E.U. plans economic reforms to strengthen euro

BRUSSELS, MAY 8. The 11 Finance Ministers of the countries that have adopted the euro as their national currency, today issued a statement saying they proposed to ``speed up'' economic, fiscal and tax reforms to enable the euro regain its strength and credibility on the financial markets.

The statement comes amid growing concern about the fate of the euro which now stands depreciated by 24 per cent since its historic launch on January 1 last year.

How these countries will ``speed up'' the reforms remains to be seen. However, the financial markets have breathed a sigh of relief with the realisation that the Ministers are ``at least prepared to contain the problem of euro.''

The more pessimistic perception in the markets is that the euro may fall still further against the dollar before it stages a recovery. How the European Central Bank (ECB) responds to the challenge remains to be seen, but a further hike of a quarter per cent in the interest rate cannot be ruled out. The ECB is closely monitoring the inflationary pressure. The current rate of inflation remains below two per cent in major euro-zone economies - Germany, France and Italy.

Euro-zone exports have risen sharply with a weak euro and the order books of exporting companies have registered a healthy growth. The rise in exports has yet to make any significant mark on the high rate of unemployment which hovers around 11 percent in these countries.

The economic growth rate could reach four per cent according to more optimistic assessments but may average around three percent by the end of the year. But, much about the psychological impact of the proposed ``reform process'' depends on what the German Chancellor, Mr. Gerhard Schroeder's Government does.

The Schroeder Government has already outlined broad tax and administrative reforms and also proposes to loosen the notoriously tight labour laws to boost employment. But, all this has yet to be translated into reality as analysts conclude that the future health of the euro will depend on the outcome and impact of the German reforms.

The financial community was anticipating a more stronger statement from the Finance Ministers. Many wonder if the ECB will stage a major intervention in the markets if euro does not stabilise in the immediate future. The Germans are against intervention as senior Government officials feel that controlling markets by intervention is ``a very risky process'' which may not have the desired results.

The hiking of the interest rate may make borrowing more expensive for euro-zone exporters and hence caution is advised on this front and the future of euro depends on ``sentiments'' in the markets. The U.S. interest rate may also rise and the ECB will be seen working in tandem with the Federal Reserve. If the euro stabilises at the current level, the ECB will not be forced to intervene but if the euro slides under 85 cents - compared to the current 90 cent against the dollar, then the ECB will have little choice but to defend the euro.

The perplexing issue for euro-zone citizens is that their currency is supported by much economic and fiscal stability and yet they cannot understand why it has been sliding in recent weeks. This year alone the euro has depreciated by 11 percent against the dollar and obviously a hint of panic has been developing.

Today's meeting of the Finance Ministers was convened to ``put out the fire'' and their assurance that they would ``speed up'' reforms may send the right signals to the markets. The ECB has a lacklustre image and so far it has done nothing more than issue statements reassuring worried Europeans about the future health of their slumping currency.