Why the euro? Some facts that need consideration - a brief analysis of a recent conversation with the National Bank of Belgium by John Birchall

Expected Gains - 1 Intra eurozone trade less expensive one catalogue one bank account Easier and more efficient less formalities easier to compare prices Strengthens eurozone countries on export markets safer and more stable exchange rate stability price stability

Expected Gains - 2 The eurozone will carry more weight on the international scene euro will gradually emerge as a significant rival to $ a more balanced management of euro/$ parity? Integration of European financial markets? Increased markets’ liquidity means increased attractiveness Sounder fiscal policy can be used as countercyclical instrument

Expected Gains - 3 Long term low interest rates as a result from price stability, enhanced competition integrated bond markets, sounder public finances Paves way for for further political integration harmonize social policy and tax policy stricter discipline of fiscal policy emergence of European identity?

Why is the euro weak against the $? Stronger economic growth in US +3.6% on average since last trough (1991) + 5.0% in 2002 BUT for how long? Eurozone +2.1% on average since last trough (1993) 3.4% in 2000 forecast to drop in 2002 BUT for how long?

Why a weak euro? Here’s why - 1 Wall Street is the ultimate magnet for capital flows attracts 2/3 of capital outflows from third countries market capital availability has increased three fold since Rates of return in US are normally higher- which reflect higher productivity increases) investors tend to buy more shares and Wall Street has the world’s largest stock markets

Why is the euro weak- here’s why - 2 Structural rigidities amongst EU economies higher public spending, especially on social security in terms of GDP>more tax less growth lack of entrepreneurial spirit Fewer regulations in US relating to investment ‘pay as you go’ pension schemes under threat lack of selective immigration policy

Here’s why - 3 Less flexible labour force, especially in some EU countries e.g France under-utilisation of human capital political uncertainty regarding support for euro costs of enlargement US growth largely based on consumer-led spending, which in part is based on ‘wealth’ effect of high stock markets will this continue?

Some thoughts Can Fed avoid a crash landing of US economy? might it be a double dipper? Will the long-term interest rate differential close to virtually 0? Could inflation be lower in EU than US? Will euro purchasing power parity rise against $? Will sentiment alter in EU

Impact of weaker euro Positive short term boost for US exports in the $- area(a 10% decline in euro boosts growth 0.5%) Negative higher import prices for goods and services ( ex. Commodities and energy) invoiced in $ deters investments aimed at increasing productivity

Are we looking for trouble? BOTH the US and Eurozone economies are relatively closed economies, so the exchange rate’s impact must NOT be overestimated? Watch this space!