By Anne D. Picker, International Economist,Econoday
Monday, June 25, 2001

Markets ended the week on the quiet side as investors waited for the next Federal Reserve move. Earnings worries dominated. No one was happy with the slew of negative economic indicators, especially those from Germany, where economic growth for this quarter could be negative. French data were not reassuring either. Consumers spent less while manufacturing continued to slide. And as expected the European Central Bank did not lower their policymaking interest rates despite the weakening economy. This had little impact on the euro. Foreign exchange traders seemed resigned that the ECB would not lower rates as long as inflation (currently 3.4 percent when compared with last year) continues to be so much above their two percent target. The question remains whether, under the current environment, rising inflation or frail economic growth is more important. Investors are increasingly thinking it's economic growth that is more important.

The Japanese government, in its June economic report, once again admitted that the economy is deteriorating, as falling exports continue to hurt production. As a result, the Cabinet Office lowered its assessment of the economy for the fifth straight month. The Bank of Japan had lowered its own outlook the prior week. Given the ongoing slowdown and downward pressure from the bad loan cleanup as well as uncertainties in the U.S. economy, the outlook may also suggest an economic contraction for the fiscal year.

Two leading economic officials said that Britain would not rush to join the single currency. Britain's policy on joining the euro is "considered and cautious," according to Chancellor of the Exchequer Gordon Brown who indicated the government is unlikely to call for a referendum on euro membership despite this month's landslide election victory. The euro needs to strengthen before Britain can join, Bank of England Governor Edward George added. Brown said passing the five economic tests for entry is essential. He rejected calls by some business leaders to disregard the tests, which he said must be "rigorously" met. George has concentrated on conditions for joining that he considers necessary, apart from the five criteria the government has established. He said that he would like to see a combination of a pickup in the global economy and a recovery in the euro exchange rate before Britain joins EMU. He noted the pound touched a 15-year low against the dollar earlier this month but is close to its peak value against the euro.

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