27 December 2002, 09:13  Duisenberg Says Introduction of Euro Boosted Prices

/www.bloomberg.com/ By Jennifer M. Freedman
Brussels, (Bloomberg) -- European Central Bank President Wim Duisenberg acknowledged for the first time that the introduction of euro coins and notes in January led to higher prices in the 12 countries sharing the single currency.
The introduction added as much as 0.2 percent to the overall cost of goods, Duisenberg said an interview with Dutch business channel RTL-Z that was broadcast in part on Kanaal Z in Belgium. Previously, the ECB and most European finance ministers had maintained that the introduction had no impact on inflation.
``We have been reserved about recognizing that the switchover influenced prices somewhat,'' he said. ``We should have been more honest about this sooner. Then we also would have been able to explain that for the total package of goods, the effect is limited.''
Duisenberg said the single currency is one reason inflation among the 12 countries is exceeding the ECB's targets. The bank aims to limit annual price increases to no more than 2 percent.
Businesses such as hotels, restaurants and cafes ``abused the introduction of the euro by raising prices,'' he said. The cost of food and drinks in Belgium rose about 5 percent this year, said Jan Smets, the member of the National Bank of Belgium's governing council who oversaw the country's transition to the euro.
``It is very obvious that the consumer realizes that a cup of coffee and his beer have become more expensive,'' Smets said in an interview with VRT-radio. ``What people don't see is that the prices of what people buy in a department store, or that the price of a computer, haven't risen and may even have fallen.''
Belgian Inflation Slower
Prices in Belgium generally have risen about 0.2 percent on average, he said. Compared with the Netherlands and Germany, euro- related inflation in Belgium has been limited, Smets said.
In Frankfurt, home of the ECB, motorists paid 1 deutsche mark (53 U.S. cents) to park for half an hour before the changeover, Duisenberg said. After Jan. 1, the price doubled to 1 euro ($1.04). ``That happened immediately,'' he said.
Retail goods that people buy regularly are more expensive, he said, though ``the cost of goods such as computers and photo equipment, which people don't buy every day, actually have decreased.''
Prices in the 12 countries fell 0.1 percent in November and rose 2.2 percent in the year. Economic growth is grinding to the slowest pace in nine years, limiting retailers' ability to raise prices. Falling inflation allowed the ECB to cut borrowing costs Dec. 5 for the first time in more than a year.
Duisenberg said the ECB would have been better able to demonstrate reducing interest rates this month was the right choice at the right time had he communicated more clearly.
The euro, rising against the dollar this year for the first time since it was introduced, will remain above $1 next year, according to a Bloomberg News survey of 51 analysts, traders and investors. It will be worth $1.02 at the end of the first quarter and the same at the end of December 2003, the survey showed.
A possible U.S. war with Iraq and higher interest rates in Europe may damp demand for the dollar, making it harder for the U.S. to attract enough foreign money to offset its current- account deficit. A war may also hurt consumer confidence and curb growth in the world's biggest economy.

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