Euro Growth

Interest rates are rising in Europe. From The Economist today:

The European Central Bank raises interest rates to 3.5%, as the euro continues to nudge up against the dollar

[T]he ECB chose to raise interest rates another quarter of a percentage point, to 3.5%, at its monthly meeting on Thursday December 7th. It was the sixth such increase in the past year, as the export led recovery has slowly spread to other sectors in the euro zone.

Naturally, rising interest rates in Europe tend to reinforce the recent trend of the euro getting stronger against the dollar. The last time the euro/dollar exchange rate was at this level, in 2004 and early 2005, the European Central Bank seemed rather unhappy about it. But perhaps not this time.

The bank isn’t quite as uncomfortable with a rising euro as it used to be: unlike 2004, there has been no attempt to talk the euro down. This time around the recovery seems solid enough to withstand (and even contribute to) a dearer euro. Europe's economy is looking more self-sufficient these days. Companies are finally starting to invest their export profits in domestic expansion, particularly in Germany. Even consumption, previously weak, has finally started to look a little less wan.

Indeed, the European economy seems to be on a reasonably strong trajectory right now, and GDP growth will probably be close to 3% in the euro-zone in 2006, compared to GDP growth in the US of perhaps 2.5%. Note that on a per-capita basis, 3% GDP growth in Europe would be equivalent to almost 4% GDP growth in the US - a very respectable rate of economic growth, indeed.