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Thursday, 3 January, 2002, 12:26 GMT
Europe's economic adventure
Euro Expo
What is in store for eurozone dwellers?
by BBC News Online's Emma Clark

In recent days the rhetoric of European politicians has touched new heights with the launch of euro cash.

"We are witnessing the dawn of an age that the people of Europe have dreamed of for centuries," said Gerhard Schroeder, the German Chancellor.

Gerald Schroeder, German Chancellor
The Chancellor looks forward to a new dawn
"It is the beginning of a new chapter in European history... It's our future. It is a piece of Europe in our hands," echoed Romano Prodi, President of the European Commission.

Europe has not experienced such hyperbole since the Romantic poets greeted the French Revolution with the words "bliss was it in that dawn to be alive".

That revolutionary dawn proved less than auspicious after many Frenchmen died under the blade of the guillotine.

Although Europe's economic adventure will be more prosaic, there are plenty of people attempting to forecast how this latest dawn will turn out.

New beginnings

Unlike the politicians, the economists have their feet planted firmly on the ground.

Growth forecasts
Eurozone: 1.5%
US: 1.1%

Eurozone: 1.3%
US: 0.8%

Source: OEF
"In the near term, economic growth is likely to be quite subdued in the eurozone," says Robert Lind, chief European economist at ABN Amro bank.

"But from late spring and certainly through the summer, economic activity should begin to pick up."

The prospects for the eurozone have been deteriorating sharply since the autumn when the 11 September attacks dented consumer and business confidence on both sides of the Atlantic.

People problems

Germany, the eurozone's biggest economy, is expected to fall into recession this winter once the final economic data comes through.

If consumers think they are about to lose their jobs, they spend less. If they lose their jobs, they spend nothing

Keith Church
Meanwhile, unemployment is rising in both Germany and France as struggling companies lay off their employees.

Although the think-tank Oxford Economic Forecasting (OEF) is betting the eurozone will avoid a technical recession - defined as two quarters of negative growth - it is concerned about the risk of rising unemployment.

"If consumers think they are about to lose their jobs, they spend less. If they lose their jobs, they spend nothing," explains Keith Church, an OEF economist.

Cooking up a slowdown

The factors that have pushed the eurozone into an economic downturn have been well documented:

  • wasted investment in telecom companies and dot.coms

  • past increases in the oil price to $30-40 a barrel, which have effectively acted as a tax on European consumers and manufacturers

  • reduced trade with the US market, which has also experienced a sharp slowdown

  • and the fall-out from the stock markets which has made European consumers feel less wealthy and less inclined to spend.

However, 2002 is expected to bring better news for the eurozone as the economic factors begin to shift.

Inflation boon

ABN Amro's Mr Lind predicts that falling inflation and an improvement in outlook for the US economy - and therefore for European exporters - will eventually revive the eurozone.

Oil worker in Kuwait
Lower oil prices promote growth in the eurozone
Fresh data from the US this week has shown factory output rose faster than expected in December.

Meanwhile, a lower oil price at around $20 a barrel means that European manufacturers are now finding it cheaper to produce goods.

There is good news for the consumer as well.

Food prices are recovering from spikes brought about by bad weather and various health scares, such as BSE, says Julian Callow, an economist at Credit Suisse First Boston.

Crucially, last year's series of interest rate cuts, which have brought the cost of borrowing down to 3.25%, will also start to provide a boost.

'A piece of Europe in your hands'

The launch of euro cash could also play a role in bolstering consumer confidence if greater pricing transparency across the region brings down the cost of goods.

Bundesbank president Ernst Welteke is confident that the euro "will have a positive effect for growth".

The spending of "mattress money" - money that consumers do not want the tax man to see - ahead of the currency changeover has also provided a temporary stimulus.

It is likely that end-of-year car sales in France were boosted by such hoarding.

"It has come very fortuitously, when the economy most needs it," says CSFB's Mr Callow.

"It could carry through to the spring when global demand should pick up," he adds.

A new economic empire?

In the long-term, however, the eurozone's prospects for growth are likely to be limited by "significant structural problems", says Mr Lind.

In particular, inflexible labour markets - which make it more expensive to employ and lay off people - have hampered production of goods.

In recent years, much production has shifted outside the eurozone from Germany to the Czech Republic and Hungary, where it is cheaper to employ workers, says the OEF's Mr Church.

The eurozone's performance relative to the more dynamic American economy is also likely to remain sluggish, unless the US suffers a sustained downturn.

Over the long-term the US economy has grown at about 3.5% to 4%, while the eurozone has chugged along at 2% to 2.5%.

So, whereas the euro will no doubt increase trade within the region, there is still more to do on the economic checklist.

Until European politicians embrace these challenges, the eurozone will be slow to realise its dream of becoming an economic powerhouse.

ABN Amro's chief European economist Robert Lind
"I think in the near term economic growth is likely to remain quite subdued in the eurozone"

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