KARLSRUHE, Germany, Oct 7 - Economic recovery in the 12-nation euro zone may yet stumble and the rising euro and climbing oil prices pose risks, European Central Bank Governing Council Member Ernst Welteke said on Tuesday. But Welteke held out no early hope that the ECB would come to the region's rescue with cheaper credit, saying that the central bank has created conditions for recovery. "With the lowering of interest rates, the ECB has provided the framework so that the upturn can take hold," Welteke said in a speech before the Law Association. Still his reading of the economy was very cautious. Asked about risks to the outlook, Welteke told : "The consequences of the euro appreciation give cause for concern. The oil prices is not developing as we would have imagined after a successful war in Iraq."
He also said markets took the wrong signal away from the statement issued last month by policymakers from top industrial nations calling for flexibility in currency markets. "Markets have interpreted Dubai in a way that was not intended. It was aimed at the Asian imbalances with the United States, and it was not aimed at the euro," Welteke told . Nor was it intended to drive down the dollar, he said. The dollar has accelerated its descent against the yen and the euro since the Group of Seven finance ministers and central bankers on September 20 called for currency flexibility and urged steps to tackle macro-economic imbalances -- a veiled way of calling on Asian countries to stop weakening their currencies. As the euro has risen against the dollar, up more than seven percent in the past month toward its record high, it has stirred fears that euro strength will stifle exports and weaken corporate profits, snuffing out the nascent euro zone recovery.
SHAKY OUTLOOK
Welteke's comments at first shaved about 20 cents off the euro/dollar but it soon resumed its upward tilt, and was trading on Tuesday at $1.1772 . Welteke, who sits on the ECB's rate-setting Governing Council and also is head of Germany's Bundesbank, was wary about growth prospects. The ECB's official forecast is for the euro zone to start recovering late this year and then full recovery to take hold by the end of 2004. Against this backdrop, it held interest rates steady at record lows of 2.00 percent this month. "The hopes for Europeans of a U.S.-driven upturn could still be disappointed," Welteke said in his speech. "We are cautiously optimistic, but we are aware of the existing risks," he added. He said that recent data from Germany feeds the scepticism about an upturn building in the euro zone's largest economy. He pointed out that while the German IFO business confidence index has improved, most of that came in future expectations component, not current business conditions. "The longer we have to wait for positive data, the greater the danger that confidence worsens," Welteke said. Retail sales for August were also very weak, and the jobless rate is stubbornly high. Additionally, a rising euro is raising concerns among Germam exporters that it will dampen demand.//