What to Watch in Europe in 2005

A rising euro, deflating housing market, new pollution limits, angst over a new EU constitution. A riveting year is shaping up

By Beth Carney

Europe faces an unusual level of political and economic uncertainty in the coming year. Of course, the biggest news events of any year are always the ones no one can predict, but here are some important developments to watch for the continent in 2005:

The euro will keep rising.

The unified currency's climb against the dollar in 2004 is already vexing European finance ministers, and economists doubt the coming year will bring any relief. The eurohas jumped 10% against the dollar since September alone. "We see the euro carrying on rising," says Simon Hayley, a senior international economist at Capital Economics, an independent economic consultancy in London. The group predicts that one euro, now worth about $1.33, will buy $1.40 at some point in 2005.

For European countries already struggling with slow growth, the trend is unwelcome. It means European exporters will struggle to sell goods in the U.S. and will also face competition at home from cheaper imports. Despite such conerns, most analysts say the always-cautious European Central Bank won't take action to prop up the euro anytime soon. In the meantime, manufacturers may see layoffs, says Graham Turner, economist with London research firm GFC Economics. Turner says: "It's negative for the economy."

Ratifying the new EU constitution opens old wounds.

The European Union constitution was signed in October at a ceremony in Rome, but the real debate on the document starts in 2005. As many as 10 of the 25 member countries are expected to hold referendums to ratify it over the next two years, with the remainder leaving the task to their parliaments. The constitution, which would replace all former treaties and establish new rules for operating the EU, still faces passionate opposition in a number of states where voters are either skeptical of ceding power to Brussels or unhappy with the terms of the deal.

Britain, which has been deeply wary of increased ties with Europe, isn't likely to vote until 2006, but campaigning on the issue will heat up by the end of 2005. Even countries such as France, considered a pro-European stalwart, could struggle with ratification. Many French voters are anxious over the proposed entry of Turkey into the union. Warns Aurore Wanlin, a research fellow at the Center for European Reform in London: "If Britain is isolated, then the implication will be huge, but if France were to vote no, the constitution might have to be renegotiated." These issues could dominate the headlines in 2005.

The end of Europe's housing bubble may be at hand.

Home prices in Britain have doubled over the past five years, but that could be about over. Indeed, some signs show that it already is. Halifax, Britain's biggest mortgage lender, reported that prices fell slightly in October and November, and the bank warned of a 2% decrease in the coming year.

Others paint a riskier scenario. Andrew Lilico, an economist with independent consultancy Europe Economics, expects British home prices to plunge by 30% over the next two years as investors pull out of the housing market. "The opportunity for a quick buck won't be there anymore," says Lilico. "Prices can fall very quickly."

Other property hotspots that could see prices leveling off or cooling down in 2005 include Ireland and Spain, which have also experienced unusual booms. An unlikely welcome spot for homeowners might be in Germany, says Llyod Barton, a European economist at PricewaterhouseCoopers. There, prices are actually lower than they were in the '90s but are starting to see some upticks in western cities.

Olympic dreams?

On July 6 the International Olympic Committee will choose the host for the 2012 Summer Olympics, and European cities are dominating the contest. Paris is widely seen to be the front-runner in this race, thanks to its attractive venue plan, reliable transit system, and successful hosting of the 1998 World Cup. Also vying for the IOC nod are London, Madrid, and Moscow. The games will cost the winning country billions of dollars to stage -- the British government has already pledged $4.6 billion for infrastructure improvements -- but hope springs eternal that the games will bring even more cash into the local economy.

A Paris Olympics, according to French planners, would create 40,000 permanent new jobs and transform a city district that's now an industrial wasteland into a vibrant new neighborhood. Although IOC votes are known to be unpredictable, the City of Lights' lead looked strong earlier this month, when Britain's former Sports Minister Kate Hoey told the BBC that the London marketing effort was a waste of money. "We don't deserve it, and Paris does," she said.

As for the French bid, spokeswoman Valerie Amant says: "We are really trying to concentrate on our own race and not look at anyone else." Spoken like a true competitor.

Euro-angst over climate change will shape public policy.

No continent has been as serious about countering climate change as Europe. The EU's scheme for trading carbon emissions goes into effect Jan. 1. In an effort to bring EU countries in line with the Kyoto protocol, member states will be setting caps on carbon-dioxide emissions thought to contribute to global warming. The Kyoto protocol requires EU countries to reduce their carbon emissions level by 8% from 2008 to 2012.

Under the new emissions-trading scheme, each country will allocate a number of credits to heavy industries, such as oil refining and steel production, and companies in those industries will be able to buy and trade credits to meet their targets. Implementing the plan may be bumpy for some countries, though. Britain has just announced that it has revised its more ambitious carbon-emission targets upward, although it's still on track to meet the Kyoto guidelines. Still, expect the market for trading in carbon-emissions credits to grow rapidly.

Carney is a contributing correspondent for BusinessWeek Online in London

Edited by Thane Peterson

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