The euro continued its slide on Tuesday on the consequences of France’s rejection of the European Union constitution.
One of those consequences was the naming of a new French prime minister, Dominique de Villepin.
Villepin, a less-than-popular choice, is seen as against economic reform and has a reputation as being “confrontational”. In addition, he is an opponent of the Iraq war.
French president Jacques Chirac emphasized economics and the environment on Thursday in a 10-minute television address to the nation to urge the French to vote in favor of the European constitution on Sunday.
He said that a united Europe would deal with challenges such as those affecting the environment and the economy, as well as issues surrounding terrorism, more effectively but said that a “no” vote on the constitution would lead to a breakdown of European unity.
He took this nearly unprecedented step - he has only made four other national television addresses of this kind in his ten years as president - including after the 9/11 attacks and at the outbreak of the Iraq war - in the face of polls showing that the majority of French voters plan to vote “no”.
The perceived opposition to the constitution has sent the euro to a seven-month low. The secretary of France’s socialist party, also urging a “yes” vote on the constitution, told voters that they must differentiate between discontent with their government at home and their status as Europeans.
In it’s twice-yearly report on the outlook of the global economy, the Organization for Economic Co-operation and Development called Tuesday for eurozone interest rates to be reduced by 0.5 percent.
This contradicts the position taken by the European Central Bank, which insists that a drop in interest rates would be harmful, is not supported by “sensible” economists, and that interest rates should in fact be raised.
It may be difficult for the ECB to maintain this position in the face of support for the OECD position from Italian ministers as well as from the German minister for economics and labour.
The OECD came to its conclusion after determining that the lack of recovery in the eurozone economies could not be completely explained by external factors such as high oil prices and the war in Iraq.
In addressing other economic issues, the OECD report cut its growth forecasts for all leading economies, putting the blame on imbalances between global economies. It also predicted that the US would see its current account deficit grow to $900 billion (€715 billion) next year.
Despite an increase in political upheaval in the eurozone, the euro held its own on Monday as it rose a fraction in relation to the US dollar, up to $1.2568. The euro held the status quo against sterling at £0.6868, and it fell in relation to the yen, but only 0.3 percent to ¥135.36.
Among the factors influencing the political climate were a call for early elections in Germany and polls showing that both France and the Netherlands look likely to reject the EU constitution in upcoming votes. However German equities rose on the belief that the early election will drive chancellor Gerhard Schröder from office and speed economic reforms.
Farmers in the European Union are facing a time when they will not have subsidies and prices supports in place to protect them from variations in demand for their products.
The Common Agricultural Policy is being phased out and farmers will have to face free market fluctuations without help.
This is being seen by financial experts as a good opportunity to set the stage for an expansion of the farm derivatives market in Europe.
These advocates of expanding the market in farm derivatives are engaged in teaching the European farming community how to use the market to their advantage in improving their financial position.
While European exchanges do make derivatives contracts available, the are underutilized at present.
Many European farmers are hesitantto test the market due to several factors including affordability, the fact that they are used to having help from the Common Agricultural Policy and subsidies, and their perception of derivatives as unacceptably speculative.
They differ in this from United States farmers, where agricultural derivatives trading has been conducted since the mid-1860s when the Chicago Board of Trade opened its doors.
Even Australia is ahead Europe in the use of derivatives. While experts realize that an active farm derivatives market is years away in Europe, the move to develop such a market is already in process.
The European Central bank decided on Wednesday to keep its main interest rate at 2 percent for the twenty-third straight month in a row.
Analysts suspect that the weak economy will mean that interest rates will probably remain the same until at least autumn.
In the eurozone growth is weak and unemployment is rising, while consumer confidence is low. At the same time, inflation rates remain under control.
The European Commission has already revised earlier 2005 growth estimates in the eurozone. The current estimate for 1.6 percent growth is down from 2 percent.
The Commission put the blame for the revision on high oil prices and the strength of the euro. Additionally, German’s six top economic institutes changed their growth estimates for 2005, revising them down to 0.7 percent from an earlier estimate of 1.5 percent.
Although some members of the ECB’s governing council are believed to be in favor of raising interest rates, the current unfavorable economic conditions make such an action unwise at the present time.
Bad economic news out of both the eurozone and the United States last week sent the yields on 10-year German Bund to the lowest level in nearly 4 decades.
Business confidence in Italy and France were reported to be lower in April. The European Commission on Thursday said that economic sentiment in the eurozone fell to 96.5 in April, the lowest since August since 2003 and down from 97.5 in March, indicating slower growth in the second quarter.
And on Friday, the German government announced that it was lowering its estimate for growth in 2005 due to reports of falling business and consumer confidence. Additionally, news from the United States showed that inflation was up while consumption and employment rose only slightly in the first quarter, and that the U.S. economy in general had not grown as much as expected in that period.
All of this combined to send 10-year German Bund yields below the 3.4 percent mark on Wednesday, while on Friday they reached a low of 3.377 percent. This fall in yields were all the more notable in light of expected gains in eurozone yields this year.