By BRIAN FALLOW
At Berlin airport a series of advertisements shows the faces of geeky-looking guys above a slogan declaring: "If you look like this, you should at least drive a Mercedes."
In profoundly affluent Germany a Mercedes is a realistic aspiration for more of the population than just about anywhere else.
But all is not well.
There is distinct grumpiness about having exchanged the mighty deutschmark for a euro which has dropped 26 per cent against the United States dollar since it was introduced last year, compounding the effects of high world oil prices.
Concern is also evident in some quarters about the implications for German jobs of the European Union's prospective eastward enlargement, when unemployment is still at 9.5 per cent.
As the euro dropped to all-time lows below $US0.87 last week, some of the selling was triggered by comments by Chancellor Gerhard Schroeder that the currency's weakness
was "more a reason for satisfaction, for joy, than concern" because of the benefit to exporters.
On the face of it he has a point. Foreign demand for German goods has been growing at double-digit annual rates for more than a year, reaching 22 per cent in the June quarter.
But, to the foreign exchange markets, conflicting messages from European political leaders and central bankers contrast unfavourably with the consistent line from their American counterparts that a strong dollar is just plain good for the United States.
European central Bank president Wim Duisenberg has described the euro's present level as "clearly below fundamental equilibrium" and warned of the inflationary implications if it stays there.
The sort of fundamentals he seems to have in mind are robust growth (a typical forecast is for growth of 3.5 per cent in the euro zone this year, easing to 3.3 per cent next, and a current account deficit which is small by US standards, and minute by those of New Zealand).
But in an era when international capital flows are increasingly driven by equity rather than debt investments, Europe suffers by comparison with the United States in areas like output growth, productivity and the rigidity of labour markets.
Over the past five years gross domestic product growth in Europe has averaged 2 per cent, compared with 4 per cent in the US. And as a crude measure of labour market rigidity, unemployment in the euro zone stands at 9.3 per cent, compared with 4 per cent in the US.
Commerzbank economist Dr Bernhard Pfaff is picking a slight recovery in the euro, to $US0.94 or $US0.95 by the end of the year and $US1.04 in a year's time.
"But that hinges on the US economy slowing," Dr Pfaff said, "and it has often surprised everyone with higher than expected growth."
As for the inflationary dangers of a weak euro, so far that is more a future concern than a present fact. German inflation was 1.9 per cent in the year ended July.
The Bundesbank says the core inflation rate is running at around 1 per cent and has not increased significantly, despite the heavy impact of higher oil prices.
But the weaker euro threatens inflation, both through higher import prices and the stimulatory effect on exports.
The European Central Bank (ECB) is concerned, like the Reserve Bank here, that higher import (and especially oil) prices will trigger second-round inflation through higher wage settlements.
The Bundesbank's Wolfgang Moerke said: "There's almost a hysteria at the moment when people talk about the euro. People find it hard to distinguish between its internal and external value.
"For most people it is the internal value which matters and by that measure it has performed well."
Well, reasonably well.
Maintaining the internal strength of the euro - that is price stability - is the priority target set for the ECB. This year, for the euro zone as a whole, inflation has been near or above the 2 per cent top of its target zone, reaching 2.4 per cent in June.
More damaging, however, for the credibility and public acceptance of the euro is its external value, which has fallen 26 per cent against the US dollar since it was introduced on January 1 last year.
An opinion poll this month found that 63 per cent of Germans would prefer to keep the deutschmark; only 34 per cent wanted the euro. But the euro is a fait accompli, although it will not replace national currencies as physical cash until January 1, 2002.
Germans did not get to vote directly on whether to trade the deutschmark - long a source of pride as the world's No 2 currency and a symbol of economic success - for the euro. The German constitution does not allow for referendums.
Dissatisfaction with that perceived disenfranchisement perhaps forms part of the context of calls last week by the European Union's commissioner in charge on enlargement, Guenther Verheugen, for a German referendum on EU expansion.
The call was supported by Franz Muentefering, general secretary of German's ruling Social Democrat Party. But a two-thirds majority in Parliament is needed for the necessary constitutional change, and the measure is opposed by the opposition Christian Democratic Union.
The concern about enlargement relates above all to jobs. While Germany's unemployment rate is now at 9.5 per cent, it stood at 13 per cent as recently as 1997.
One of the main arguments for European monetary union was that it would put competitive pressure on member Governments to carry out structural reforms.
The tax reforms pushed through by the Schroeder Government in July for example have prompted moves in the same direction by France and Italy.
German corporate tax rates are to be cut next year and personal income tax rates progressively until 2005, dropping the top rate from 51 to 42 per cent.
Euro-wobbles make a mark
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