International
Tuesday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Jan 3, 2006, 08:04

And there has also been an improvement of over €2.1bn in the Exchequer balance.

The deficit of around €852m to be revealed tomorrow compares to the forecast total of €2,988m at the start of last year.

The figures will come as a further boost for the Government as it heads into the last year before a general election.

It has already had a giveaway Budget, and a continuation of the trend in favourable Exchequer performances this year will give it further scope for tax and social welfare improvements as it embarks on the campaign for a third term in office.

Finance Minister Brian Cowen claims the Exchequer finances are in a sound position because of the Government's strategy.

"Our tax and economic policies have put more money into the pockets of taxpayers who are spending and investing this extra money as they see fit. This extra spending and investment yields extra taxes," he says.

The buoyant economic situation will be confirmed when the end-of-year Exchequer returns are published by Mr Cowen tomorrow.

Throughout the year, one trend which has continued is the fact that expenditure in several Departments has been below what was provided for.

This has been the case particularly in the health area where the administrative changeover from the health boards to the Health Service Executive has meant that a lot of the planned spending did not take place.

The Exchequer receipts for the year include €489m from the main special investigations of the Revenue Commissioners, which was €294m higher than expected for the period. Even excluding the impact of these one-off receipts, taxes were over 4pc above the anticipated level.

The main increases over the expected "take" were on VAT, stamp duty, capital gains tax and excise.

This, according to Mr Cowen, is due to strong growth in the domestic economy and "in particular, in personal consumption expenditure", the volume growth, which was over 5pc for the year.

"The continued buoyancy of the property market is also a contributory factor in tax revenues being ahead of target. Income tax, excluding the impact of one-off receipts from Revenue's special investigations, was broadly on target, while corporation tax was close to €300m below profile," according to the minister.

The department's forecasts for revenues in 2006 from capital taxes include capital gains tax of €2,035m, stamp duties of €2,685m and capital acquisitions tax at €260m.

These amounts represent forecast increases of 3.6pc, 2.1pc and 4pc respectively on the outturns for capital gains tax, stamp duties and capital acquisitions tax for the past year.

The forecasts assume a lower rate of growth in tax revenues from these sources next year than the significant increases this year.

But the predictions still assume a "reasonably buoyant" property market this year, both residential and commercial.

Department sources say that, while there has been comment about the high rate of personal debt, the fact most of this has gone into bricks and mortar means people have an asset to show for it.

The Irish Independent also reports that the fee for changing a flight may be only €30 to the punter, but to Ryanair it's €30m, and possibly €78m, in extra revenue for this fiscal year.

As the price of plane tickets fall the importance of the extra charges rises for discount airlines, analysts say.

It's a bit like how they say publicans make their money, not on the spirits but on the mixers, agreed one aviation analyst, who preferred not to be named.

Passengers who pay Ryanair from €30 to €65 for the privilege of changing their minds collectively will add up to €78m to its revenues for fiscal 2005, which ends in March.

That's without factoring in revenue from Ryanair reselling those customers' original seats, possibly at much higher fares because they are being booked closer to departure. Aer Lingus said "between 2pc and 4pc of our passengers make name changes".

There are also less lucrative changes to date, time and itinerary, leaving the total percentage of Aer Lingus tickets changed unknown.

Ryanair quoted upwards of 5pc for both types of change. Neither airline could be reached for clarification.

John Mattimoe, an analyst with Merrion Stockbrokers, said: "Change fees are less than or equal to 2pc of revenues for Ryanair and EasyJet."

Even 2pc of Ryanair tickets changed at a cost that is midway between the two possible fees added up to about €30m of Ryanair's likely €1.7bn in 2005 revenues.

Aer Lingus is expected to have about €880m in revenues and to carry 7m passengers, compared with Ryanair's 35m passengers in 2005, one analyst said. Ryanair makes €7.50 in extras, such as car rental, on top of its average €41.50 fare. Aer Lingus does not break down its revenues in equal detail.

