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Thursday, 30 December, 1999, 20:44 GMT
The euro's troubled first year
By BBC News Online's Tim Weber
It's been a dreadful year for Europe's new single currency, the euro. At least that's the verdict of much of the press, especially in the UK.
All they know is that the euro has been a weak currency.
So has the introduction of the euro, has Europe's economic and monetary union (EMU) been a very expensive mistake?
Not according to what the economic experts call "the fundamentals".
After two troubled years the economies of the eurozone are growing again. Analysts at J.P. Morgan, an investment bank, predict that they deliver growth rates of 3.5%, rivalling the bullish US economy.
This in turn is creating jobs. The rate of unemployment has already fallen below 10% - for the first time in seven years.
And despite the weak euro, prices have been stable across the region, which in turn is keeping interest rates low.
Buoyed by such good economic news, stock markets in France, Spain and the Netherlands are trading at record highs.
In fact, some of the recovery has been prompted by the euro's weakness. A strong dollar translates into easy exports, boosting the eurozone's laggards Germany and France.
A strong currency may be a matter of national pride, but it does not guarantee a strong economy.
While British industry was moaning about the strong pound, the eurozone's exporters were cranking up production.
Big Mac index
And anyway, the euro has not fallen by as much as it may seem.
In the run-up to the single currency's launch, the currencies making up the euro rallied. Now they have given back these gains and the euro trades not very much below the value it would have had in spring 1998.
Some even argue that the euro is still too strong, at least in terms of purchasing power parity, i.e. how much one euro can buy compared to one dollar.
Tongue-in-cheek, the London-based Economist magazine has compiled a "Big Mac" index, comparing the price for an identical product - a hamburger - across the world.
In the USA, one Big Mac costs $2.44. At current rates, eurozone citizens have to pay $2.64. That would suggest that the euro "is still a tad overvalued". The paper suggests an exchange rate of about $0.95.
This will be little consolation for Euroland citizens travelling outside the EMU area. They pay the price for the weak euro, regardless of whether they eat at McDonalds or in one of London's fancy new restaurants.
So what's gone wrong?
But if the euro fundamentals look good, why is the currency so weak?
One reason is the strength of the US economy. It has now grown for eight years in a row, the longest economic expansion during peace-time ever, and is still going strong.
To cool down the economy, US interest rates are much higher than the 3% rate of the eurozone. UK interest rates are higher too, albeit for different reasons. This attracts euro money, driving down the single currency.
At the same time, it makes American and British products less competitive. The US trade deficit is at record highs, the UK's balance of trade is deep in the red as well.
The eurozone, meanwhile, is counting its trade surplus.
Nonetheless, there are some very big question marks hanging over the single currency.
When the euro was launched, Europe's politicians promised to cut down their deficits and stop meddling in the markets.
But investors wonder whether governments have got the guts to implement such harsh policies.
Germany, for example, recently bailed out a large but bankrupt construction company. State intervention like this weakens the euro on the currency markets.
The slow pace of economic reform is another sore point undermining the strength of the euro.
And then there is the single currency's guardian, the European Central Bank (ECB).
Thomas Mayer, economist with investment bank Goldman Sachs, echoes many observers when he says that "clarity and consistency" are not the ECB's strong points.
Compared to the US Federal Reserve, or Germany's now near-powerless Bundesbank, the ECB lacks a track record. More worryingly, currency traders say they have trouble predicting the ECB's next move, which in turn is increasing volatility in the markets.
Making life difficult for itself, the bank is trying to meet a complicated set of monetary targets, besides keeping inflation in check.
Wim Duisenberg, the ECB's president, defends this policy: "We have to recognise that we live in a rather complex economic world."
Seth Garter at Credit Suisse First Boston believes that the combination of "interest rate differentials, economic differentials, concerns about politics in Europe and general investment in the US" will continue to drag down the euro for "a little while ahead".
Living with the euro
Euroland's businesses, though, have taken to the euro. The region has seen a wave of mergers, as companies shaped up to compete in the larger market place.
John Hawksworth, economist with PricewaterhouseCoopers, says: "The whole issue of the euro focused the minds of chief executives on European strategies, thinking of Europe as a single market."
And Graham Bishop of Salomon Smith Barney echoes this sentiment: "In real economic aspects the euro is having a great success. In terms of how it has enhanced the single market, its success has been tremendous."
The biggest surprise, however, has been the success of the euro bond market, where companies take out loans on the capital market, denominated in euros.
During 1999, underwriters launched euro bonds worth more than 580bn euros ($590bn), pushing dollar bonds into second place.
The trend to issue euro bonds was strong throughout the year, and not just the flutter during the first few months of post-launch euphoria.
During the first 10 months, companies raised 230% more cash than they did in all of 1998 with bond issues in the old currencies of the eurozone nations.
Four EU countries have stayed out of monetary union. Greece did not qualify, but harsh budget cuts have set the country on course to join, possibly within two years.
In both Denmark and Sweden, euro fans now out-number euro sceptics, a dramatic shift from one year ago.
Only the United Kingdom appears determined to stay out. A majority of voters wants to hang on to the pound, while government politicians are cagey about whether to proceed.
It could result in the UK keeping the pound, while the rest of Europe does its business in euros.
Since the euro's launch, scores of analysts have issued "medium-term" forecasts, that predicted the currency would trade at about $1.20 or even higher within 12 months.
They have been wrong.
However, for the Euroland citizens, it does not really matter whether the euro is weak or strong, as they do most of their shopping and trading within the eurozone.
On the financial markets, the euro is still settling in.
This year's Nobel prize-winning economist, Robert Mundell, who helped develop much of the theory on currency unions, said recently: "From 1915 until the end of the century, the dollar has been unchallenged as the dominant currency. Over the next decades, however, the euro will vie with the dollar."
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