Euro fights to retain parity with dollar amid economic policy discord in EU

The euro again slid below parity against the dollar yesterday as market fears rose of economic policy disarray in the euro zone.

A warning from Mr Gerhard Schroder, the German Chancellor, that his country might unilaterally introduce a withholding tax on cross-border savings reinforced the impression that governments were failing to unite around the need to undertake radical reform of the region's economies.

"If all else fails, one will have to consider national solutions," Mr Schroder said, noting British resistance to a harmonised EU scheme.

Economists said the policy threatened by Mr Schroder would risk driving capital out of the euro zone, further weakening the currency. "This is not so much Fortress Europe as Schloss Deutschland," one analyst said.

"It is another example of the way that individual national interests appear to over-ride the utopian ideas of a single Europe when the going gets a little tough."

Foreign exchange markets have been particularly sensitive to developments in Germany since Mr Schroder decided last week to use state funds to bail out Philipp Holzmann, the troubled construction group.

Having dipped below $1 several times during Asian trading yesterday, the euro again broke through the parity level when US data were released showing employment continuing to grow strongly while wage pressures were subdued. It closed at the end of European trading just above parity and held that level in New York last night.

Remarks made by European Central Bank president, Mr Wim Duisenberg to the Wall Street Journal on Friday suggested the bank was not concerned about its slide through $1, adding pressure on the single European currency.

However, analysts also said the economic backdrop in Europe would support an appreciation of the single currency after year-end liquidity concerns ebbed.

The single currency has lost 15 per cent of its value against the dollar since its January introduction, plumbing lifetime lows near $0.9990 on Friday.

The overall economic impact of currency moves is small given external trade no longer accounts for as large a share of gross domestic product as it did for each of the euro-zone's 11 members before they formed a monetary union. However, states like Ireland still import significantly from outside the euro zone and many commentators argue that the currency's decline is affecting public confidence in the entire monetary union project.

Merrill Lynch chief economist for Europe, Mr Holgar Schmie ding, said last night that the euro may go noticeably below parity in thin liquidity ahead of Christmas but saw the currency rising to $1.06 in three months and $1.12 in 12 months.

"We expect the euro to go up to $1.06 early next year and to between $1.10 and $1.12 over the course of next year," he told a lunch with analysts in Geneva on Friday.

His projection compares with Merrill Lynch's most recent forecast for the euro at $1.10 in three and six months and $1.12 in 12 months.