Both airlines recently increased their change fees. The biggest jump was Ryanair name changes, which rose to €65 from €30, with the concession that the customer no longer has to pay any difference in fare.

The cost of changing a name on a ticket with Aer Lingus rose by 40pc to €70. Consumers willingness to pay for convenience appears to have been tested. "The increases suggest to me the airlines are finding that they've pricing power in that area," Mr Mattimoe said.

However, he said it couldn't be construed as gouging, because ultimately consumers benefit. While it is true that low-cost seats create a need for alternative sources of revenue, it's also the case that such ancillary income allows the airlines to further reduce their fares.

"Its a chicken-and-egg argument as to which comes first," he said. Joe Gill, research director with Goodbody, said the revenue per passenger on Ryanair is still the lowest in Europe.

The low-cost airlines are always trying to innovate to drive volumes, he added.

The Irish Times reports that Labour leader Pat Rabbitte has called for a reassessment of immigration policy in the light of the Irish Ferries dispute and evidence of the displacement of Irish workers in a range of industries.

"The time may be coming when we will have to sit down and examine whether we would have to look at whether a work permits regime ought to be implemented in terms of some of this non-national labour, even for countries in the European Union," he said.

In an interview with The Irish Times, Mr Rabbitte said that unless basic standards for workers were established across the EU, Irish jobs would be threatened.

The Labour leader also said that there would be no coalition with Fianna Fáil under his leadership.

On taxation, he committed himself to keeping personal and corporate tax rates at their present levels and refused to be drawn on whether he would propose any increase in capital taxation.

However, he said his party was looking at the idea of a minimum effective tax for the super rich.

On immigration, Mr Rabbitte said that the recent dispute at Irish Ferries had raised serious questions, particularly as the Government had been blocking the directive on agency workers in Europe and had also been blocking the maritime directive.

"If the EU services directive goes ahead you can establish a company in Poland or Latvia and come over here on contract and do an Irish Ferries. You get an agency to employ the workers here at domestic rates in Poland or Latvia. It is a big issue."

Mr Rabbitte said it was nonsense to argue, as Ibec and the Taoiseach had done during the Irish Ferries dispute, that the practice was confined to maritime industries.

"That is manifestly not the case. Displacement is going on in the meat factories and it is going on in the hospitality industry and it is going on in the building industry.

"What Irish Ferries has done has lanced the boil and we need to know more about the numbers coming here, the kind of work they are engaged in, the displacement effect, if any, on other sectors.

"We need to look at that because there is anecdotal evidence about it happening in construction, and happening in meat factories and happening in the hospitality industry."

Mr Rabbitte said that for the very same reasons Tánaiste Mary Harney invited Gama to come to Ireland, he did not expect there would be any outcry from Ibec about the situation because it was contributing to wage moderation.

"We can't compete now in the traditional type industries. The rate of attrition in terms of job losses has been far higher than we have acknowledged. It has been concealed by the scale of the boom. There are many positive spin-offs from the diversity of labour here now, but to say that that should for all time go unregulated I think has been thrown into question by the Irish Ferries dispute.

"There are 40 million or so Poles after all, so it is an issue we have to have a look at."

On tax he said the issue now was fairness in the system.

"There is a lot of merit in looking at the concept of a minimum effective tax for very high rollers. In other words that irrespective of your income, irrespective of the number of schemes and tax incentives that you avail of, that you still pay the minimum effective tax," he added.

On electoral strategy Mr Rabbitte said the divisiveness in the Labour Party that started a year ago was finished and that, despite "Fianna Fáil mischief", the party was united behind the strategy.

"I have made my bed and I am prepared to lie on it. I don't honestly think that it would be in the interests of the Labour Party at this particular juncture to put Fianna Fáil back in power and it won't happen under my leadership," he said.

 The Irish Times also reports that confidence is growing among business leaders that Angela Merkel will lead the country out of its economic slump, but nagging doubts persist. Derek Scally reports from Berlin

This is a tale of two Germans. One's glass is half-full, and he is waiting expectantly for it to fill up in 2006. The other's glass is half-empty and he expects it to be knocked over by 2007 at the latest.

