Now the euro has successfully arrived on the scene it will rapidly become a normal part of everyday life for most of us. Already some states are pushing for the introduction of euro notes and coins earlier than the planned 2002 deadline. However, for those involved in the stock market the time for thinking in euros is now. As part of the euro zone Irish investors have two home markets - the Republic and the markets of the euro-11 states. Most Irish investors will be expecting another good year for the Republic's economy in 1999, but will be less sure of the prospects for the new euro zone, which will come to play an increasingly influential role in Irish financial affairs. The table summarises economic forecasts for growth and inflation in the euro zone.
Forecasted growth of 2.5 per cent looks paltry compared with forecasts for the Irish economy of 7.9 per cent. Nevertheless, for an economic block as large as the euro zone, a growth rate of 2.5 per cent would be very respectable. Unfortunately, these growth forecasts are on the downside. Part of the reason for believing we might be disappointed is that economic performance varies enormously across states and sectors in the euro zone. In general, the larger European economies are finding the going much tougher than the smaller, more peripheral economies. The Netherlands, Spain and the Republic are growing more rapidly than the core economies of Germany, France and Italy. In aggregate, the peripheral economies account for a substantial proportion of euro zone GDP. Despite this, the overall economic health of Europe over the long term will depend on a strong economic performance from the two larger economies of Germany and France.
Another imbalance across Europe is that consumer demand is the main driver of economic growth. Basic industry across Europe is struggling to remain competitive and is suffering from the fall-off in demand engendered by the Asian crisis. Consumer confidence has strengthened across Europe over the past year and has been the main factor in supporting economic recovery. A slackening in this improvement in consumer confidence would adversely change the outlook for economic growth.
On the positive side inflation is very low and, if anything, downward pressure continues to prevail. The new European Central Bank (ECB) recognised this when it authorised the reduction to 3 per cent in European rates. With inflation so low the ECB has the scope to reduce rates further if economic growth shows serious signs of faltering.
For stock market investors who have made stellar returns from investing in Irish stocks in recent years, the somewhat lacklustre economic outlook for the euro zone does not seem to necessitate a rush into European stocks. Another year of strong performance in the Republic should mean Irish company profits will continue to grow faster than the European average. However, over time it will make sense to diversify into a broader range of European shares since they offer the ability to gain exposure to companies covering the full range of economic sectors.
Dealing in European shares is still more expensive and cumbersome than dealing in Irish and British shares. However, European stock exchanges are actively working on developing a unified European exchange, and, once that is achieved it will be equally easy to deal the shares of Deutsche Bank as in those of AIB or CRH.
