The euro's dizzying descent isn't so unfathomable.

Most experts believe the single European currency's 24% plunge against the dollar since its January 1999 launch is unwarranted, and they expect the market to wake up soon and send the euro soaring against the greenback.

Adherents of the irrational-selloff school, however, appear to have overlooked important economic and political factors that could be unnerving the market. If these problems persist, it stands to reason that the euro could fall to the point where the governments and citizens of the European Union question their commitment to the single currency. This has already started in Germany, whose participation in the euro is absolutely necessary for the euro's survival.

The euro appreciated 1.5% against the dollar Tuesday to 90.73 cents, gaining some distance from its May 3 low of just above 89 cents. The currency started trading Jan. 1, 1999, at $1.1874, though actual euro notes and coins won't be available until 2002, if ever.

A Yen for Growth

On the surface, the theory that the euro's slide is due to the dollar's present strength is attractive. It contends that global capital is being sucked into the U.S. by its go-go economy and by higher U.S. interest rates. America's economy is cruising ahead at a 5.4% clip, while the combined rate for the 11 countries signed up for the euro was 3.1% at the end of last year.

As for interest rates, the 10-year U.S. government bond yields 6.53%, vs. 5.36% for Germany's 10-year government issue. Moreover, in February the U.S. had a large $29 billion trade deficit, while eurozone countries had a 300 million-euro surplus. Over the long run, a country with a large trade deficit tends to experience downward pressure on its currency.

But while all those numbers suggest a big reversal for the euro is imminent, consider the currency's equally sad performance against the yen. The euro is down 25.7% against the yen since its launch, even though Japanese interest rates -- at 1.72% on a 10-year note -- are much lower, and its economic growth is considerably slower, at 0.6%.

Socialism and Worth

Many commentators, including some of Europe's centrist and right-wing politicians, say that eurozone countries will gain a much better chance of attracting euro-boosting foreign capital by speeding up economic restructuring, a euphemism for ditching socialist policies. The problem with this argument is that the French economy, held to be most in need of economic liberalization, is going like a train and is expected to grow by as much as 3.8% this year.

In fact, the recent strength in many eurozone economies can be attributed to the weak euro, which has made it much easier for companies there to make GDP-goosing exports.

Europe's leaders and policymakers have never explicitly stated that, when the region was in the doldrums in the first part of last year, they opted for a softer euro to help speed growth and thus bring down the area's grotesquely high unemployment rates (even today, over 9% of Europe's workforce is without a job). But it is clear that some sort of weak-euro strategy was pursued. How else to explain the apparent lack of concern among elected leaders and at the

European Central Bank

about the euro's slide -- until the last couple of months, when the currency's slide has accelerated?

All Politics Is Global

So what has happened in the last two or so months to make the policy of benign neglect look suddenly dangerous? In short, the political difficulties of the region have piled up.

Romano Prodi, appointed as head of the powerful Brussels-based

European Commission

last year to reform the corrupt body, is under attack and hasn't had much success in achieving his goals. Earlier this month it was announced that Jean-Claude Trichet, the French central banker who is slated to take over from Wim Duisenberg as head of the ECB in two years, is being investigated by a Paris magistrate for possible involvement in a financial coverup involving the bank

Credit Lyonnais

.

In addition, no one really knows who controls Europe's exchange-rate policy. Is it the ECB, the 11 finance ministers of the eurozone countries, or the Franco-German axis controlled at its most senior level by Chancellor

Gerhard Schroeder

and President

Jacques Chirac

? Imagine dollar policy being fought out among

Alan Greenspan

,

Larry Summers

, the governors of large states and

President Clinton

and you get some idea of what's going on.

Perhaps most disquieting, however, is the growing rejection of the euro in Germany, which, unlike France and other countries, never asked its people in a referendum whether they wanted to join the currency union. A recent poll there showed that four out of five Germans, who had grown accustomed to a strong mark, have minimal confidence in the euro. What's more, Germany's once fervently pro-Europe media and political establishment are beginning to publicly question the single currency and Brussels institutions.

Who knows? Against this backdrop, the euro may even be overvalued.