Skip to main content

LONDON -- With the British economy braking, the

Bank of England

will be under less pressure to raise interest rates when its monetary policy committee meets next week.

For those who think that could spell good news for the euro, think again.

Should the Bank of England decide to boost its repurchase rate by 25 basis points to 6.25% at its regular monthly meeting on May 4, that would likely put further pressure on the euro, which has already fallen to new lows this year against the sterling. With the

Office for National Statistics

saying Friday that gross domestic product growth slowed to 0.4% in the first quarter, down from 0.8% in the fourth quarter of 1999, a rate hike becomes less likely.

Even if the beleaguered euro escapes further humiliation at the hands of the sterling, it's sure to remain under pressure for other reasons that cut to the heart of problems within European economies. Until politicians reach a consensus on a way to grow their respective economies without incurring inflation, the euro should remain weak, argues Philip Chitty, senior European economist at

ABN AMRO

.

The

European Central Bank's

decision last week to raise its refinancing rate by 25 basis points to 3.75% failed to stem the currency's slide. On Friday, the euro traded at 90.87 cents to the dollar (1.69 euros to the pound) -- well off its January 1999 high of one euro equaling $1.18 -- thus leaving the window open for further rate hikes before the ECB's summer recess in August.

But central bankers alone are unlikely to stem the fall of the euro.

"We have a severe problem with any analysis that says the euro should be a strong currency, before structural problems are addressed," Chitty says. Eurozone economies "need to increase their ability to grow without inflation."

Chitty takes issue with Europe's inflexible labor markets. The U.S. economy, for example, can absorb a 4.5% unemployment rate without running into labor shortages, ABN AMRO estimates. In the eurozone economies the figure is 9.5%.

TheStreet Recommends

Also, countries in the European Union (which includes the U.K.) are investing less in information systems and telecommunications -- the high-growth areas of the economy -- than is the U.S. The EU invested just 6% of its GDP (on average) in information systems and telecommunications in 1998, the most recent data available, compared with the U.S., which plowed almost 9% of its GDP into those industries.

Compounding these underlying issues is one of public relations. European officials are divided over strategy for the euro.

"Not a week goes buy without three or four members of different organizations speaking out," Chitty says. "There's no clear voice. That's a problem for financial markets."

Germany's Turn to Phone Home

The auction for the licenses to operate third-generation mobile phone services moves from the U.K. to Germany next week.

Germany will begin its auction on Friday, and the government is undoubtedly salivating over the amount of money it expects to reap. The British government raked in 22.5 billion pounds ($35.4 billion), which is more than it got from privatizing any of the former state-owned utilities.

The Germans, pragmatists that they are, have opted not for a beauty contest or a straight auction, but a hybrid of both. First, the competitors for the licenses will be required to give technical assurances -- where their coverage will extend, how much they expect to charge customers, quality of service -- and then the auction will start.

Despite this difference, the result of the auction may look remarkably similar to that of the U.K.

There will be five licenses auctioned. Like the U.K., there are four incumbent operators in Germany:

Deutsche Telekom's

(DT) - Get Dynatrace, Inc. Report

T-Mobil

,

KPN's

(KPN)

E-Plus

,

Viag's

Viag Interkom

and

Vodafone AirTouch's

(VOD) - Get Vodafone Group Plc Report

B2

. So the result may mirror the U.K.'s, where four licenses went to incumbents and the fifth to a newcomer.

Debitel

and

Mobilcom

, which have confirmed they will bid for a license, are the new entrants.

The U.K. auction has also moved the argument about prices out of the realm of speculation.

"The U.K. was the first auction and before, it was all speculation how much these licenses were worth," says Rodrigo Parreira, a senior consultant at

Cluster Consulting

. "Now we know how much operators value these licenses."

While much of the mainstream press went overboard denouncing the prices paid as too exorbitant, thankfully for the companies, investors don't appear too fazed. On Friday, the day after the U.K.'s auction, Vodafone closed up 5.5% at 294 1/2, British Telecom was up 1.7% at 11.51 pounds, and Deutsche Telekom was up 2.5% at 71.39 euros.

Of course, that's not to say that the prices in Germany won't be higher.