By Nawab Khan
BRUSSELS, Jan 13 (KUNA) -- The policy shift of the European Central Bank, the slow economic growth in Europe, the Greek crisis and the steep drop in oil prices are factors behind the big drop in the euro exchange rate, according to two leading European economists.
"It is a combination of different factors, it's not just one factor. Certainly the planned actions of the European Central Bank play a role. The political uncertainty which is associated with the Greek crisis will also influence the euro exchange rate," Dr. Fabian Zuleeg, Director and chief economist at the Brussels-based think tank European Policy Centre, told the Kuwait news agency, KUNA, in an interview.
"But I think fundamentally what is behind it is the long-run growth projections for Europe in comparison to other regions of the world such as the US. In the end we are looking at a weaker economy in Europe which would mean that the Dollar will continue to strengthen," he opined.
The euro last week hit a 9-year low against the dollar, at 1.17. It was the euro's lowest level since late December 2005.
On his part, Nicolas Veron, senior fellow at Bruegel, a Brussels-based European think tank specializing in economics, said the drop in the euro exchange rate is due to the European Central Bank'a (ECB) policy shift.
"I don't think it is much linked to the development in Greece. We saw in 2011 and 2012 that instability in the eurozone did not mechanically result in a decrease in euro exchange rate. So I think it has much to do on the policy signals coming from the ECB," he told KUNA.
Zuleeg said he expects that the euro rate will remain relatively low for the coming months but added that it is difficult to predict towards the end of the year.
On his part, Veron declined to forecast on developments this year saying "I never make forecasts on foreign exchange rate. They are notoriously difficult to predict. I won't be surprised if the trend continues, but I am not making any forecasts." He said the drop in oil price "is also part of the context " and added "you see different reactions in oil importing countries on this." The ECB's governing body is expected to meet on 22 January to discuss a new government bond-buying programme hoping that injecting more money into the economy will drive up demand and force up prices in the European economy.
"It is certain the ECB is going to do this so the exchange rate reflects that proposed action," commented Zuleeg.
He noted that the drop in oil prices will have some influence but it depends very much on what exchange rate.
"The low oil prices are also affecting some other countries so it depends very much on bilateral relationship whether you are oil exporting countries or oil importing countries," he said.
On the economic situation in Europe, Zuleeg said "we are in a period where economic growth remains difficult." "We are not talking about very high growth rates. Certainly we have some problems with Germany starting to slow down so overall growth performance is not going to be very high in Europe. It is not going to be a recession but certainly not high growth," he added. (end) nk.mt