]," he said.

Analysts said there was little to stop the euro hitting dollar parity and, with dim growth prospects, underlying structural concerns about the European economies and the Kosovo crisis, the mystery, perhaps, is why the euro has not already done so.

However, it is important to keep a sense of perspective. For one thing, the currency's 12.5 per cent decline over five months is pretty gentle by the standards of the foreign exchanges.

The pound fell by just as much in a period of seven weeks last summer, then just as swiftly reversed it. The euro has now reached the same level it would have held last July if it had been in existence then - its "record" lows are records in its short life since 1 January.

Ian Morris, global economist at HSBC, said the euro could hit a low of $1.02 but forecast it would recover to $1.25 by the end of the year. "Looking forward we would expect a substantial appreciation based on fundamentals," he said. "Further down the track we see some wobbly US fundamentals driving a current account deficit. It would help to have a strong euro economy but if the dollar slips for whatever reason that would lift the euro by default."

Eurosceptics seized on the euro crisis, saying Britain's strong economic performance would be harmed if it joined.

They were strengthened by comments by Eddie George, the Governor of the Bank of England, who warned it was "tremendously difficult" to know if the UK would fit in.

He said he was worried about the ability of individual countries within the euro to react to problems such as high unemployment. "When you are operating nationally, the exchange rate can fluctuate, you can adjust monetary policy and you've got more flexibility on the fiscal side to manage demand. You lose those flexibilities within the euro zone," he said.

Asked if Britain should join the euro, he said there were potential advantages and potential risks which would have to be weighed up: "But it would be very judgmental."

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