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2000 In Review: Storm-Tossed Euro Had More Downs Than Ups

  • Breffni O'Rourke

The European Union's euro currency is now completing the second year of its stormy life, mostly punctuated by losses against the U.S. dollar and other major currencies. During the past year, there were multiple interventions to support the euro, once by the world's key central banks acting in concert. The support seems to have put a floor under the currency, although its value is still seen as low. This glum scenario was not what the euro's founding fathers had in mind when they launched the currency in January 1999. And RFE/RL correspondent Breffni O'Rourke sees additional pressures on the euro's horizon, including the EU's coming Eastward enlargement.

Prague, 15 December 2000 (RFE/RL) -- Before talking about economics, let's spend a few moments thinking about holidays. Let's accompany a typical Czech family -- Jan, Monika and their two children -- on their summer vacation to Verona in Italy.

It's a stunning drive from their home in Prague through the wide Czech countryside and into the German state of Bavaria heading south to the first outriders of the Alps. Then they cross the Brenner Pass into Austria and move steadily downward through the Dolomites onto the heat-stricken plain, where lies the fair city of Verona, home to legendary lovers Romeo and Juliet.

Yes, it's a fine day's drive, but nothing could illustrate better the inefficiency of national currencies in the modern era of fast travel. Our fictional family used Czech crowns, German marks, Austrian shillings and Italian lire to pay for food, gasoline and road tolls on this relatively short journey. Time, money and effort was wasted obtaining the different notes and coins.

Three of those currencies -- the mark, shilling and lira -- are of course already part of the new European Union currency, the euro. But since there will be no euro notes and coins circulating until early 2002, the old national monies are still in use.

Corporations and companies doing business have similarly had to deal with a maze of currencies, which in the past constantly fluctuated in value and complicated accounting and profit margins.

So the case for introducing a single currency is a strong one.

But in practice the results have been disappointing, at least as seen from outside the EU. Union leaders who introduced the euro in 11 member states two years ago -- Greece will become the 12th on 1 January -- made much fanfare of creating a rival to the dollar for global financial pre-eminence. Things have turned out very differently, with the euro instead losing a third of its value.

So what happened?

Former British Treasury official and Conservative Party parliamentary candidate Paul Raynes tells RFE/RL:

"It suggests the markets so far have not had confidence in this new currency, in its first years of operation. That's not entirely surprising, because that's they way the markets often are with something untried and untested. It's a bit of a blow, of course, for people who talked the euro up, wholly unrealistically, just before its launch."

But Raynes, whose British party is notably euro-skeptic, argues that there are also more weighty reasons for the euro's problems:

"Various factors have operated. I think people continue not to have confidence in the economic policies which predominate in the euro zone. I think they have their doubts about the sustainability of the public finances of many of the major countries in the euro zone -- we all know the kind of situation Germany and France are in with their pension schemes, for example."

Raynes says the euro-zone economies are also perceived as needing modernization, and he questions the wisdom of having what he terms a "one-size-fits-all" currency for so many countries with differing growth rates and needing different fiscal remedies.

One promise the euro has kept, however, has been to create new efficiencies in the euro zone's vast internal market.

Harald Finger is a senior analyst with Deutsche Bank Research in Frankfurt. He tells our correspondent that there are informal estimates that overall savings from eliminating transfer and exchange charges among EU national currencies are likely to add up to nearly 1 percent of the Union's total gross domestic product -- in other words, hundreds of millions of dollars.

Finger says the euro has largely achieved another key aim, the creation of internal price stability on the huge euro-zone single market. And because it has fallen in value so far, it has made euro-zone goods cheaper on world markets, leading to an export boom. On the other hand, he points out, imports to the euro zone -- particularly oil, which is purchased in dollars -- are more expensive, producing inflationary pressures.

Finger says the market's distrust of the euro so far is an overreaction, given euro-zone economic fundamentals, and he expects it to gain in value next year.

But he notes that in making their investment assessments the markets usually look a long way ahead, in the case of the euro toward the EU's coming eastward expansion. And the markets may have already factored into the euro's value the knowledge that the euro zone will soon be getting a lot of new recruits with somewhat feeble economies. Finger puts it this way:

"That might be something which has happened already. Part of the events we have seen in regard to the exchange rate may be blamed on the fact that weak countries, or countries that are at least perceived to be weaker, are on the road towards joining. However, there are rules, and if a county is too weak it will not be allowed to join in, so we should not overreact to the situation."

Another economic expert, Stockholm-based Maria Giannetti, foresees a similar scenario. She says:

"I would look at the euro like a linear combination of very strong currencies, such as the Deutschemark used to be, and at the other end the peseta and the Italian lira, which were much weaker. If all the East European countries join, it will be a less stable currency because of course those are still more crisis- prone and their financial systems are less developed. However, I think the move may be good for the Eastern countries because it may make them more competitive, in that the thing you really do not want is over-valuation of their currencies.

A team of economists with the London-based Center for Economic Policy Research issued a report last month in which they say the EU's expansion to the East could effect the euro negatively in a entirely different way.

The economists note that expansion will inevitably change the composition of the governing council of the European Central Bank, or ECB, which is the EU institution in charge of the euro. The ECB has come in for some strong criticism in the last two years for what is widely regarded as its inept defense of the infant currency.

The Center for Economic Policy's report says that, by adding a host of new eastern central bank governors to the ECB's governing council, decision-making will be made more difficult and could be slowed dangerously. The report says even a hint of a dysfunctional ECB could have a severe impact on the financial market and urges restructuring the ECB before EU enlargement.

One of the compilers of the report is Mika Widgren, a Finnish economist. He tells RFE/RL that expanding the ECB's governing council could mean that, when key interest rates have to be set, the bank governors of numerous smaller countries will be able to out-vote members from the big EU 'core' countries, which make up nearly all the economic output of the euro zone. As in other EU institutions, Widgren says, that looks like a recipe for trouble.

"The central bank governors -- at least in principal -- one can think they to some extent represent their own national views, whatever they might be. And therefore if ever their country faces asymmetric shocks, then it may be that they would be inclined to take those national views more into account than euro-wide views."

Widgren proposes one possible solution: Before enlargement, change the ECB voting system so that only the six-member executive board on its governing council actually votes.