| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| INTERNATIONAL BUSINESS
Why the Euro Is So Wimpy Policy missteps by euro zone countries are scaring investors According to the script, the euro was supposed to challenge and then possibly supplant the dollar as the world's premier reserve currency. Instead, the greenback is seeing off Europe's newly minted currency in short order. Since its Jan. 1 introduction, the euro has slumped in value by 15% and is now hovering humiliatingly close to parity with the dollar. Europe's money, says a senior French banker has ''a severe short-term image problem.'' You can say that again. Europe's citizens, with fond memories of the superstrong German mark, one of 11 currencies melded into the euro, couldn't agree more. Many are busy penning angry letters to the euro's ranking watchdog, European Central Bank President Wim Duisenberg, to ask him what is going wrong. The affable Dutchman with a signature shock of white hair is a bit nonplussed. In public, at least, he says he's ''puzzled'' by the southerly trend. But the answer is simple. Investors are increasingly skeptical about the willingness of major European countries to embrace fundamental--and long overdue--economic reforms. French Prime Minister Lionel Jospin recently attacked tire multinational Michelin for threatening to fire 20% of its global staff in a cost-cutting exercise. German Chancellor Gerhard Schroder's government is still talking about reimposing his country's hated wealth tax. Other missteps also are freaking out investors. ''The way Schroder rushed to bail out Holzmann [a troubled construction company] suggests that things in the euro zone have not really changed,'' says Robin Marshall, director of European research at Chase Manhattan Bank in London. So investors are bypassing Europe and the euro altogether. Japan has attracted more investment in its stocks and bonds than the euro zone for 40 of the past 43 weeks. And despite dire predictions of how it would suffer by staying out of the euro, Britain continues to receive more than 50% of foreign direct investment in Europe. Big European investors, such as pensions and mutual funds, are making matters worse by themselves dumping euros. They buy dollars and pile into Wall Street, betting that when they cash out capital gains, they'll earn currency profits from a yet weaker euro. NO PANIC YET. Despite this dismal scenario, panic isn't yet invading Europe's wintry capitals. Indeed, some analysts point to benefits Europe could draw from a weak currency. Those arise because foreign trade with the rest of world, already $60 billion in surplus, accounts for little more than 10% of the euro zone's economy. So the impact of a falling euro on inflation rates, currently just 1.2%, should be small. Besides, the region's fast-recovering economy, expected to grow 3% or more next year, could be further boosted by higher exports. This would enable Europe to clip unemployment, which still averages just a fraction over 10%. The rosy forecasts explain why Duisenberg isn't leaping to the euro's defense by raising rates or by intervening on foreign-exchange markets. ''There will be no change in monetary policy,'' he told the European Parliament in Brussels on Nov. 29. He does admit, though, that he's concerned that ''all the talk and hype'' surrounding the euro's decline could undermine confidence in it yet more. Maybe he should be a lot more worried. The euro's latest bout of problems began on Nov. 4, the day the European Central Bank raised its key interest rate from 2.5% to 3%. ''You would normally expect a currency to rally under those circumstances,'' says Deutsche Bank economist Manuela Preuschl in Frankfurt. That's the sort of disrespect no central banker can afford for very long. Unluckily for Duisenberg, his fate--and that of the euro--isn't entirely in his own hands. Until he can talk or bully Europe's political leaders into getting serious about reform, he'll be nursing a sick patient. By David Fairlamb in Frankfurt _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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