Germany's economic record for 2005 was a mixed bag: growth is likely to average out at around 0.9 per cent, with unemployment still stuck at over 10 per cent.

Meanwhile exports surged ahead, with a record trade surplus of €14.8 billion in September, reinforcing Germany's status as the world's leading exporter.

For 2006, most economic institutes in Germany are predicting the end of the country's economic slump and are out-doing each other with optimistic growth forecasts.

But not all are convinced, with some predicting a one-year flash in the pan unable to stop a long-term trend of mass lay-offs, company closures and a continued exodus of jobs to central and eastern Europe.

The new government has been hard at work since taking office in November; its first cabinet meetings have been a series of slash and burn events, cutting subsidies and spending with the aim of bringing German borrowing within euro-zone guidelines by 2007.

Some 74 per cent of business leaders questioned by Capital business magazine say they believe Dr Merkel will be a strong chancellor, a view reflected in the Ifo confidence index, which reached its highest level in five years in December.

Two-thirds of the 7,000 managers surveyed by the Ifo expect an upswing in the next six months, while the institute increased its 2006 growth forecast to 1.9 per cent.

The Ifo economists, with their talk of "cautious but solid" growth, are in good company: the six leading economic institutes have issued growth predictions ranging from 1.4 to 1.7 per cent, all above their joint autumn prognosis of 1.2 per cent.

The optimists are pinning their hopes on several one-off special boosts to the German economy in 2006.

Economists expect the World Cup to boost earnings by up to 10 per cent in the hotel and restaurant sector. Some also talk of an extra psychological boost they refer to as the "Klinsmann effect", after the German national football coach.

"The problem in Germany is that the mood is always worse than the reality," said Mr Wolfgang Twardawa, head of marketing at the society for consumer research (GfK). "If Klinsmann manages to bring about a psychological economic boost, that'll be good for us."

The government's plan to raise VAT by two points in 2007 is likely to result in another one-off economic boost next year, as consumers rush to buy consumer electronics and replace expensive items like cars, kitchens and furniture before they get even more expensive.

All this extra consumption could be financed by huge levels of savings - 11 per cent on average in Germany. Even spending just one per cent of that would pump €16 billion into the German economy.

But not everyone is convinced that Germany is out of the woods for good.

"We do not share the enthusiasm and good cheer that other institutes are spreading around the country like Santa Claus," said Dr Udo Ludwig of the IWH institute in Halle. It is one of two leading economic institutes that say next year's growth will be just a flash in the pan, quickly extinguished in 2007 with a slump back into stagnation and perhaps even recession.

The spending rush ahead of the VAT hike in 2007 is unsustainable and will be short-lived, they say, forcing Germany back into its vicious circle of low growth and high unemployment. Surveys show that German companies will only start hiring again when economic growth hits 2.75 per cent. That's a long way from even the most optimistic growth forecast of 1.7 per cent next year, and unemployment is only expected to drop marginally from 4.8 to 4.7 million in 2006.

Underlying all this is consumer demand held back by nervousness about job insecurity, as Germany's best-known companies continue to cut jobs.

Deutsche Telekom plans over 19,000 redundancies by 2008; DaimlerChrysler wants to cut 8,500 jobs in 2006; West Landesbank wants 1,200 redundancies; while tyre-manufacturer Continental is seeking 320 job cuts.

What makes most of these redundancy announcements so bitter for workers is that they go hand- in-hand with news of record profits.

Deutsche Bank, Germany's largest financial institution, is cutting 3,700 jobs despite an 87 per cent rise in profits to €2.5 billion. Siemens is cutting 4,000 jobs in Germany despite profits of €3.4 billion, the second-highest in the firm's history.

Many believe this is the flipside to the dissolution of Germany Inc, the post-war system of company cross-holdings in Germany that kept foreign investors out and earning expectations moderate.

