The euro's rise on the currency markets eroded euro-zone competitiveness by about 1 per cent in the fourth quarter of 2002, even before the currency hit three-year highs near $1.06, the European Commission said yesterday.

But the Commission said the euro zone could cope with this loss of competitiveness and that the single currency was more appropriately valued than in the past.

"The euro is better reflecting economic fundamentals at the moment than it did a year ago," said Mr Gerassimos Thomas, Commission spokesman on economic affairs. "The loss of competitiveness in the fourth quarter can be absorbed by the economy," he added.

Commission data on euro-zone competitiveness showed the euro rose about 2.5 per cent against a trade-weighted basket of currencies in nominal terms in the last three months of 2002.

Since then the euro has extended its gains, hitting new three-year highs against the dollar and three-and-a-half-year highs above 0.66 pence against sterling.

Hard data on the loss of competitiveness will be ammunition for those who are worried the euro's rise will make exports from the euro zone more expensive in foreign currency terms and erode the value of foreign currency earned by exporters in the region.

Bundesbank president and European Central Bank council member Mr Ernst Welteke said last week the euro's rise helped make imports cheaper but could pose a long-term risk to German competitiveness.

The latest German growth figures underscored the importance of exports for Europe's largest economy. Germany grew by 0.2 per cent in 2002, its slowest pace in nine years, with exports crucial in averting a contraction.

Mr Thomas declined to comment on whether further euro appreciation would be damaging for euro-zone exports. He would also not be drawn on the German data.

The Commission report showed the cost competitiveness of euro-zone producers deteriorated by 7 per cent compared with a year earlier but was still about 9.5 per cent above its long-term average. - (Reuters)