Baby Euro's growth pains may ease with time

June 03, 1999|By William Pfaff

PARIS -- Europe's new currency, the euro, was introduced in January not only as a culminating step in European union, but also with the conviction that it would provide a new and powerful rival for the dollar.

Now the euro -- launched at a value nearly 20 percent higher than the dollar -- has fallen to near-dollar parity. It traded yesterday at $1.03 to the dollar, down 11.3 percent for the year. Markets and analysts rumbled with forebodings that the European currency would fall below the $1 barrier, a seeming humiliation for the European Union.

This reflects a misunderstanding. The euro is the direct descendant of the ecu, or European currency unit, established in 1979 on the basis of a weighted basket of European currencies, given the original trading value of $1.

When the ecu was replaced the euro, the ecu's trading value was $1.18. A fall by the euro to dollar parity would represent a return to what the European Community currencies were worth, on weighted average, 20 years ago.

It might be a blow to European pride, but falsely so. It would merely represent a fluctuation within a range of European-American currency parities that has prevailed for two decades.

The simplest explanation for what has happened to the euro since January is provided by the continuing success of the U.S. economy.

The euro's fall is good news for Germany and Italy, where business and employment have been depressed by the European Central Bank's tight-money policies. Both countries depend heavily on exports, which a weaker euro will support. American, Japanese and other non-European exporters are the ones with a right to complain about a weaker euro.

The euro could yet become a rival to the dollar as a reserve currency and stable denominator of commodity values. Its current loss of value is an undramatic development but once again draws attention to the European monetary system's key problem, which observers of the European scene have talked about since the euro debate began.

Can one currency, and one fiscal policy, really suit 11 countries?

The fragile budgetary situation of Italy caused Rome to ask the other euro states last week for permission to run a budget deficit of 2.4 percent of gross domestic product, rather than the normative 2 percent. There was not much the others could say. With Italy's weak current growth, there was really no choice.

The positive effects of the euro have contributed to the improvement already apparent in Europe's growth prospects. The International Herald Tribune reported on Monday that there is "real surprise" at the speed with which the euro has fostered "a large and liquid capital market, along U.S. lines, that would spur investment, innovation and competition."

Some investment circles see the large euro capital market as promoting a new European emphasis on shareholder return. Others, convinced that the U.S. obsession with quarterly profits is a structural weakness, dictated by the big American pension funds (which are increasingly active in Europe), see this development in the European capital market as offering an opportunity for European industries to escape the American short-term approach.

It is now unthinkable that the Europeans would allow the euro to fail. (To say that something is unthinkable does not, of course, mean that it cannot happen.) The euro originated in the Europeans' political determination to validate what already had been accomplished in economic integration. It was the logical completion to the single European market.

William Pfaff is a syndicated columnist.

Pub Date: 6/03/99

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