German adviser calls for euro action

The new head of Germany's "five wise men", a group of economists who advise Chancellor Schroder's government, has plenty of reasons to feel cheerful. The German economy is growing faster than anyone predicted, inflation is under control and the number out of work, although still around four million, is starting to fall.

But Prof Jurgen Donges declared this week he was a worried man, anxiously watching the continuing slide in the euro's value.

"The Germans were promised before the introduction of the euro that this currency would be at least as strong as the deutschmark. Now people see the opposite in the news every day. Many are losing confidence in the new currency even before they hold it in their hands for the first time," he said.

Until now, German politicians have been muted in their criticism of the euro's performance on the foreign exchange markets, perhaps because the weakness of the currency has made German exports more competitive. But as the euro slumps to new lows and analysts predict it could soon be worth less than $0.90, senior opposition figures are demanding action.

"The euro is making all Germans poorer," Mr Michael Glos, the deputy parliamentary leader of the conservative opposition, complained this week.

Most economists agree that the perils of a weak currency now outweigh any competitive benefits, but few have any suggestions about how to boost the euro's value. Even if, as many observers expect, the European Central Bank (ECB) raises interest rates by 0.25 per cent tomorrow, such a move is unlikely to influence the foreign exchange markets.

The ECB president, Mr Wim Duisenberg, denies the bank is pursuing a policy of "benign neglect" towards the exchange rate, but acknowledges there is little the central bankers can do to boost the euro in the short term.

If the ECB raises rates too swiftly, it risks strangling the economic recovery in the euro zone's biggest economies. And most analysts agree that selling the ECB's own foreign exchange reserves to boost the euro is a strategy that would be doomed to failure.

Germany's Finance Minister, Mr Hans Eichel, insists the slide is no cause for concern and predicts the euro zone's booming economy will soon manifest itself on the foreign exchange markets. But Prof Donges dismisses such ritual optimism and points out that encouraging words have done little to help the euro in the past year.

"We won't tackle the problem if we just keep talking about the euro's `great potential for appreciation'. That will not impress the markets," he said.

Prof Donges does not blame the ECB for the euro's slide against the dollar and he praises the zeal with which it has guarded against the threat of inflation. He argues that the only way to persuade investors to move capital to Europe is to accelerate reform of the labour market, of social welfare and of the tax system.

He is especially critical of Germany's failure to deal with its budget deficit, which stands at a massive DM40 billion (€20.40 billion), and suggests that, with the strongest economic growth since German reunification, Berlin should be able to balance its budget.

More optimistic observers point out that, during the 1980s, the deutschmark was much weaker against the dollar than the euro is today. While the US economy is expected to slow down in the second half of this year, major changes to Germany's tax system are likely to generate a wave of corporate restructuring in Europe. Such restructuring may not bring good news for employees, but it will certainly please the foreign exchange markets and should give the euro a lift.

Meanwhile, as the ECB ponders its decision on interest rates tomorrow, Mr Ulrich Ramm, chief economist at Commerzbank, believes popular confidence in the euro is at a dangerous low.

"The damage to its image is beyond dispute. I would never have believed such a low exchange rate to be possible. I am very disappointed by this development," he said.