Euro wins a reprieve on upbeat German prospects

THE EURO bounded higher on the foreign exchanges yesterday after helpful comments from Ernst Welteke, the president-designate of the Bundesbank, and figures pointing to a recovery in the German economy.

The euro gained more than a cent to $1.044, up from a low of $1.026 on Monday. It also climbed from its low of 63.79p against the pound to 65.09p.

Mr Welteke played down the currency's decline since January, saying it reflected both stronger growth in the US than in Europe and the shadow cast by the Kosovo crisis. He said an appropriate level for the currency would be around $1.08.

The euro has declined from its launch value of $1.17, with almost every day recently bringing new lows. Mr Welteke suggested the initial enthusiasm in the run-up to the launch of the single currency meant that it had started life overvalued.

He did, however, swipe at finance ministers who had helped speed the currency's decline by allowing the Italian government to relax on its budget deficit target. It was "politically and psychologically a wrong signal," he said, adding: "It should not become a precedent."

New figures yesterday showed the German economy grew faster than expected in the first quarter, averting the threat of recession.

After contracting by 0.1 per cent in the last quarter of 1998, GDP expanded by 0.4 per cent in the first quarter of this year. In the year to the first quarter, the economy grew by 0.7 per cent, compared with a forecast 0.5 per cent.

On the basis of these figures, published yesterday by the Federal Statistical Office, this year's growth could meet the official 1.5 per cent target. "The government sees its view confirmed that a phase of cyclical weakness can be overcome soon," the German Finance Ministry commented.

With exports still depressed by the crises in Asia, Latin America and Russia, growth was led by increased domestic consumption and accelerating capital investment. Exports dipped in the first quarter, but the weakness of the euro is starting to help them recover, with a rise in April.

Although the latest statistics are hardly breath-taking, they nevertheless allayed fears that Germany was slipping into recession, or bumping along the bottom at best.

Economists were particularly heartened by indications that industrial confidence may be returning. Investment in plant and machinery increased by 7.9 per cent, and construction investment by 3.6 per cent in the year to the first quarter.

In that quarter, exports were still falling by 0.8 per cent, but more recent figures show exports and orders increasing in April. Industrial orders in April were up 3.3 per cent, while orders for exports had jumped 5.1 per cent. Once again, it seems, the German economy has weathered the storm. But unless the government starts tackling structural problems, the scale of this recovery will not be very impressive.

The most important task - the reform of the tax system - is yet to begin. Hans Eichel, the new Finance Minister, will be unveiling some of his plans at the end of this month. It is already known that he wants to cut DM30bn out of next year's budget, while the reform of corporate taxation is not due to begin until 2001.

Outlook, page 21