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Friday, 1 September, 2000, 08:20 GMT 09:20 UK
Tax cuts will boost euro
France is the latest Eurozone country to cut taxes
France is the latest Eurozone country to cut taxes
by BBC business reporter Jonty Bloom

The European Central Bank raised interest rates on Thursday by 0.25% to 4.5%.

The fifth hike this year it is designed to fight inflation and support the weak euro.

The increase in rates was smaller than predicted by many, who were expecting an increase of a 0.5%.

In a statement after the decision was announced the ECB said that "the protracted depreciation of the exchange rate of the euro and the renewed rise in oil prices have increasingly put upward pressure on import prices and consumer prices in the euro area."

But that doesn't necessarily mean that this increase in rates will bolster the euro.

In one of those really annoying twists that must drive Central Bankers to distraction, the fear in the financial markets is that higher interest rates will damage European growth.

That in turn would increase the gap between the booming American economy and Europe's and, quite possibly, boost the dollar at the euro's expense.

It is structural change that will make the big difference to the euro's value in the long term.

French tax cuts

Overshadowed by the ECB's decision there was further proof on Thursday that that is actually starting to happen.

The French Finance Minister Laurent Fabius unveiled a series of tax cuts on Thursday, worth in the region of 120bn French francs (that's about 18bn euros or 12bn).

This follows on from the massive tax cuts and changes planned in Germany for the next couple of years which were announced earlier this year.

France and Germany aren't alone, Italy and Belgium are keen to follow suit and Ireland and the Netherlands led the way years ago. All of a sudden it seems that the countries of the Eurozone are engaged in a round of tax cuts.

Financed by economies that are performing better than they have done for ages and the financial discipline imposed by the Maastricht criteria, there is now the room, and far more importantly the will, to cut taxes. Of course there are no plans to get the tax burden in such countries down to the American level but even starting to move in the right direction is likely to increase investment, competitiveness and growth.

That is likely to do more for the euro, in the long term, than an increase in interest rates of one quarter of one percent.

But there is still a long way to go in transforming the European economy.

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See also:

25 Aug 00 | Business
The ECB's rate dilemma
01 Sep 00 | Business
Euro's struggle continues
09 Aug 00 | Business
Euro teeters on new low
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