Euro zone undergoing fragile recovery

  • 2003-11-13
  • By Elahe Merel, AFP
BRUSSELS - The 12-country euro zone is seeing the first signs of fragile recovery after a prolonged slowdown, fueled by the U.S. upturn but remaining highly dependent on the euro.New European Central Bank chief Jean-Claude Trichet arrived in his Frankfurt office this month amid cautious sightings of light at the end of the tunnel after a downturn that has seriously stretched the zone's budget rules.

"In the euro zone indicators are increasingly pointing toward a certain improvement in activity in the second quarter of this year," said Trichet in his first press conference on Nov. 6.
After a bleak first half of the year when the European economy stagnated, "there are initial encouraging signs in the euro zone," said Citigroup economist Jean-Francois Mercier.
"In particular recent economic assessments show that business leaders are increasingly confidant about how their order books are developing," he added.
In France domestic and foreign demand is improving, according to the country's statistics institute, while in Germany industrial orders were up by 0.9 percent in September compared with August.
But while hope is in the air, real performance is lagging some way behind: industrial production in the zone's powerhouse German economy was down by 1.2 percent in September, according to data released Nov. 7 that disappointed analysts who had forecast an upturn.
According to analysts, Europe's hopes cannot rely solely on recovering growth globally and in particular in the U.S. economy; only a surge in domestic demand can underpin a solid recovery in the coming months.
"But demand in the euro zone is still lagging," said an analyst at Deutsche Bank, forecasting that Europe's growth will remain significantly behind that of the United States and Japan for some time.
Overall consumer sentiment in particular appears changeable, despite encouraging figures like retail sales in France or a boost in auto sales in September. "Consumers' morale is sapped by the worsening job market," said the CCF bank.
Unemployment, which afflicted 8.8 percent of the euro zone's active population in September, is clouding the horizon. The European Commission warned at the end of October that it is likely to increase into next year.
A hoped-for euro zone recovery would also need to be based on strong exports, but these have been threatened recently by a surge in the value of Europe's single currency.
There is also concern that the euro, currently at around $1.14, could be about to soar again as markets sell the greenback, said Mercier.
"The euro zone economy remains dependent on the rest of the planet and of the euro exchange rate," said analyst Florence Beranger of CDC-Ixis.
Against this uncertain background, the ECB "will not be in a hurry to raise interest rates," said a Deutsche Bank economist.