If anything, 2005 will be remembered in Germany as the "year of the locusts", the pejorative badge a leading politician pinned on international investment funds that he said descend on German companies, pick them clean and move on.

There are dozens of stories like that of Grohe Water Technology, once Germany's most successful manufacturer of kitchen and bathroom fittings, with nearly 6,000 employees worldwide.

Six years ago the Grohe family sold its company to the BC Partners investment group for €900 million. The new owners had borrowed the purchase price from banks, and left the company cover the repayments and interest.

By the end of 2004 the company was €760 million in debt; this in a company that, in 2003, had a turnover of €889 million and a profit of €186 million. Earlier this month, the 300 employees from one Grohe plant in Herzberg near Berlin were made redundant.

By 2007, the investment consortium wants to cut costs by a further €150 million by cutting another 943 jobs in Germany and outsourcing production to Portugal and Thailand.

"This is a model case of a healthy company being sucked dry," said Detlef Wetzel of the union IG Metall.

The closures will hit hard in Herzberg, a town that already has an unemployment rate of 20 per cent, nearly twice the German average.

"The closure is a financial disaster, and will lead to around €500,000 less in tax income," said Michael Oecknigk, the local mayor.

"That's the money with which we finance the library, the swimming pool and the small zoo," he said.

It's an everyday story in Germany these days, but still a relatively new, bitter experience, and one of the main reason many Germans still see their glass as half empty.

The Irish Examiner reports that the dollar gained against the euro and yen in 2005, rising about 15% versus both currencies as the US interest-rate gap widened with Europe and Japan.

The US currency saw its biggest annual rally versus the euro since 1999, the year the 12-nation currency was introduced, and the first in four years. The Federal Reserve raised its target rate eight times while the European Central Bank lifted its key rate once and the Bank of Japan held rates at zero percent. The Fed has raised rates 13 times since mid-2004.

“The dollar is firmer this year because interest rates have moved more in the dollar’s favour than anticipated earlier this year,” said Daniel Katzive, a currency strategist at UBS.

The dollar rose to $1.1849 per euro at the close of business in New York last Friday, up from $1.3554 at the end of 2004.

Fed policy makers are expected to lift rates twice more by June, to 4.75% from 4.25%, and the ECB will boost borrowing costs once to 2.5% from 2.25%, Bloomberg surveys show.

“Until it becomes clear the Fed is finished tightening rates, I don’t think we will see a change in the trend,” said Richard Grace, a senior currency strategist in Sydney at Commonwealth Bank of Australia.

The yield premium on US bonds over European and Japanese debt widened to the most in at least four years in 2005. Two-year Treasuries yielded 4.11 percentage points more than similar-maturity Japanese government bonds.

“Yields were very important in 2005; we think they’ll be important again over the early part of 2006,” said Nick Bennenbroek, a currency strategist at Brown Brothers Harriman & Co in New York. “Over the first half of the year we think the dollar will do a little better on interest rates.”

The dollar’s rally this year wasn’t anticipated by the biggest traders in the currency market, who predicted the dollar would weaken for a fourth year because of a widening current account deficit.

The Financial Times reports that European countries on Monday suffered large cuts to their gas supplies as a bitter stand-off between Russia and Ukraine over gas prices intensified.

Supplies of Russian gas to Italy fell by 25 per cent, according to Eni, the country’s biggest oil and gas supplier. Deliveries of Russian gas to France dropped up to 30 per cent, Gaz de France said. Many central and eastern European countries, which depend heavily on gas from Russia, reported even larger declines.

European governments urged Russia and Ukraine to resolve their dispute over the price Moscow charges the former Soviet republic, which reached a head on January 1 when Russia cut the amount of gas flowing into the pipeline. The European Union is due to hold a crisis meeting in Brussels on Wednesday.

Gazprom, Russia’s state-owned gas monopoly, on Monday promised to export more gas to Europe to make up for the shortfall caused, it claimed, by Ukraine illegally siphoning gas from the pipeline.

“With the aim of preventing a possible energy crisis, caused by Ukraine illegally taking gas, Gazprom has taken the decision to deliver additional gas into the gas transport system of Ukraine,” the company said.

