--Says Euro Weakness is Consequence of Dollar's Safe Haven Function

By Stefan Kramer

FRANKFURT (MktNews) - The German federal government's official growth forecast for this year is "very optimistic" in view of current developments, according to Bundesbank Vice President Juergen Stark.
Given the growth slowdown in the second half of last year and the economic data available so far in the first quarter of 2001, it is unlikely that the Berlin's growth projection will be attained, Stark said in a discussion with business journalists Thursday evening.
The government's official forecast is for Germany's economy to grow by 2.75% this year, the center point of a range between 2.625% and 2.875%. German Finance Minister Hans Eichel has already said that growth this year is likely to be at the lower end of that range.
But Stark's remarks reinforce the warning in the Bundesbank's latest monthly report that German growth this year would be "clearly lower" than the 3.0% rate seen in 2000. In addition, major German economic research institutes have already cut their 2001 growth forecasts to as low as 2.1%.
Stark made clear that the main effects of the U.S. slowdown on the eurozone economy may be indirect. Lower demand from the U.S. is dampening growth in many emerging markets, which in turn will dampen their appetite for European exports. he argued.
Still, Stark remained upbeat about a U.S. recovery later this year, saying that "healthy trust is justified that the current slowdown in the U.S. will not lead to a hard landing."
He expressed hope that the U.S. adjustment process will be gradual and that foreign investors would temper their focus on the U.S. as a safe haven. This would be healthy, as it would free up capital for investment in the rest of the world, Stark said.
Still, there is a risk that the U.S. economy is not heading for a swift recovery, Stark cautioned.
"Nobody knows the degree and duration of consumers' reaction to the (negative) wealth effect" caused by falling stock markets, he said, noting also that many U.S. companies have announced job cut plans which will come into effect in mid-2001. There are also other risks -- such as banks adjusting their balance sheets to stock market losses -- that will not become visible before the middle of the year, Stark added.
In related comments, Stark attributed the weakening of the euro in recent days to the U.S. dollar safe haven role against the backdrop of the global stock market slide. In addition, the dollar's strength may reflect the market's expectation of a swift U.S. economic recovery in the second half of this year, whereas recently weak eurozone data have put pressure on the euro, according to Stark.
However, the likelihood that eurozone economic activity this year will be within the range of potential growth -- that is, 2.0-2.5% -- "should hopefully help the euro exchange rate," Stark said.
In the longer run, the structural imbalances in the U.S. are "not sustainable," Stark said, arguing that a swift U.S. recovery would cause the country's current account deficit to approach 5% of GDP. "The markets can change their opinion very quickly on the question of whether the U.S. can finance a current account deficit of maybe 4.5% every year," Stark warned. The fact that the U.S. played the role of global growth engine between 1998 and 2000 was not wholly positive, Stark said. The emerging economies of southeast Asia partly stopped their reform efforts because strong U.S. demand masked their shortcomings, he argued. Moreover, neither Europe nor Japan are in a position to pick up the slack from the U.S. this year, said Stark. Europe is ill-prepared to stimulate world growth because the potential for higher consumer demand stemming from tax cuts in several eurozone nations this year is likely to be largely offset by the sharp deterioration of Europe's terms-of-trade position. This development has "dampened the needed increase in private demand," Stark said. "I only can strongly advise the Europeans not to aspire to this (growth engine) role" if that were to involve large imbalances, Stark said. "Everyone has to do his own homework," he added. "The U.S. has a positive budget (balance) but a negative savings rate. The American consumers have to get used to saving. This is a necessary structural change."