Europe and US head for clash over policy for euro

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The Independent Online
EUROPEAN FINANCE ministers and the US administration are poised for a clash over sluggish growth in Europe and the weakness of the euro.

US officials are expected to use Monday's meeting of Group of Seven ministers and central bankers to urge their European counterparts to boost growth and to share with the US the burden of soaking up imports from Asia. The weak euro has become a symbol in the US of European economic inaction.

The International Monetary Fund added its pressure yesterday, urging the European Central Bank to be more open about its policies and to respond to low inflation. Although praising the ECB's "sensible and pragmatic" approach to monetary policy, the IMF agreed that the weakness of the euro since its 1 January launch reflected doubts about growth in the euro area.

"It was particularly important at the early stages of the ECB, in view of uncertainties for the outlook in the euro area and the global economy, that the public understand and have confidence in the monetary framework," the IMF said.

The new currency remains close to its low against the US dollar, hovering just above $1.06 yesterday. It has lost about 10 per cent of its value against the dollar since the new year. Trading was quiet yesterday ahead of Monday's G7 meeting. Finance ministers arrive in Washington tomorrow in the wake of the weekend Nato summit.

Financial market analysts predict that the euro will remain weak until economic fundamentals on the Continent show signs of improvement.

Philippe d'Arvisenet, chief economist at BNP in Paris, said: "The Americans might put on some pressure, but the currency is just a reflection of economic conditions." Slow growth in Europe compared to faster US growth would keep the euro weak for a few months, he said. The Balkan war also weighs on the euro, analysts said.

However, the suspicion in the US is that Europe is deliberately practising towards its new currency the policy of benign neglect that has served the dollar and US exporters so well. The issue has become sensitive because of the Asian crisis and subsequent explosion of the US trade deficit. Protectionist sentiment among US producers is rampant.

New figures for the UK economy yesterday confirmed that growth remained sluggish in the first quarter of this year. However, the 0.1 per cent rise in GDP in January to March, to a level 0.7 per cent higher than a year earlier, is widely expected to mark the low point of the business cycle.

According to preliminary figures from the Office for National Statistics, manufacturing output fell during the quarter, but more slowly than in the final quarter of 1998. The figures for manufacturing output in the first quarter are likely to show a fall of around half the fourth quarter's 1.3 per cent decline.

But if the worst is over for manufacturing, growth in services slowed to its lowest since the trough of the recession in mid-1992. Services output rose 0.4 per cent in the first quarter, taking the year-on-year growth down to 2.3 per cent from 2.7 per cent in the fourth quarter.

Since mid-1992, services output has climbed by 26.7 per cent, compared to a rise of about 8 per cent for manufacturing output.

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