Europe obtains a quarter of its gas from Russia, and around 90 per cent of its supply crosses Ukraine by pipeline. In spite of assurances from Russia that its dispute with its neighbour would not affect the region’s gas supplies, the pressure fell sharply on Monday in one of Europe’s principal import pipelines.

Poland said it was receiving about a third less gas through the pipeline, while Austria’s OMV, the oil and gas company, said its supplies of Russian gas had fallen by the same amount. The former Soviet republic of Moldova said it had not received any Russian gas for two days.

Russia, which this month took over the rotating presidency of the Group of Eight industrialised nations, faced growing criticism from abroad for its hardball tactics. On Monday the International Energy Agency warned that Russia’s international reputation could be jeopardised by its actions.

“They have a great reputation as an energy supplier but this is now at risk with recent events,” said Noé van Hulst, director of policy analysis at the IEA, the consuming nations’ watchdog.

The IEA and EU said the situation was “manageable” in the short term because many European nations had a lot of gas in storage. However, cuts to homes and businesses cannot be ruled out if supplies are not restored soon. Intensive gas users have been ordered to switch to oil in some countries.

Russia and Ukraine traded bitter accusations on Monday, with the row showing no signs of being resolved. Russia accused Ukraine of stealing 100m cubic metres of gas worth $25m from the pipeline in the first 24 hours of the cut-off. Ukraine’s president, Viktor Yushchenko, denied the charge, saying there had “not been a single cubic metre of gas from Russia” for several days.

Ukraine has said it will take only the amount it is entitled to for transporting the gas through its territory – about 15 per cent of the total flow.

The FT also reports that a hiring spree helped push up banks' expenses on Wall Street last year. But several leading banks that managed to keep revenues ahead of their rising costs are vowing to keep a rein on spending, and avoid repeating the excesses of the past.

Goldman Sachs, Lehman Brothers and Bear Stearns all produced record full-year profits in 2005 and say they are eager to invest in people, and in business services, to keep profits growing this year. But they also claim they are keen to avoid the meltdown that followed the previous boom, should markets turn for the worse.

After the technology stock bubble burst, Wall Street weathered its biggest loss of jobs in a quarter of a century. Those employees who remained on staff had to give up many of the perks they had been offered to keep them from defecting to internet start-ups. Incentives included concierge services, increased meal allowances and personal Bloomberg terminals.

As Wall Street profits have risen in recent years, some treats have crept back on to the menu. Little yellow packets of Splenda, the artificial sweetener, are once again being served with coffee at meetings in the conference rooms at Goldman, for example.

Nonetheless, banks are still pinching pennies, making sure they get bulk discounts when buying services, combing through telephone bills, and outsourcing tasks to cheaper workers in India.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.Goldman Sachs had operating expenses of $16.51bn in 2005, an increase of 19 per cent. But the Wall Street bank was able to boost revenues by 21 per cent to $24.78bn and net income by 23 per cent to $5.61bn. Goldman spent $11.69bn on compensation and benefits, up 21 per cent from a year earlier, and its non-compensation expenses – such as office space, communications and fees for consultants and lawyers – rose 14 per cent to $4.82bn.

Lehman and Bear Stearns also managed to boost revenues and profits more than expenses.

But as Wall Street hires, it can become harder to control costs. Goldman and Bear Stearns boosted staffing levels by 8 per cent last year and Lehman increased its staff by 17 per cent. All three plan to hire this year and will have to be diligent when awarding compensation, as well as when choosing and allocating office space, desks, phones, BlackBerries and the like.

Such non-compensation expenses can add up. Lehman boosted its annual spending on technology and communications by 9 per cent last year to $834m. Goldman, which has about the same headcount, spent $490m, an increase of 6 per cent.

Wall Street also spent large amounts on consultants and lawyers. Goldman spent $475m on "professional fees" last year, an increase of 41 per cent.

