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EU: Commission Panel Focuses On Euro Decline

The European Union's Executive Commission is holding a two-day high-level forum in Brussels to assess Europe's economic strengths and weaknesses. RFE/RL correspondent Ahto Lobjakas reports most of the first day's discussions centered around the steady decline of the euro, the EU's vaunted single currency.

Brussels, 5 May 2000 (RFE/RL) -- In his opening remarks to the Brussels Economic Forum yesterday (Thursday), European Commission President Romano Prodi acknowledged that no one seems to know why the euro continues to lose value while the EU's economy is strengthening. Many experts, businessmen and Commission officials participating in the forum also said they could not answer the question.

Just two months ago, at a summit in Lisbon, EU leaders said the economic outlook for the 15-nation group was better than it has been in a generation. The Commission later backed the EU's optimism, when its most recent analysis predicted continuing growth, low inflation, falling public-sector expenditure and growing employment rates for the years 2001 and 2002.

Yet the euro keeps falling. Yesterday, it reached levels below 90 U.S. cents -- nearly 25 per cent less than when it was launched 16 months ago.

Despite the currency's difficulties, Prodi was staunchly upbeat in his remarks to the Brussels forum:

"I'm convinced that very few, starting [with] me, understand [the continuing fall of the euro], and I'm among those who don't understand the change that we're [facing]. I'm trying to understand it. Surely the European situation is much better than is commonly appreciated, surely there is a moment when the truth comes out. We are building the political and economic environment to make the [euro's] revival possible."

Most economic analysts at the forum see the euro's current weakness as a short-term phenomenon. Ray Barrel of the London-based Institute of Economic and Social Research said a rapid drop in a currency's value can usually be explained by either a sudden economic collapse or a near-catastrophic loosening of budgetary policy. He says neither has happened in the EU.

Barrel found a better explanation for the euro's decline in what he described as the superlative performance of the U.S. economy. He said the United States -- already a world leader in technological advance -- is making a revolutionary economic leap forward. Barrel said there is solid evidence to show that both capital and labor productivity in the United States has grown far more quickly in the past four years than ever before.

The obvious question is whether the EU can take a similar leap forward. Most European experts at the forum were doubtful, but an American analyst on the panel, Jay Lipsky of the Chase Manhattan Bank, says countries in the 11-nation "euro zone" stand a good chance of emulating the U.S. success.

Lipsky says he's encouraged by economic reforms that are already underway in the EU. And even if the currency exchange markets are skeptical, he said the financial markets believe the euro has so far been a success.

He said, though, the euro could face several problems:

"Basic institutions remain untested -- the [EU's] European Central Bank [which oversees the euro], the durability of the Stability and Growth Pact [buttressing the euro], the pressures that could arise from regional differences within the European Union, and the need for the euro-zone economies to face their own impending social-security problems."

Independent U.S. analyst David Roche said there are other problems as well. Writing in the Wall Street Journal Europe last week, Roche said the flow of capital from the EU into the U.S. is the greatest single factor behind the fall of the euro. He noted that last year, the amount of investment and capital that left the EU equaled 6 per cent of its total gross national product (GDP).

Roche also said international investors believe the EU's efforts to reform its economy are half-hearted and may not succeed. And he said investors are concerned that the EU has not yet embraced the high-tech, Internet-based "new economy" that is the cornerstone of high productivity and wealth creation in the United States.

Prodi seemed to bolster Roche's argument when he spoke yesterday about the strength of Europe's traditional industries:

"Don't forget that traditional industries count a lot [as] a percentage of the structure of economy. Europe in the last years has done a lot, you know. I'm happy that in the last supplement of the [British weekly] 'Economist,' there's this discovery of the real strength of Europe."

It remains to be seen how and when investors will accept the idea that Europe's "traditional industries," -- in contrast to the "new economy" in the United States, are a growth sector worth spending -- or basing -- their money on.