Cover

Euro Growing Pains

Europe’s common currency is going through hard times

Tom Fennell July 5 1999
Cover

Euro Growing Pains

Europe’s common currency is going through hard times

Tom Fennell July 5 1999

Euro Growing Pains

Europe’s common currency is going through hard times

Like the arrival of any child, the birth of the single European currency on Jan. I was greeted with great optimism. The proud parents—11 European Union countries—had agreed to abandon their own money in the belief that a single super-currency would boost the economic fortunes of the entire continent. For a while, they seemed to be right. The fledgling euro soared in value against the U.S. dollar, and pundits predicted the muscular greenback would finally have some legitimate competition on world markets. But six months later, the euro is stumbling as investors rush to dump it. The problem: Europe’s economy is sputtering, and worse, traders believe that the fiscal policies underpinning the new currency are being unravelled by member countries that feel the sacrifice required for maintaining it may not be worth the fiscal pain.

The euro, which has already lost over nine per cent of its value this year, was battered again last week. One blow came from Romano Prodi, the incoming European Commission president from Italy. He said economic problems in Italy could make it impossible for the country to meet its targets for deficit reduction, as agreed to under the euro plan. That, Prodi said, might force Italy to abandon the common currency—underscoring a major problem looming for the euro. If even a single country is allowed to deviate, the value of the new currency, which will be fully phased in by July 1, 2002, could continue to fall. The Italian question “is a sign of incoherence,” said Jim O’Neill, a currency strategist at Goldman Sachs International in London. “It adds to people’s feeling that there’s no co-ordinated economic leadership.”

Another blow came from still-abstaining Britain, when Prime Minister Tony Blair said it would be “daft” for his country to choose the euro. That dashed the hopes of British pro-Europeans who had hoped that the prime minister would help shore up the currency by urging its adoption.

And voters in France also hurt the euro in recent elections for the European Parliament. The nationalist Rassemblement pour la France, campaigning on a promise to pull France out of the currency union, captured more votes than President Jacques Chirac’s own Rassemblement pour la Républic party. “The nation-state remains the main point of reference for Europe’s people,” said William Abitbol, the RPF’s chief political adviser. “We are going to create a major political force in France on the basis of defending national sovereignty.”

With the euro’s troubles continuing, Germany last week tried to shore up the currency by launching a round of spending cuts in a budget reform package. The proposals, which are expected to stimulate the German economy, would cut corporate taxes by $4.2 billion and slash government spending by 1.5 per cent. If adopted, said a government spokesman, the measures “would give an important signal for the stability of the euro.”

The euro’s supporters also claim that the mounting hysteria over its falling value has masked the new currency’s many advantages. Businesses, they say, have benefited because of the euro’s set value (in the past they were hurt when the value of currencies fell). And pessimism over a common currency may also dissipate if the European economy begins to fire on all cylinders. With the world economy apparently entering a growth phase, many analysts believe that the euro could start to rebound. And Inigo Aguirre, who follows the currency for Value Line, a financial services and information firm in New York City, says the euro will eventually take its place as a world-class security. “But we are talking about four or five years,” Aguirre cautions. In the meantime, though, opposition to the new currency continues to mount, even as its value plummets.

Tom Fennell

Hugo Miller

in London