Litigation-related costs have been a problem for the banks, though Brad Hintz, analyst at Sanford C Bernstein, says the outstanding litigation risk for the banks is falling. "This is obviously good news for an industry that has spent the last two years paying lawyers and writing settlement checks," he wrote in a research report.

The New York Times says that this is the year that the world's major economies will have learn to live without easy money.

The Federal Reserve has already significantly tightened monetary policy in the United States. The European Central Bank raised interest rates last month for the first time since 2000, and will probably lift them again. And after nearly five years of zero percent interest rates, the Bank of Japan is expected to embark on a cautious tightening of policy - not necessarily by lifting rates, but by cutting back on its purchase of government bonds from Japanese banks, which pumps yen into the market.

These moves will have far-reaching consequences for the world economy, as well as for financial markets. Economic activity in the United States, Europe and Asia has been lubricated by loose credit since 2001, when the collapse of technology stocks led to an easing of monetary policy.

Removing this stimulus without choking off growth in Europe and Japan or taking the wind out of the housing market in the United States will be an exceedingly delicate, if not risky, task.

"This is a high-wire act," said Thomas Mayer, the chief European economist at Deutsche Bank in London. "The global economy has been propped up by huge liquidity. The question is, How do you take this liquidity out of the economy without the whole thing crashing down?"

Very carefully, central bankers in Washington, Frankfurt or Tokyo might well answer.

None of the three banks is acting aggressively, and two of them, the European Central Bank and the Bank of Japan, seem prepared to rethink their plans if economic conditions suddenly deteriorate. While the Federal Reserve has left itself room for further rate increases, it is believed to be nearing the end of this cycle after raising the rate to 4.25 percent in 13 consecutive quarter-point increases.

The good news, analysts say, is that the world has a fair amount of momentum as it heads into 2006. Propelled by a fast-growing Asia and a still-vibrant United States, the global economy could expand 4.5 percent this year, according to Deutsche Bank. That is roughly on par with 2005.

While housing prices in the United States may have peaked, the economy remains vigorous, and consumer spending is likely to get a fillip from the easing of oil prices. Deutsche Bank forecasts that the American economy will expand 3.9 percent in 2006, a shade more than last year. Other economists expect less robust growth, on the order of around 3.3 percent, compared with this year's expected 3.7 percent.

Growth is also likely to accelerate in Asia, thanks to a reinvigorated Japan and the continuing boom in China. The Chinese economy will expand nearly 9 percent in 2006, only slightly less than last year, according to a forecast by the Asian Development Bank.

Even Europe, which fell short of expectations last year, may perk up in 2006, thanks to continued strong demand for its exports - from China, as well as from traditional markets like the United States - and signs that Germany's long-dormant consumers are stirring.

There are caveats to this upbeat scenario. A sharp decline in real estate prices in the United States, rather than the expected gradual softening, would crimp consumer spending. That would hurt both Europe and China, which ships 40 percent of its exports to the ravenous American market.

A slowdown in China's export-led economy, either because of internal political pressure or external resistance, would also reverberate globally. China's relentless rise as a low-cost manufacturer has helped the global economy in a number of ways, not least by driving down inflation.

"For the last three years, we've had a two-engine world: the Chinese producer and the American consumer," said Stephen S. Roach, the chief economist at Morgan Stanley. "Both engines are going to slow down. The debate will be whether this two-engine global 747 is in danger of stalling."

Sometimes regarded as an economic Cassandra, Mr. Roach is not actually predicting such a calamity. But he says that there are risks. If China's exports continue to boom, China will face rising pressure from the United States to further revalue its currency, the yuan - a move that could start to reorient its economy from exports to its vast domestic market.

"Everybody still embraces China as a perma-growth story," Mr. Roach said. "But that will be challenged in 2006."

A renewed weakness in the dollar, which Mr. Roach expects this year, would put pressure on American consumers because it would make imports more costly. That, in turn, could threaten the sky-high housing market, without which, he said, "the American consumer is toast."

