Today, Mr Wim Duisenberg, the president of the European Central Bank (ECB), is due to appear before the Economic and Monetary Affairs Committee of the European Parliament. He can expect some tough questioning on the performance of the bank and of the currency it is charged with overseeing. The euro finished trading on Friday at below 86 US cents, amid growing pessimism about the outlook for European growth. The currency has also been affected by doubts about the ECB's strategy in managing the currency and a poor performance by the bank in communicating its views to the market.
The outlook for the main euro-zone economies is uncertain. German growth is slowing markedly; figures published last week show business confidence at its lowest level for two years. Meanwhile, the French economy, which had been performing more solidly, may also be slowing, according to recent data. The main reason for the fall-off in growth in the Continent's main economies appears to be the US slowdown.
Worryingly, inflation in the euro zone remains stubbornly high, registering an annual rate of 2.9 per cent last month, well above the ECB's 2 per cent preferred maximum. This has led analysts to fear that the ECB will not feel able to respond to slowing growth by cutting interest rates again. It surprised the markets by announcing a 0.25 per cent point cut earlier this month, but its tactics stand in contrast to the aggressive reductions by the US Federal Reserve Board, which has announced five successive interest rate cuts of a half point each and has indicated that it may cut again.
Subsequent economic data have confirmed the coincidence of slowing growth and relatively high inflation, although there are no indicators of a sharp downturn, as is happening in the US, where figures on Friday showed that the economy only grew at an annual rate of 1.3 per cent in the first quarter of the year.
Economic analysts remain uncertain about the outlook for the US economy. The Bush administration will hope that the $1.35 trillion tax-cutting package passed by Congress on Friday will help to support consumer sentiment. While it is an 11-year package, it will involve refunds for all US taxpayers later this year and so will have some impact on the growth outlook.
While the US economy will get some boost from lower interest rates and lower taxes, the policy response on this side of the Atlantic is less clear. Some easing in inflationary pressures may allow the ECB to reduce interest rates in the months ahead. But for the moment it is caught in a bind because of relatively high inflation and slowing growth. It is an unwelcome picture just months ahead of the introduction of euro notes and coins in 2002.