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EU: One Year Later, Euro Holds Record High Against U.S. Dollar

  • Breffni O'Rourke

It has been a year since the euro common currency was put in official circulation. After spending much of its fledgling year emerging from the shadow of the dollar, the euro is now enjoying a record high against the U.S. currency. RFE/RL looks at the state of the euro on its birthday, and examines what its prospects for the future are.

Prague, 2 January 2003 (RFE/RL) -- The European Union's common currency, the euro, has been in general circulation in 12 EU states for one year -- and, as if for a birthday present, the currency has stood in recent days at record highs in value against the dollar (roughly one euro to $1.04 for the past week).

That is considerable progress for the euro, which has spent much of its short life emerging from the shadow of the U.S. currency. From the moment it was introduced as an invisible currency for accounting purposes four years ago, the euro has faced an uphill struggle. Amid derisive jeers from skeptics in the political and financial worlds, the euro regularly reached record lows against other major currencies.

But despite its slow acceptance on the market, the European common currency is now holding strong on the market, with an increasing flow of capital into euro-denominated investments. That move is partly at the expense of the dollar, which has been falling against other currencies as the euro rises.

Ottmar Lang, a currency expert with the Deutsche Bank in Frankfurt, said, "The demand for U.S. securities is no longer so high; not that it's necessarily to imply that investors are selling, but apparently the appetite for U.S. dollar-denominated paper is weakening."

Factors influencing the slackening interest in the dollar are the continuing poor state of the U.S. economy, and the fear of a U.S.-led war in Iraq. Lang believes the looming war is the more serious issue of the two. "The domestic problems [in the United States] are not less serious than they are in Europe -- well, in Europe they might be even more serious -- so probably it is the geopolitical situation which is currently weighing on the external value of the U.S. dollar."

The current appreciation of the euro makes products made in the euro-zone more expensive and therefore less competitive. But at the same time, it helps to keep inflation low by making imports, such as key raw materials, cheaper.

The question of inflation and the euro is a sore point around much of Europe. That's because of the common public perception that retailers, restaurants, and other businesses used the changeover from national currencies to the euro to steeply raise the prices -- illegally -- of their goods and services.

The Greek daily "Eleftherotypia" makes this point in an article on the euro. It says the euro "brought us closer to the other 11 countries [in the euro-zone, but] ignored the urgings of government officials and was rounded off upwards, sending prices through the roof and making the high cost of living possibly the major issue for the average person."

Inflation in Greece -- which stands at over 3.5 percent -- has been above the euro-zone's average, and analysts say this is due partly to the upward rounding-off of prices.

European Central Bank President Wim Duisenberg last week addressed this thorny issue. He was quoted in various media as saying the bank should have been "more honest" about the inflationary impact of the euro launch a year ago. He admitted officials were "reluctant" to recognize that the switchover had indeed led to higher prices.

Analyst Lang, however, sees this as a problem of the past, not of the future. So what does the future hold for the euro? London-based analyst Alisdair Murray of the Centre for European Reform said there is much uncertainty.

The war in Iraq is a major potential element. Murray said the market has priced down the dollar to its present level in expectation of a short, sharp war against Iraq. But if a conflict were to drag on for longer than that, then the dollar could fall further.

Another factor influencing the euro is the poor state of the EU economies. Murray said, "Of course, the euro-zone economy is not in great shape, to say the least -- especially Germany -- and a stronger euro could cut off exports at a time when Germany in particular needs all the export growth it can get, so that in the medium term that could prove quite damaging."

The euro has not always been a popular currency. When it arrived to replace the long-established national currencies there were many citizens who felt some element of national identity was being lost. But, a year later, is the euro gaining more acceptance?

Murray said: "I think there has to be a longer track record [for the euro] and I think people have to get used to it through good times and bad, before it will be 100 percent accepted. But I mean it has been a successful launch; I don't think anyone could deny that."

In perhaps the clearest sign of the euro's growing acceptance, Anders Fogh Rasmussen, the prime minister of Denmark -- one of three EU countries not currently in the euro-zone -- yesterday announced he would hold a referendum on joining the single currency as early as next year. With Sweden likely to vote "yes" on a euro referendum next September, that leaves Britain as the only EU member reluctant to commit to the common currency.