what scares me about the Euro

Dear Nick,

Recall in my last note to you I hesitated about
trading dollars for Euros.

It isn't because I believe the dollar will be "strong"
but, rather, that I expected the Euro to collapse along
with Germany.

So here is a relevant article from today:

["fair use," "teachable moment," "archival," Section 107(a), 1976
Copyright Act and 1998 Digital Millennium Act]

Economist: Recession threatens Germany

By Reuters, 5/27/2003

BERLIN -- The German economy will grow only around 0.2 percent in 2003
and Germans are "dancing on the Titanic" as their economy nears
recession, the chief of one of the country's top economic think tanks
said yesterday.

Klaus Zimmermann, president of the DIW institute, one of Germany's six
leading institutes, said Germans were still too well off to realize
that they will slide into recession unless the country implements deep
structural reforms.

"Germany is in a phase of stagnation and we're on the brink of
recession. I see no signs at the moment that give rise to hope,"
Zimmermann told journalists at a dinner in Berlin.

He also said the euro's recent appreciation had brought it close to
levels that were dangerous for the German economy and had heightened
the risk of recession and deflation, or a sustained price fall that
discourages buying and stalls growth.

The euro hit a fresh four-year high against the dollar around $1.1876
yesterday. "From $1.30 on things will get critical. There will be a
significant effect" on the economy, said Zimmermann.

Separately, the head of another top think tank, the Ifo institute,
said he saw a small chance of deflation in Germany.

"If the euro keeps appreciating and there's a substantial recession,
there's a 30 percent probability of deflation in the next five years,"
Ifo president Hans-Werner Sinn told the FT Deutschland newspaper.

Zimmermann reiterated the left-leaning DIW's frequent calls on the
European Central Bank to cut interest rates by half a point to help
stimulate the economy and stabilize the surging euro.

He said the center-left government's growth forecast of 0.75 percent
this year was "totally exaggerated" and that growth this year was more
likely to be close to zero.

The 0.5 percent joint forecast the six institutes made in their spring
outlook in April was too upbeat, Zimmermann said. "We're going to be
very close to zero," he said, adding that growth would be around 0.2
percent.

Without major reforms of the welfare state and labor market, Germany,
Europe's largest economy, would run into big trouble, he said.

"We're dancing on the Titanic: We haven't seen the iceberg," he said.
"People aren't badly off enough yet for there to be unrest, but we can
relatively quickly get into a situation where there is no way out, at
least not easily."

Unemployment, at 4.495 million or 10.8 percent on an unadjusted basis
in April and 4.46 million on a seasonally adjusted basis, was likely
to reach 5 million by December, Zimmermann said, not specifying
whether he was referring to adjusted or unadjusted figures.

This story ran on page C3 of the Boston Globe on 5/27/2003. c
Copyright 2003 Globe Newspaper Company.

-- 


           W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB@MIT.EDU http://Cybertrails.org