Euro rise could hamper economy

europe.cnn.com Friday, January 31, 2003 Posted: 1553 GMT

BRUSSELS (Reuters) - European Central Bank council member Ernst Welteke said on Thursday the euro's fast rise was due to international political concerns and could hurt the economy if it continued.

"The quick rise of the euro, which has nothing to do with a shift in fundamentals, but with the geopolitical situation, could have negative consequences for economic developments if it were to continue like this," Welteke said after making a speech at a political conference.

The euro hit a three-year high against the dollar at above $1.09 earlier this week, but has since fallen back.

Welteke's words echoed those of EU Economic and Monetary Affairs Commissioner Pedro Solbes earlier on Thursday, who said the Commission's concern over the recent rise in the euro was not the level it had reached but the speed at which it had happened.

A growing chorus of European companies also voiced worries on Thursday that the euro's relentless rise against the war-worried dollar may damage profits and the economy.

Germany's second-largest listed drugmaker Schering, French aluminium and packaging firm Pechiney and French industrial gases group Air Liquide all said the strong euro was hitting business.

Oil a concern

Welteke said that concerns over a possible war in Iraq could boost oil prices, which in turn could hurt growth and the prospects of tame inflation. Venezuela had now dropped out as an oil-exporting country for several months, he added.

"One cannot rule out a temporary rise in oil prices, which could also be longer-lasting depending on the political scenario. This could hurt the outlook for growth and inflation."

But Welteke, who is also Bundesbank president, voiced optimism about a rebound in growth prospects if not blocked by international political concerns.

"The recovery could definitely happen this year, if external risks don't stand in the way," he said.

The ECB cut its benchmark interest rate by a half-point to 2.75 percent in early December but many economists say the ECB will trim borrowing costs again in the coming months in the face of falling inflation, a strong euro and ongoing economic weakness.

The ECB itself has said its interest rate level was appropriate and characterised its stance as "wait-and-see."