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The Gloom Lifts in Euroland

Europe's awash in liquidity, and a soft landing in the U.S. could help Euromarkets even more.

FRANKFURT -- It seemed a sure thing back in the dark days of December: The

European Central Bank

would be forced to cut key rates by spring.

But the days in Europe don't seem quite so gloomy anymore. The Jan. 1 launch of the euro has triggered an epidemic of euro-phoria that has sent stock markets rocketing. Europe is awash in liquidity. And the U.S. economy, the global locomotive, might be headed for a picture-perfect soft landing instead of an ugly crash reverberating around the world.

There is a chance that the first rate change by the ECB will be up, not down as most economists now forecast. But truth be told, it's too early to know what the ECB will do. They don't know yet. They, and we, need more data, need to see how global developments will affect Euroland's economy.

ECB President

Wim Duisenberg

will provide some clues when he briefs the press today after a meeting of the policy-making Governing Council.

It is a near certainty that Euroland growth this year will be less than last year's 2.8%.The question is: Will growth slow enough to trigger a rate cut? Private economists now see 1999 Euroland growth anywhere from 1.7% to 2.3%.

Anything below 2.0% would likely force the ECB to ease rates. And there are plenty of time bombs ticking that could slam Euroland growth below 2.0%: a major slowdown in the U.S., a meltdown in Japan, investors fleeing Latin America, Russian defaults, another round of stock market crashes, sharp gains in the euro that would hurt European exports. And there's always the Big D, as in deflation.

But as noted, those concerns now appear to be just that. That's in contrast to late last summer and autumn, when a glance at the morning newspaper or the


screen started stomachs churning and palms sweating -- and elicited shouts from German and French politicians for rate cuts.

Uwe Angenendt, chief economist at

BHF Bank

in Frankfurt, said "the picture is changing now." And he mainly means the picture of the U.S. economy, which appears to be humming along fairly well, thanks to Fed Chairman

Alan Greenspan

and his aggressive rate cuts last fall.

If the U.S. economy behaves, another rate cut might not be needed. And if the U.S. stock market continues to sizzle, Greenspan might be nervous about adding more rate-cut fuel to what some already believe is an out-of-control, irrationally exuberant stock market fire. "Without another Fed rate cut, it would be difficult for the ECB to cut rates," Angenendt said. "And if we see a soft landing in the U.S. economy, that would help European exports and the European economy."

A gentle U.S. landing might also help the dollar defy expectations and hold firm against the euro. Or the greenback might even surprise and strengthen. This would also help European exporters and decrease the need for a rate cut.

Angenendt was nearly alone last autumn to correctly

call the dramatic -- and confidence-inspiring -- Bundesbank-led coordinated rate cut on Dec. 3. And back in those scary days, when business confidence and growth forecasts slipped almost daily, he expected the ECB to cut again in the first quarter.

But not anymore. Although he still leans in favor of a rate cut in the second quarter, he believes the next ECB rate change might be a hike, although not until next year.

Soaring European stock markets are another factor that could prevent the ECB from cutting rates. Bundesbank President

Hans Tietmeyer

, also an influential ECB council member, was known last summer to be concerned about record high European stock markets. Most markets here are still well off those record highs, unlike the gravity-defying U.S. market. But Euro stocks also bounced mightily in the fourth quarter last year and in just three trading days this year have jumped 7% to 9%. There would be nothing like an ECB rate cut to send European markets exploding to new highs.

Stefan Bergheim, economist at

Merrill Lynch

in Frankfurt, said, "I definitely know it is a concern of Bundesbankers. They have repeatedly talked of Japan's bubble economy, Japan's mistakes in the1980s." Plus, the ECB rate of 3.0% matches the Bundesbank's historic low. Any move down is uncharted territory.

Adolf Rosenstock, economist at

Nomura International

in Frankfurt, agreed. "I think the ECB is afraid to go below 3.0%. That would put them deeper in a monetary corner, a liquidity trap, where monetary policy gets less and less effective as rates go down. Kind of a Japanese situation. They are very concerned about that."

Hmmm. Spoil all the fun just because they're scared of an itty-bitty bubble popping. Tietmeyer and Duisenberg probaby don't even own any

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. Party-poopers.