The little euro that could

European Report - After a slow start a year ago, Europe's beleaguered

One year ago, amid much fanfare, a new currency burst confidently onto the international financial scene. The euro was born as the symbol of Europe's future as the world's No. 1 trading bloc.

As its first birthday approaches this weekend, the currency that was to have rivaled the almighty dollar has shed 15 percent of its initial value, after an almost nonstop slide. Earlier this month, humiliated, the euro slipped below parity with the US dollar.

Yet, curiously, nobody seems the slightest bit perturbed.

"This is more a question of prestige than of economic importance," says Harry Schrder, senior economist at Commerzbank in Frankfurt, voicing an opinion that is nearly unanimous among bankers and analysts. "And it won't last for more than a short time."

"I have no idea why anybody worries about this," said Stanley Fischer, deputy managing director of the International Monetary Fund (IMF), when the euro fell below the dollar for the first time.

Euro's short life

The euro's short life has certainly been embarrassing, however. When 11 European countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain) abandoned their national currencies a year ago to embrace the euro, they took a giant step toward creating a seamless market across the Continent. There was much talk of economic powerhouses and exciting potential for growth.

But the reality of the past 12 months has been different.

While the US economy has grown at a remarkable annual 5.6 percent this year, the euro-zone economies have managed less than half that.

You don't have to look much further than those figures to see why the euro is weak, economists say. Especially when the US stock market is booming, and US interest rates are at 5.5 percent, compared with euro interest rates at 3 percent.

"International investors go where they get the best rate of return," points out Jerome Sheridan, director of American University's Brussels center. "At the moment, that is the United States."

The European Central Bank - Europe's equivalent of the Federal Reserve - has shown no signs of concern. Asked recently whether the ECB might consider buying euros in order to drive their value up, the bank's president, Wim Duisenberg, said bluntly that "the answer will be no."

"The euro's exchange rate is outside the ECB's mandate," says Dr. Sheridan. "The bank is there to ensure price stability." And with inflation running at just 1.4 percent across the euro-zone, nobody has any fears on that score.

Indeed, it is here that the euro has shown its mettle. In the old days, if an individual country's currency devalued, inflation was almost sure to follow, because imports became more expensive.

Today, the euro-zone economy is more like the American one - a large closed market that imports only 13 percent of the value of its output, and on which higher dollar prices have little effect.

The signs, say economic forecasters, are that European growth will pick up next year, and will pull the euro value with it. The Paris-based Organization for Economic Cooperation and Development (OECD) sees euro-zone growth in 2000 close to the US rate - 2.8 percent compared with 3.1 percent - and outstripping it in 2001.

Concerns over German hegemony

Not that all is rosy. Underlying the predictions are worries about Germany, which accounts for one- third of euro-zone output, and where growth rates have consistently lagged behind the continental average.

German chancellor Gerhard Schrder has done little to assuage these worries. After a brief fling with pro-business policies in the style fashioned by British Prime Minister Tony Blair, Mr. Schrder has been more careful recently to appease the left wing of his Social Democratic party.

Doubts about the German government's readiness to embrace structural economic reforms and modern business practice were reinforced when Mr. Schrder publicly voiced opposition to a takeover bid by a British mobile phone company, Vodafone, against Mannesman, a German phone operator.

Investors also had cause to question the German government's readiness to let markets work freely when Berlin stepped in with $130 million earlier this month to bail out a bankrupt construction company, Philipp Holzmann, whose failure would have cost thousands of jobs.

Projecting the right image

That intervention earned a rebuke from Mr. Duisenberg, who commented acidly that "it does not enhance the image that we want to have of being an increasingly market-driven economy across the euro area."

Some indicators in recent weeks, however, suggest that Germany might be pulling out of its cyclical slump.

And the news is also good in the euro-zone's other major economy, France, where growth next year is expected to top 3 percent.

"The euro will bounce back with time," predicts Sheridan. "Once the reality of the situation sinks in, things will change."

(c) Copyright 1999. The Christian Science Publishing Society

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