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Economic Growth Predicted in Europe

January 4, 2000

FRANKFURT, Germany (AP) _ An influential German economic institute warned Tuesday that an interest rate hike by the European Central Bank would jeopardize predictions for an economic comeback in the countries using Europe’s common currency, the euro.

The report came on the eve of Wednesday’s ECB meeting, where the banks’ governing board was expected to discuss the merits of a further rate increase to guard against inflation. Economists speculate another hike could be in the works as early as March, and that central bank chief Wim Duisenburg might signal the bank’s intentions after the regular meeting.

``The ECB’s orientation gives reason to fear that the monetary conditions will hamper steady and strong growth,″ the economic institute DIW said Tuesday, releasing its forecast for 3 percent growth this year in the 11 countries sharing the euro.

Still, the institute’s figures gave a boost to those expecting a resurgence in the euro by year’s end. Last year growth was only an estimated 2.1 percent.

Duisenberg has said a stronger European economy would help bolster the sagging currency, which was launched at $1.17 a year ago but dipped below $1 in early December. In Tuesday afternoon trading in New York, the euro was at $1.0275.

Echoing Duisenberg, the DIW said Tuesday the euro’s weakness ``isn’t dramatic″ and noted that it has helped stimulate exports, a key to economic growth.

The institute predicted that inflation will increase only slightly in 2000 as the price of oil levels off and the euro stages a comeback.

``It may take some time, but it will get clearer and clearer that the economy is recovering, not only in the euro area but also in Germany,″ said Petra Koehler, an economist with Dresdner Bank.

She said private consumption and more jobs were spurring the economy throughout the euro zone and cited Italy, Spain and France as noticeable areas of improvement. France’s jobless rate fell to 10.8 percent in November, breaking below 11 percent for the first time since mid-1998.

Koehler said the overall prospects for economic growth mean the euro could turn upward as early as the this spring and predicted it would climb to between $1.15 and $1.20 by year’s end.

Germany _ which accounts for about 32 percent of the euro-zone economy _ remains key to a European comeback.

The DIW noted that the outlook for German growth, which it forecast at 2.4 percent, is less favorable than in other euro-zone countries, because internal demand in Germany is relatively weak. But the country’s export-driven economy still has room to benefit from devalued euro, which makes German goods cheaper overseas.

Koehler remained bullish about German growth prospects, citing recent efforts at tax reform and improving job market. She predicted growth to reach 2.7 percent.

The DIW said that Germany’s jobless rate is expected to fall by 200,000 to 3.9 million this year from an estimated 4.1 million average in 1999.

However, DIW hedged its prediction, saying this year’s decline of Germany’s unemployment rate to 9.8 percent from 10.2 percent last year would be primarily caused by demographic factors rather than increased economic momentum.

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