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Data to Show Further Divergence in the Euro Area Economy

Greenspan may have the more dramatic decision to make this week, but Duisenberg is likely to have a bigger headache.
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Alan Greenspan

has it easy.

Sure, the U.S. markets are terrified that Friday's higher-than-expected consumer prices data increases the likelihood the

Federal Reserve

chairman will raise interest rates next week. But at least he doesn't have to try to reconcile his decision with contradictory elements like inflationary Irish growth or lagging Italian industrial output.

Wim Duisenberg

, the president of the

European Central Bank

, does have to worry about such things, however, when he considers the appropriateness of the bank's 2.5% benchmark refinancing rate. And European economic data to be released next week highlight the difficulty in setting a one-size-fits-all interest rate for the 11 countries that make up the euro area.

In theory, when Duisenberg and the rest of the ECB's policymaking

Governing Council

meet on Thursday to discuss monetary policy, they will take a holistic view toward the euro area economy. When the six ECB executive board members and the 11 national bank governors walk into the ECB tower in Frankfurt, they are supposed to check their nationalities at the door. But even if the central bankers can set aside their identities for half a day, they may have some difficulty in convincing the rest of their countrymen to eagerly accept a pan-European monetary policy.

Sure, U.S. interest rates don't take into account the different needs of the economy in Silicon Valley or in Detroit. But then again no one expects it to either. Everyone figures the Fed will look at the needs of the whole country. In Europe, however, Dublin still doesn't really care about the dismal business confidence in Dortmund. And as things grind to halt locally, Milan certainly doesn't worry about inflationary pressures in Madrid.

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This highlights the true challenge placed upon Europe's new monetary authorities. And although the ECB members are all professionals, you can't help but to imagine the derisive snort coming from the German central banker as his Irish colleague complains about the woes of having a "Celtic Tiger" of an economy.

Going Their Own Way

In preparing for monetary union, the economies of participating countries began to converge, allowing the difference between their highest and lowest inflation levels to narrow to 1.4 percentage points in 1997. But by March of this year, the spread had widened to 2.7 percentage points, as national economies again began to go their own way.

A government report released Friday showed that April Spanish consumer prices increased a greater-than-expected 2.4% on the year, the highest annual rate since February 1997. At the other side of the euro area inflation scale, a government report on German wholesale prices to be released in the coming week is expected to show that despite rising world energy prices, wholesale prices for April remained subdued compared with the same month last year. (German consumer prices were unchanged in April versus March and annual inflation was only 0.7%.)

Germany's weakness is troubling, but the Italian economy continues to be the euro bloc's biggest laggard. Industrial output for March compared with March 1998 plummeted 2.3%, following a similar decline in February. "While output was not as weak as expected in March, it was certainly not strong, and the economy remains the most anemic in the EU," says Alison Cottrell, chief European economist for

PaineWebber International

in London.

Conversely, figures for Spanish March industrial production, to be released Thursday, are expected to show that output expanded by as much as 2.8% on the year as domestic demand remained robust, according to Catherine Lee, an economist for

Greenwich NatWest

in London.

Also on the ECB's watch list for next week will be a report on Thursday from the Munich-based


economic institute on Western German business confidence. Business sentiment has been wallowing near two-year lows since the beginning of the year, and although it has stabilized somewhat lately, German companies aren't exactly bursting with optimism.

So while Greenspan may have the more dramatic decision to make this week, the nuances of Spanish inflation and German business sentiment are likely to give Duisenberg a bigger headache: He has to deal with the sizeable problem that one-size-fits-all products don't really fit anyone very well.