Sinking euro, soaring oil burn hole in EU growth

By CAROL WILLIAMS BERLIN Friday 22 September 2000

As international concern grows over the collapsing euro and soaring price of crude oil, the two events together threaten damage to Europe's economic health that could far outlast the effects of the recent blockades by angry truckers and farmers.

The 11 European Union countries using the euro common currency are already reeling from a domineering dollar and rosy United States economic growth forecasts that are luring investors to the other side of the Atlantic.

And with oil prices edging toward a stratospheric $US40 a barrel, the euro zone faces further erosion of its growth expectations vis-a-vis the Americans, whose more technologically sophisticated industries are better prepared to weather the oil-price shocks.

Because the US economy has benefited from considerably higher investment in computers and conservation, its output is less dependent on oil imports than most European producers.

And because oil is universally traded in dollars, the weak euro buys less oil than ever before, creating inflationary pressure. That made the euro nations "a bit more vulnerable" to the ravages of the oil crisis, said Germany's deputy finance minister, Caio Koch-Weser.

On Wednesday, an unexpected drop in German business confidence and weaker-than-forecast economic figures for Italy helped send the euro to an all-time low against the dollar for the eighth day in 11.

It dropped to 84.44 US cents, from 85.09 on Tuesday, before recovering slightly on talk the European Central Bank might have bought euros to prop up the currency.

The euro fetched $US1.17 when it was introduced in January, 1999.

While the euro's poor showing against the dollar lifts the spirits of the anti-euro forces, especially in Britain, economists on the Continent claim the currency is being undervalued and its contributions to fostering competitiveness and efficiency among its users is being ignored.

"The hard part is behind us already," said Wolfram Schrettl, chief of international economics at the German Institute for Economic Research here, dismissing the euro crisis as one more shaped by perception and emotion rather than performance and fact.

Meanwhile, such blows to the euro zone's economic outlook may prove especially painful for the centre-left governments in power, as conservative opponents can cast the leaders as insensitive to the suffering of the common consumer - the rank-and-file constituency that Labor and Social Democratic governments purport to represent.

"All these centre-left governments are already weak and they are going to feel enormous pressure from their populations, especially as we head into winter and heating-oil prices also go up," said Catherine McArdle Kelleher, director of the Aspen Institute think tank here.

Dusseldorf-based Westdeutsche Landesbank issued a revised national economic forecast last week estimating the higher-than-budgeted oil prices will mean $US11 billion ($A20.4 billion) more out of German consumers' pockets this year and $US16billion more than planned in 2001.

The bank said that would mean 0.75 per cent lower growth and would more than wipe out the $US13 billion in tax relief due German wage earners next year - the first in which the benefits of this year's tax reform were to be felt.

The attention-grabbing blockades erected in France, Britain, Spain, Belgium, Ireland, the Netherlands and to a lesser extent Germany uniformly demanded government action to lower petrol prices that, largely because of high taxes, average more than $US4 a gallon. This week, turmoil spread to Sweden and Norway.

Despite concessions by France, Italy, the Netherlands and Hungary, other governments are holding the line. Germany's so-called eco-tax on petrol, which adds about 20 cents on the gallon, has political support because it is used to defray employers' social security contributions, thus creating jobs that have helped scale back unemployment from 12 per cent two years ago to 9.5 per cent at present.

But analysts say the pressure on the euro from rising oil costs may chip away at euro-zone growth forecasts if prices remain at present levels, because EU government budgets were calculated with expectations of oil costing $US26 a barrel.

Euro-zone economic expansion had been predicted at a robust 3.4 per cent next year, but if oil prices stay above $US35 a barrel, at least half a percentage point may be shaved off that International Monetary Fund forecast, said Mr Koch-Weser.

But some economists argue that Europe is not as badly exposed to the oil crisis as competitors in the US are wont to suggest.

"If you compare the United States and Europe, I would say the country that wastes more resources is the one more vulnerable to the oil price rises," said one. "Europe may only be more vulnerable because the euro is not so well trusted yet as the dollar."

Truckers, taxi drivers and farmers are the most adversely affected by oil prices because they use so much fuel, but also because profit margins in those spheres are extremely tight, as is competition among the mostly small and medium-sized businesses.

Tax on petrol consumed by the average 40-tonne truck travelling 137,000 kilometres a year in Europe already costs its owner more than $US18,000.

Even with no change in the underlying price of petrol, that would rise to nearly $US20,000 in January, when the next phase of the eco-tax kicks in, the Federal Association of Truckers and Transport reported from Bonn.

In arguing for tax relief, the industry association noted the French Government's decision to appease strikers had put French truckers at a competitive advantage, lowering annual petrol-tax costs from their current $US17,200 to $US13,700.

On Wednesday, France called for a meeting of the EU, the United States and the Organisation of Petroleum Exporting Countries to urge a boost in oil production to bring prices down.

LOS ANGELES TIMES

http://www.theage.com.au/bus/20000922/A11277-2000Sep21.html

-- Martin Thompson (mthom1927@aol.com), September 21, 2000

Answers

The euro drop, combined with the high price of oil, is a doube whammy for Europe. Glad I'm not living there right now.

-- Billiver (billiver@aol.com), September 21, 2000.