Euro fights for foothold amid woes
Agenda 2000 summit in Berlin March 24 to test European cooperation on tough budgetary issues.
BOSTON — Money trouble is rattling Euroland as the euro - common currency for 11 countries - hits a rough spot two months after its launch.
The skid could end before it has time to deeply impact trade. But if Europe can't afford US goods, American industry takes a hit - even as the dynamic dollar gains from its popularity in world markets.
For now, while the euro has lost some 7 percent of its value in relation to the dollar, raising questions about Europe's early success at forming a powerhouse monetary union, the drop doesn't appear to trouble European economists.
"The euro should be in the future a bit stronger," says Ulrich Ramm, chief economist in Frankfurt of Commerzbank, one of Germany's largest banks.
What's happened, economists explain, is that the economic paths of Europe and the US have dramatically diverged: The US direction is up. Europe's economic outlook has slipped.
That difference has helped make the dollar more attractive on foreign-exchange markets.
On Friday, the US Commerce Department revised upward the annual growth rate for national output after inflation to a fantastic 6.1 percent in the fourth quarter of 1998. It was the fastest pace in 15 years.
For 1998 as a whole, US gross domestic product (GDP) - the total national output of goods and services - rose a real 3.9 percent. That's the third straight year with growth above 3 percent.
And economists have been boosting their forecasts sharply for 1999. The consensus now calls for still-handsome 2.5 percent growth this year. In Europe, economic growth numbers are being cut.
J. Paul Horne, European economist for Salomon Smith Barney in London expects after-inflation growth in the 11 euro-zone economies to run about 1.8 percent this year.
By some estimates, Europe's dominant economy, Germany's, shrank at an annual rate of 1.8 percent in the fourth quarter of last year. However, Commerzbank's Mr. Ramm predicts Germany's real growth for all of 1999 will be positive.
Germany's unemployment rate stands at 11.7 percent, typical of euro-zone nations. The US jobless rate is a mere 4.6 percent.
On Wall Street, Friday's GDP news raised concern that the Federal Reserve might decide to hike interest rates to prevent a renewal of inflation. As a result, bond prices rose and stock prices fell.
In Germany, Finance Minister Oskar Lafontaine has been urging the European Central Bank (ECB) to lower interest rates.
European politicians "might do themselves a favor" by putting less public pressure on ECB monetary policymakers, says Mr. Horne. The bank, which took over monetary policy from the 11 national central banks at the start of the year, is trying to establish itself as a tough inflation fighter. So ECB officials may fear that if they do knock a quarter percentage point off short-term interest rates, to 2.75 percent, they will compromise their independence.
Nonetheless, some economists suspect the ECB will soon lower interest rates. The bank certainly need not fear inflation, Horne notes.
Germany has no inflation, perhaps deflation. In January, consumer prices were up 0.2 percent from the same month in 1998. Average inflation in the 11 nations was 1.1 percent last year, less than the US's 1.6 percent.
Europe's slow growth is also troubling American officials.
Deputy Treasury Secretary Lawrence Summers told the Tokyo Press Club Friday that it can't be assumed "the global economy will be able to fly permanently on a single engine" - the US economy. He called for European economies "to do their part." Japan also is in a slump.
Another cross-Atlantic difference: The US has a huge deficit in its various international payments ($235 billion in 1998). Europe has a large surplus.
Over time, that difference might strengthen the euro. But right now, interest rates are higher in the US than in Europe and this attracts investors.
The troubles in Brazil and elsewhere in Latin America have also produced capital flight to the US, further bolstering the dollar.
Last month, finance officials of the Group of Seven leading industrialized nations met in Bonn. One issue raised by French and German officials was a suggestion to link the euro, the dollar, and the Japanese yen more closely by some form of intervention in foreign-exchange markets.
The proposal met opposition from the US and some European central bankers and got nowhere.
Despite the drop in the euro's value, European economists regard the introduction of the new currency as a great success.
They note the Feb. 23 announcement by Britain's Prime Minister Tony Blair of a tentative schedule for his nation's joining the euro between 2002 and 2005.
The euro was created largely to add more stability and greater harmony. In this regard, it is too early to tell whether the euro has helped, says Jeffrey Gedmin, executive director of the New Atlantic Initiative in Washington.
One test for the currency's future and for European Union will start with an Agenda 2000 summit of leaders of the 15 European Union nations in Berlin March 24 to sort out extremely difficult European budgetary issues.
"The euro will survive unless Agenda 2000 blows up," Horne says.