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EU: Falling Euro Directly Affects Eastern Countries

  • Breffni O'Rourke

The European common currency, the euro, is again under pressure on international money markets, reaching record lows this week against other major currencies. This comes at a time when the Central and East European candidates for European Union membership are moving ever closer to the orbit of the euro, and are thus directly affected by the swings of that currency. Correspondent Breffni O'Rourke examines the impact, both positive and negative.

Prague, 1 March 2000 (RFE/RL) -- The euro seems stuck in an ever-descending curve. The common currency this week again fell to record lows against the U.S. dollar and Asian currencies. At its worst point, the euro dropped 3.5 percent against the dollar -- meaning the currency has lost 20 percent of its value against the dollar since its launch 14 months ago.

This descent affects all the Central and East European countries that plan to join the European Union. Some, such as Bulgaria and Estonia, have currencies already directly pegged to the euro through the deutschmark. Others, like Slovakia, Romania, Slovenia, and the Czech Republic, have a managed float with the euro used as a reference currency. Others, like Poland, have an exchange rate regime involving a basket with both dollar and euro. Lithuania, as an exception, pegs its currency for the moment against the dollar.

First, the good news. As the euro draws the eastern currencies down with it, there's a two-fold benefit for the easterners. First, because the present EU member states are the major market for eastern exports, those imports remain competitive in price inside the euro-zone.

Second, those countries increase their competitiveness against countries using other, stronger currencies like the dollar. As Frankfurt-based senior analyst at Deutsche Bank Research, Juergen Conrad, puts it:

"A weak currency means good conditions for exports and for economic growth, that is a key factor for all countries of Eastern Europe, as well as for "Euroland," [the present euro-zone], so a weak currency is not necessarily bad."

However, as Conrad points out, the downside is that imports paid in currencies other than the euro become more expensive. For instance, energy supplies -- meaning oil and gas -- are normally accounted in dollars, and thus cost extra. This creates pressure for inflation, especially now when international energy prices have risen sharply.

The balance of advantage and disadvantage of a weak euro depends therefore on each country's circumstances. Baltic News Service business analyst in Tallinn, Anvar Samost, draws a generally favorable balance for Estonia, as exports in his country are growing faster than imports.

"A very large part of Estonian exports is actually export of services, like tourism and shipping and transit trade and things like that. For example Estonia is a very important transit route between Russia and Western Europe, through the port of Tallinn, and this business is all done in U.S. dollars. So this has been very good for the Estonian transit sector. And if we talk about shipping, this is also generally done in dollars."

So even if the eastern candidates can live with a weak euro, the big question remains: Why is the euro so chronically low? After all, EU economic fundamentals are reasonable and improving. That question has no easy answers.

Some German bankers believe that a rumor circulating in Asia could explain Monday's sharp fall on the Asian money markets. The rumor was that the far-right Freedom Party, which has just entered government in Austria, was planning to block the decision-making process in EU, effectively shutting down the EU. The Freedom Party is notably cool towards the EU. In turn, the party's anti-immigrant stance and other extremist policies has led EU member states to impose sanctions on Austria.

Another Deutsche Bank specialist, Manuela Preusehl, says this Asian rumor over-inflates the importance of Austria and its ability to damage the EU. As to the longer-term factors in the weakness of the euro, she says one is certainly the continuing strength of the U.S. economy:

"As long as the USA shines as brightly as it does at the moment, people do not register very clearly that Euroland is improving."

She says what's needed to restore the strength of the euro is for Europe to "market" itself better, to communicate its successes in economic consolidation to the rest of the world. Another major requirement, according to Preusehl, is for the new European Central Bank to improve the coherency of its own communications with the financial world. She notes that senior officials in the bank are still giving apparently contradictory indications of the bank's interest rate and exchange rate policy, which confuses the market -- and leads to loss of confidence in the euro.