Low-value euro is an effective remedy for the economic sick man of Europe

From his office on the 35th floor of a Frankfurt skyscraper, Deutsche Bank chairman Mr RolfErnst Breuer has an unrivalled view of the city below. But his gaze has been fixed in more recent times, not on such sights as the Paulskirche or the old Opera House, but on a 90 hectare site behind the main railway station where Deutsche Bank hopes to develop a complex of offices, hotels, shops, museums and cinemas.

"Everybody's talking about it so much, we want to get involved too," he said.

The fact that Mr Breuer is contemplating such ambitious plans speaks volumes about the new mood in the German business world, where gloom has reigned uninterrupted for the past few years.

The latest figures confirm that Europe's biggest economy is on a roll, with business confidence improving as economists adjust their growth forecasts upwards. Germany's output grew by 0.4 per cent more during the first three months of this year than most experts predicted and the country's exporters continue to boast record profits.

Even BMW, which saw profits fall as a result of its disastrous involvement with Rover Cars, presented an upbeat assessment of its prospects last week.

Deutsche Bank's profits grew by more than 45 per cent during the first six months of this year.

Much of Germany's export boom is due to the fall in the value of the euro since its arrival in January, which made goods from the euro zone cheaper on the world market. But the recovery owes much to the recent upturn in Asian economies which import more goods from Germany than from any other European country.

German firms exported 13 per cent more goods to south-east Asia in the first three months of this year than during the same period last year - compared to a general increase in exports of 5.6 per cent.

"The crisis countries in Asia are growing again and western Europe is about to recover," according to Mr Jorg Kraemer, an expert on the euro area with Invesco Asset Management.

Europe's recovery coincides with signs that the American economy may be about to slow down, a development that could give an unwelcome boost to the euro's value.

Mr Ernst Welteke, president-designate of the Bundesbank, has warned there is a danger that the euro could become overvalued, making no bones about the nature of Germany's fear of a strong currency.

"We don't want too strong an external value for the euro because it would weaken our export trade," he said.

The rise in the euro's value against the dollar appears to confirm the confidence of Mr Wim Duisenberg, president of the European Central Bank, that a strict anti-inflation policy would eventually persuade investors that Europe's new currency is built on solid foundations.

At their last meeting, the ECB's governing council expressed little concern about the euro's external exchange rate but warned that, if inflation started to rise, interest rates in the euro area might increase from their present rate of 2.5 per cent.

If the current trend continues, a rising euro could put an abrupt halt to boom, exposing the black hole at the heart of the country's recovery. Despite their record profits, few German firms are taking on new staff and the economic upturn has yet to translate into shorter dole queues.

Mr Oskar Lafontaine, Germany's much-maligned former finance minister, maintained that the key to economic success was improving domestic demand by giving consumers more money to spend. His successor, Mr Hans Eichel, has adopted a more conservative approach, cutting government spending and attempting to boost the economy by lowering business taxes and reducing labour costs.

The present level of economic growth - expected to be about 1.7 per cent this year - will not be enough to make a substantial impact on Germany's unemployment problem. Mr Lutz Hoffmann, head of the Berlin-based German Institute for Economic Research, maintains that the economy must grow by 2.5 per cent each year before firms take on new workers.

"1999 will be another lost year for the unemployed," he said.

Mr Gerhard Schroder's centre-left government was elected on a promise to cut Germany's dole queues by at least one million within four years, a pledge that he has made little headway in fulfilling. But the departure of Mr Lafontaine, who was loathed by the business establishment, combined with a cheerier economic atmosphere, could persuade some of Germany's biggest companies to co-operate with the chancellor's plans.

This could mean the end of Germany's stint as the economic sick man of Europe and the dawn of a new era dominated by a strong euro based on low interest rates and negligible inflation.