"What is a fact is that the political uncertainty will hamper the efforts in Europe to introduce more structural reforms in Europe, which are so very, very necessary."
Already the manufacturing sector is stumbling and high oil prices are hurting business and consumer sentiment, while the slow pace of market liberalisation in the euro zone's main economies has also played a part in braking an economic upswing.
"The ECB has to own up that there's a fatal flaw in their recovery optimism," said David Brown, chief European economist at Bear Stearns in London.
EURO SLIDES
Doubt over recovery and the bigger-than-expected Dutch "No" hit the euro currency, which slipped below $1.22 (67 pence) against the dollar to a fresh eight-month low. A weaker currency is a mixed blessing for the ECB, helping exports but harming inflation.
While none of 63 economists polled by Reuters expect the ECB to change interest rates this month, markets are starting to price in a possible cut and analysts are looking for a softening in the central bank's relatively hawkish stance.
Euribor interest rate futures have scaled new contract highs, eyeing a roughly 15 percent chance of a cut this year.
"People are already speculating for the ECB to communicate ... that there is an option for a rate cut," said Alessandro Tentori, bond strategist at BNP Paribas.
So far ECB President Jean-Claude Trichet has resolutely ruled out a cut, saying rates are highly stimulative and getting inflation below 2 percent is the central bank's guiding principle. He will give a news conference at 1230 GMT (1330 BST) to explain the Governing Council's interest rate decision, due at 1145 GMT.
GRIM BACKDROP
The Governing Council faces the grimmest economic and political backdrop in many months. First-quarter economic growth in the euro zone was weaker than expected at 1.3 percent year-on-year, and the ECB staff is expected to downgrade its projection for 2005 growth to around 1.4 percent from 1.6 percent in updated economic projections due out on Thursday.
The weakening economy and increasing uncertainty over the pace of future economic reforms have prompted mounting calls for an ECB rate cut -- from political leaders in Germany and Italy.
"There is also a message for the ECB here," said Christoph Leitl, president of business lobby Eurochambres after France rejected the EU constitution. "The message is they have to act, they have to contribute to active economic policies."
The respected Paris-based Organisation for Economic Cooperation and Development has described the case for a 0.5 percentage point cut as "rather compelling."
Nonetheless ECB policymakers insist that it is slow structural reform, not already-cheap euro zone financing rates, that stand in the way of a stronger recovery.
The past month has brought the ECB little cheer. Business and consumer confidence remained weak. Sentiment worsened in Germany, Italy and Belgium, and joblessness stuck at 8.9 percent, leaving 13 million people without work.
But inflation did edge down to an annual rate of 2.0 percent in May to the upper threshold of the ECB's definition of price stability, and price pressures may continue to ease as the cost of a barrel of oil fell by 1.5 percent over the past month.
"We see little chance of a rate cut," said Lorenzo Codogno, co-head of European economics at Bank of America. But deteriorating economic indicators are likely to cause a shift in the central bank's tone, he said.
The euro has happened: On 1 January 1999, 11 EU countries - Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain ? adopted the euro as their currency. Exchange rates between the national currencies, which continue as sub-divisions of the euro, were irrevocably locked. On 1 January 2001 Greece followed. This means that in legal and economic terms, all twelve have the same currency. So even before notes and coins were introduced, the euro was being used in loans, mortgages, salary payments, bank accounts, tax payments, investments, foreign exchange, trade transactions etc, Notes and Coins: from 1 January 2002, euro notes and coins were introduced, and the national denominations removed from circulation. Notes and coins of the so-called legacy currencies (French francs deutschmarks etc.) must be taken out of circulation by 1 July 2002. In practise they will have disappeared by March.
Who manages the euro? The euro currency is managed by an independent European Central Bank (ECB), based in Frankfurt. The ECB implements monetary policy for the Euro-zone, setting interest rates, conducting foreign exchange operations, holding reserves and authorising the issue of euro banknotes. Its Governing Council is made up of representatives of all the Central Banks in the Euro-zone, as well as the Executive Board of the ECB (headed by its President, Wim Duisenberg).
