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EU: Falling Euro Prompts Worries

London, 14 July 1999 (RFE/RL) -- The single European currency, the euro, sank to another record low against the U.S. dollar this week, bringing predictions that a fall to parity is now inevitable.

The euro has lost almost 15 percent of its value since it was launched by 11 European Union countries on January 1. Today, it was trading at $1.015, a slight rally from Monday's record.

The slump has disappointed politicians who launched the euro with fanfare five months ago, claiming it would make western Europe more competitive and boost the region's self-confidence. The new single currency zone makes up the second largest economy in the world after the United States, stretching from Spain in the south to Finland in the north, and including 300 million consumers. All EU states except Britain, Sweden, Denmark, and Greece are members.

But financial markets have greeted the new currency, and the experiment in monetary union, with skepticism.

The euro came under renewed pressure after Germany published surprisingly weak industrial production figures, suggesting that Europe's stagnant economy is not recovering as quickly as hoped. Germany, with the third-largest economy in the world, is regarded as a "locomotive for growth," hauling other EU economies behind it. If it is isn't pulling, the train has problems.

The euro was also hit by rumors that the U.S. is about to publish data which suggests its booming economy is doing even better than expected.

Germany's Minister for Europe Guenter Verheugen says that the fall in the euro primarily reflects higher than expected U.S. growth rates, and more attractive interest rates. He spoke earlier this month in London.

"The recent fall in the value of the euro relative to the pound sterling and the dollar, though much in line with exchange rates for the same baskets of currencies during the previous year, was not anticipated. Much of this has been due to higher than expected growth rates in the U.S., with interest rate differentials further attracting capital away from the euro."

But Verheugen and others say the European economy is now clearly recovering, with low inflation rates in member states, something that suggests the euro will bounce back later this year.

Finland, which holds the six-month rotating presidency of the EU, said on Monday the euro has been hit by temporary factors such as the crisis in Kosovo, and different rates of development in EU states.

But German Finance Minister Hans Eichel issued a blunt warning to his single currency partners on Monday saying the euro will fall further unless euro-zone governments keep a tighter grip on their economies. He said the flagging currency would be "punished" still more by the markets unless financial discipline is imposed. His message was seen as a reprimand to Italy, recently granted permission to break spending limits agreed with its monetary union partners after insisting that it could not keep within them. Eichel told EU finance ministers in Brussels that countries which had adopted the single currency now had to recognize their joint responsibilities. He said the markets would ensure that if one euro-area country broke spending rules laid down by the EU's "stability pact," this would damage all 11 countries inside the euro area.

Critics have long argued that the inclusion of inflation-prone countries like Italy, and heavily-indebted nations like Belgium, in monetary union will make the euro a "soft" currency. This in turn could cause a public backlash in Germany where many oppose the loss of the hard "D-mark," fearing the euro will bring inflation. Some say monetary union should have been limited to the northern European countries, grouped around the D-mark zone.

But Helmut Schlesinger, former president of the Bundesbank, says the euro is here to stay. He spoke about the euro in an address in London earlier this month.

"The euro, is it down or out? My short answer is that the euro is not out, and not down, but a little bit lower. The institution of [European monetary union] is constructed for a long life, in fact, for eternity. There is nothing in the Treaty of Maastricht that allows for an end, or even for an exit, of one country from the union. On political grounds, and the EMU is primarily a political creation, the EMU could not be ended without bringing the danger of an end to the EU."

Schlesinger also said the economies of the Euroland countries will recover from cyclical weaknesses sooner rather than later. In some euro-zone countries -- Spain, Portugal, Ireland and Finland -- economic growth is already strong, albeit not in Germany and Italy. But Schlesinger also cautioned that some countries, notably Germany, need to reform their over-regulated social market economies in order to adapt to the new circumstances of worldwide competition.

"Some of Germany's neighbors, France and Italy, have their own difficult problems, still retaining an important sector of state-owned enterprises, a too-large and partly-inefficient government sector. But, in each case, global competition will force those countries to adapt. These days many are speaking about the long-term potential of the euro to revive. If one underlines the word, potential, I agree. The potential is certainly there. It can be realized, but it will not come on its own."

For now, if the euro falls still closer to parity with the dollar the attention of the European public and of global financial analysts to its performance will likely grow. If the euro falls below parity, it will mark the first big challenge for a currency still trying to define itself in global markets.