Prague, 10 June 1999 (RFE/RL) - The single European currency, the euro, has again this week reached record lows against the dollar, amid a growing sense of disappointment at the performance of the new currency.
Introduced six months ago in 11 member states of the European Union, the euro has lost some 12 percent of its initial value against the U.S. currency, and is now approaching parity. On Monday it dived to a record low of 1.026 compared to the dollar, before staging a moderate recovery.
Among ordinary people and financial experts alike, the euro seems to have lost much of the gloss which accompanied its launch in January. Opinion polls in Germany, for instance, show that almost 60 percent of Germans now believe the euro will be a weak currency compared to the old German mark. That is double the number of six months ago. And in Britain, which is not yet inside the single currency zone but which may join in the next few years, public support for the euro has fallen to just 27 percent.
In professional circles, doubts have also emerged. At a meeting of central bank governors in Switzerland this week, bankers from areas as diverse as Iran, South Africa, Hong Kong, and Thailand all expressed reservations about the euro.
So what went wrong? One of the problems, according to Frankfurt-based analyst Manuela Preusehl of Deutsche Bank Research, is that initial expectations were too high:
"It is hard with a young currency to say whether it is weak or strong, but it seems quite clear that one cannot compare the euro with the very high value we had at the start of the year, that was an exaggeration, and it will take some time to find out what is really the fair value for the euro."
The euro, therefore, may have been overvalued at the start, and if that is true, then subsequent falls would be unavoidable. The world currency markets took a look at the sluggish state of the European economies, particularly that of Germany, which generates one-third of the economic output of the entire euro-zone, and decided that the underlying fundamentals did not justify the initial value. Other events have contributed to this belief, like Italy's recent decision to override fiscal deficit targets for this year, which has damaged the euro-zone's common front on fiscal discipline. And on the political front, the Kosovo conflict has also had a depressive influence on the currency.
Deutsche Bank's Preusehl thinks that a more realistic level has now been reached, and the steep plunges for the euro may be over:
"Currently we would think, that if we look at the fundamental picure in Euro-land as an aggragate, we think that, at 1.05, the level we have reached now, the Euro's value should be roughly in line with actual fundamentals."
Beyond the perception that the Euro-zone's fundamentals do not currently justify a higher value, lurks a possibly bigger danger for the euro, namely the intangible one of confidence. If the euro sinks below parity with the dollar then a general crisis of confidence could set in. And confidence once lost is hard to restore.
Analysts say that in this area much depends on the Frankfurt-based European Central Bank (ECB), the single currency monetary authority headed by Dutchman Wim Duisenberg. The bank has not signalled a clear policy towards the foreign policy exchange rate of the euro. The Bundesbank, Germany's powerful central bank, for instance, was always explicitly committed to keeping the deutschemark strong. By comparison the ECB's policy towards the euro could be described as benign neglect. Duisenberg has made various vague remarks about being generally content with the euro, despite its falls. But everyone is now watching to see if the ECB will take vigorous action to prevent it falling below parity, by increasing interest rates as steeply as necessary.
On the plus side, a low euro helps the manufacturing sector by making exported goods cheaper and thus more competitive on world markets. But most of the zone's trade is within the euro-zone itself, and therefore not currency-sensitive. So any export advantage does not offset the disadvantages of having a generally discredited currency.
The fate of the euro is of course important to the eastern candidate members of the EU. Most of the candidates have said they want to join the euro-zone as soon as possible. They do not seem too worried by recent events. A typical comment comes from the first secretary at the Romanian Diplomatic Mission to the EU in Brussels, Ion Jinga:
"We consider that this is a transitory difficulty for the euro, and it depends much on the strengthening of the European economy. Of course it is normal that in the first period of life of this new currency, difficulties could arise. But we are not very much concerned."
Estonia too has remained enthusiastic. Ambassador to the EU Priit Kolbre told the EU presidency last month that Estonia will be ready to join the eurozone on the day of accession, which Tallinn hopes will be at the start of 2003.