Sorry, euro, but dollar still rules

The Economy

May 14, 2000|By WILLIAM PATALON III

When the euro currency made its debut early last year, economist Steve H. Hanke saw that a painful decline was as inevitable as sunset at the end of a long summer day.

The euro is the 11-nation currency of the European Monetary Union, or "EMU," pronounced just like the tall, flightless bird that looks like an ostrich.

Like the bird, the currency never really took wing. Unveiled at $1.17 per euro Jan. 1, 1999, the currency jumped to a record high of $1.1886 when it first traded three days later, but it has since demonstrated little muscle. Last week, the euro achieved its lifetime low, in the high 80s, before it finally settled at about 90 cents -- a drop in value of 23 percent from its coming-out day.

"It was essentially set up for a fall," says Hanke, professor of applied economics at the Johns Hopkins University and chairman of Friedberg Mercantile Group Inc., a currency trading house.

The "euro flop," as Hanke terms it, isn't over: The currency could easily slide into the 70s before the bleeding stops, he says. And, because Europe is an important trading partner of the United States, and of Maryland, the continued weakness of this fledgling currency is going to be felt.

For most consumers, the impact will be positive -- if not downright super. As the dollar strengthens against foreign currencies, those imports we hanker for become cheaper and cheaper, meaning we can buy more with the same money than we could before.

There's a downside, however. A rising dollar makes it tougher for U.S. exporters to compete abroad. Not only does the weaker euro reduce the buying power of U.S. customers abroad, it effectively raises the prices of U.S.-made goods, giving foreign rivals something of a competitive advantage, said Penelope J. Menzies, executive director of the World Trade Center Institute of Maryland.

Already, we're seeing imports rise and exports fall, a scenario that could further inflate America's troublesome current account deficit -- a record $339 billion last year. The trade deficit -- a more narrowly defined cousin of the current account deficit -- swelled to a record $29.2 billion in February. Imports hit a record $113.4 billion, while exports tailed off for the second month in a row.

Maryland, like many other states, could feel the pinch, says Anirban Basu, director of applied economics for the Regional Economic Studies Institute affiliated with Towson University. For one thing, Europe is embracing technology and the Internet at a frenetic pace, making EMU nations excellent markets for the networking, telecommunications and software products and services that Maryland has forged into one of its business bailiwicks. As with anything else in business, though, the companies that get into a market early, striking deals and establishing relationships, often are the most successful and build the most market share. Unfortunately for Maryland and other U.S. exporters, a sliding euro means the prices for those wares have just gone up, giving European rivals a boost.

"This serves to limit export growth and limit Maryland's potential for overall economic growth," Basu says.

That's ironic, as the strong growth that the United States is experiencing is one of the foremost reasons for the euro's tailspin, say economists such as Hanke and Basu. The 4.2 percent growth rate of the United States exceeds the 2.3 percent pace of Europe, the U.S. stock markets are more efficient and its companies more dynamic, and the United States has higher general interest rates than in Europe. In the global game of rock/paper/scissors, that makes the United States a much better haven for foreign investments -- which are transacted in dollars, increasing the demand for greenbacks and driving up the value of the buck relative to other currencies.

The fact that the United States is a giant consumption machine doesn't hurt the dollar's value, either, as most of the imports are also paid for with dollars.

The upshot is that the EMU is between a rock and a hard place. Europe's economic recovery has taken longer to get under way and has been weaker than the U.S. expansion, which is now the longest in history. And yet, in one of the strange quirks of economics, Europe might face a greater potential for inflation, just because of the declining euro. The reason: The more the euro slides, the more expensive imports become -- many of which are raw materials or other key ingredients of the products that are made in Europe. It's just like seeing your household expenses keep rising without a corresponding increase in income: It leaves you feeling squeezed.

For euro-bloc countries, there are no short-term solutions to this conundrum. Raising interest rates will boost interest from investors -- and the euro's value, by boosting the demand for that currency to make investments -- but that could cause the economy to slow, which isn't what politicians or consumers there want.

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