In any case, the lopsided trade relationship between China and the United States will likely re-emerge as the decisive factor in the value of the dollar. The dollar's resilience proved to be one of the major surprises of last year. It declined sharply against the euro, yen and other currencies in 2004, and Mr. Roach and others expected it to fall further in 2005.

The United States, after all, is running a quarterly current-account deficit - the broadest measure of its balance of trade - of nearly $200 billion, which most economists view as unsustainable.

Instead, the dollar staged a rebound, driven in part by the widening gap in interest rates between the United States and Europe and Japan. The euro was also weaker because of Europe's anemic economic performance, the deadlocked German elections and the rejection of the European Union's proposed constitution by voters in France and the Netherlands.

Now, with Europe and Japan reviving and with the Federal Reserve perceived as nearing the end of its tightening cycle, analysts predict that the dollar will resume its downward course against the euro and the yen. They note, too, that the current-account deficit is coming back into focus.

"Investors will once again take this risk into account," said Michael Schubert, a currency analyst with Commerzbank. "The only thing we know about the current-account deficit is that it can't go on forever."

Mr. Schubert forecasts that the dollar will trade at $1.28 versus the euro by the end of this year; it is currently $1.185. He said the yen's value would hinge on the actions of the Bank of Japan, while the Chinese would modestly revalue the yuan, having done so once last summer.

A weaker dollar could help American stocks, Mr. Mayer said, because it would make American exporters more competitive. But with the uncertain prospects for consumer spending, it might be difficult for American markets to match their buoyant performance of recent years.

Conversely, a rising euro would not be welcome in Europe, which relies heavily on exports. Morgan Stanley expects European stock markets, after a remarkable rally in 2005, to stagnate this year, especially with corporate profits already high and interest rates starting to climb.

Repeating the performance of 2005 will be especially difficult in Germany. The DAX stock index, which includes big names like DaimlerChrysler, Volkswagen and Siemens, rose more than 30 percent - a sprightly pace utterly at odds with the country's sluggish economy.

Despite the muscular euro, Germany demonstrated in 2005 that it could maintain its title as the world's top exporter of manufactured goods. One factor was China's demand for heavy machinery and other products. But German companies, analysts said, also improved their competitiveness generally by cutting costs and keeping a lid on wage increases.

"The success of Germany's export sector has been remarkable, and I think it's quite likely to continue," said Michael Heise, the chief economist at Dresdner Bank and Allianz in Frankfurt.

The question is whether stricter monetary policy will strangle Europe. Despite a few rays of hope, consumer demand in Germany remains weak. Italy has been skirting recession and France is saddled with double-digit unemployment, which some blame for the recent surge of urban unrest there.

European politicians have vigorously protested the central bank's recent shift in policy, saying that the continent's economies are still too fragile. They say that the bank has also overestimated the threat of inflation, particularly since oil prices have moderated after surging for much of 2005.

In fact, tighter monetary policy on three continents could help keep the price of crude oil in check this year.

"Part of the run-up in oil prices was a reflection that there was a lot of monetary stimulus in the market," Mr. Mayer said. "Taking some of that out of the market could take the air out of oil prices."

Deutsche Bank forecasts that oil prices will ease after the winter, though the average price per barrel may end up the same this year as last. By the end of 2006, it projects a reduction in prices as demand moderates and OPEC members increase their production capacity.

With the retirement of Alan Greenspan this month - and the arrival of Ben S. Bernanke as the new Fed chairman - and with the major central banks moving in tandem to tighten credit, 2006 promises to be an eventful year for those who watch these institutions.

"The Greenspan era has coincided with a period when the global economy has made the job of a central banker easier," said Kenneth S. Rogoff, a professor of economics and public policy at Harvard.

The curse of high inflation has receded, he said, because the competition from low-cost producers like China has driven down the prices of so many goods. That is why the economic health of China - just like that of the United States - is a matter of concern to everybody.

"China has made everything run better," Mr. Rogoff said. "If it were to collapse, Ben Bernanke might be in the uncomfortable position of having to set interest rates much higher than he expected."