Will the UK participate in EMU? Under the 1992 Maastricht Treaty, the UK secured an opt-out allowing it to determine at a later stage whether it would seek to join the euro (assuming it met the conditions for participation). The UK Government has announced that it supports euro participation in principle, but that the UK is not yet ready to take part. The Government has announced five tests to judge when and whether it would be in the UK?s interests to join.
Will EMU lead to a ?superstate?? Many critics of EMU are concerned that EMU will lead inexorably to a form of ?superstate?, that key policies such as tax and spending issues will increasingly be dealt with at EU level and that this will lead to a ?single country called Europe?. However, none of the 12 governments who will form the euro zone wish or expect to lose power in this way. The UK Government has made clear that it does not consider the constitutional implications of EMU to be important enough to represent a bar to membership. The need for closer economic policy cooperation will continue, but there are no proposals to extend the scope of the EU into public spending decisions or to remove the need for unanimity in decisions on tax. A Stability and Growth Pact has been signed to dissuade Euro participants from running large public sector budget deficits, but the scale and the direction of taxation and public spending remain in national hands.
Are the different EU economies close enough to have a single currency? The 12 countries taking part in the Euro have worked hard in recent years to achieve stable and lower levels of inflation, interest rates and budget deficits. Governments have shown their commitment to a common economic strategy. Of course, there will still be significant differences in wealth between different Euro participants, just as there are now between different regions within one country. The aim of EMU is not to equalise, but to bring benefits which will spread over the EU economy.
What about Economic Policy? Macro-economic policy of the EU Member States is set in accordance with Broad Economic Guidelines. These guidelines are proposed by the Commission and set by Member States? Ministers in the Ecofin Council. Although non-binding in the legal sense, policy implementation is subjected to a ?peer review? process involving the Commission and the Member States. All 15 Member States, including the UK, participate fully in these arrangements
Current issues
With the Euro safely launched more than 3 years ago, attention has focused on its level against other currencies and the interest rate policy of the ECB. In the long term, the level of the Euro can be expected to follow the markets? assessment of the relative strength of the economy - latest indicators are at: http://europa.eu.int/comm/eurostat. It should be stressed that the Euro was created to eliminate the downside of floating exchange rates among participating currencies, not for its relative strength against currencies outside.
The institutions set up to manage the new system, particularly the European Central Bank, are working together to establish credibility both in the EU and on the world stage.
National stability plans from each participating government are now discussed to ensure compatibility in public borrowing policies. National convergence plans are established by the 3 non-participating Member States (including the UK) to gauge their progress against the Maastricht criteria. Together with the Broad Economic Guidelines, these plans serve as the basis for a gradual increase in economic coordination in the EU.
For Euro participants, the introduction of Euro notes and coins in both public and private sectors continues. This is a major technical and logistical undertaking and the Governments met regularly to compare their preparations for 1 January 2002 and for the subsequent withdrawal of national currencies. By the end of the first week of introduction of notes and coins, over 80% of withdrawals from euro-zone banks were in the new currency.
The Danish Public voted against joining the Euro in a referendum. In the UK, the Government has launched a publicity campaign to make sure that business is aware of the implications of the launch of the euro. It continues to monitor progress towards meeting the five economic tests. EMU is a logical extension of the single market and is seen as a way to make the EU more competitive, securing prosperity and jobs. Inside the eurozone, business benefits from:
Lower costs of managing cash. Costs of converting money from one national currency to another are eliminated, with particular benefit for small & medium-sized companies. A further side-effect is that cross border transactions are becoming faster and cheaper;
Lower currency risk. Exchange rate fluctuations are also eliminated. Firms are no longer exposed to losses associated with such movements, nor do they need to hedge business transactions against exchange rate risk, saving on the cost of hedging operations;
A larger, more transparent market. Customers will find it easier to compare prices and make purchases across national boundaries, unimpeded by the complexities of different currencies. The Euro-zone becomes a more competitive environment in which to operate.
Meet Amarendra Bhushan, A leading Strategic Human Resource Consultent, MBA from American university of athens, greece, also editing The European journal of NRI finance magazine (The TRIBUNE).As one of the leading article writer, and corporate hotel professional. Advisor to various organizations and hotels. He is an elected member of south Indian hotel and restaurant federation. Now staying at ancient city of Athens Greece.PH-0030-6947667507 abdhiraj@mail.gr