Global Downturn Tests the Euro

LONDON:The crises in southeast Asia, Russia, and Latin America are confronting the European single currency with its first major challenge. For now, the over-riding priority for the EU is the successful launch of the euro on January 1, regardless of the world’s economic storms. But if the European fallout from Asia and Russia turns out to be severe, European Union governments may be compelled to re-examine the single currency’s deflationary bias.

Earlier this month, the Group of Seven top industrialised countries responded to growing fears of a world economic slowdown, by pledging to sustain growth-oriented policies in their own economies.

Many commentators at first took this for a signal that the rich countries stood ready to reduce interest rates, to counter the deflationary pressures from southeast Asia and Russia. But those expectations were quickly quashed when Hans Tietmeyer, President of the German Bundesbank, and Alan Greenspan, chairman of the US Federal Reserve, both disclaimed any prospect of a concerted reduction of interest rates.

Mr Tietmeyer pointed out that the main economies in Europe are growing strongly, so they do not need an extra stimulus from a rate cut. Moreover, the most immediate monetary task facing the European Union, is the need to move towards a new single interest rate in time for the launch of the single currency on January 1 next year.