The Euro's Slippery Slope

EU officials are trying to make the best of a disappointing trend.
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"The euro will be stronger than the D-mark on international markets."

These words are from a report published by the

European Parliament

just weeks before the launch of the euro Jan. 1. The report predicted speculative attacks against the pound and an ever-stronger euro displacing the dollar in a host of transactions.

The truth is, of course, the opposite. The euro has been in a free-fall against both the dollar and the pound since its creation, plummeting from $1.19 on its first trading day to $1.06. Some analysts are expecting dollar-euro parity within six months.

These events are embarrassing in the light of the assurances, repeated for years by the former German Chancellor

Helmut Kohl

, that the new European currency would be as strong as the mark. So confident were Europe's leaders that Portuguese Prime Minister

Antonio Guterres

actually said in 1995, "When Jesus Christ decided to found a church, he said to Peter, 'Thou art Peter, and upon this rock I will build my church.' You are the euro, and on this new currency, the euro, we will build our new Europe."

European officials are trying to put a brave face on the euro's slide.

On Monday, the president of the

European Central Bank

,

Wim Duisenberg

, said he was bullish about the euro's prospects because the European economy would strengthen in the long term. However, on that very day, both the

International Monetary Fund

and the ECB revised their growth predictions for Europe downward and those for the U.S. upward. The much-heralded "upturn" in the European economy has now been postponed for another year. The costly war in Yugoslavia is also likely to be a further drain on the euro's strength. For years, European leaders insisted that prudent budget spending was the single most important factor influencing the stability of the currency.

Declarations this week by the president of the

Federation of German Industry

,

Hans-Olaf Henkel

, have added to gloom about long-term prospects for the motor economy of the eurozone. Henkel said that Germany continues to suffer from structural weaknesses that no government shows any sign of addressing; that the German government's own prediction of 2% growth for 1999 is unrealistic; that German industry cannot continue supporting 4 million long-term unemployed; and that Germany suffers from an absence of entrepreneurship.

"Bill Gates would never have a chance here" because he would be killed off by the unions, he said, adding that Germany was squandering its economic potential for a U.S.-style "economic miracle."

However, there might be a deliberate policy of "benign neglect" toward the euro. Europeans, especially the French, have traditionally been very envious of the pre-eminence of the dollar, apparently convinced that the U.S. has used a cheap greenback to gain a competitive advantage in world trade. Indeed, the desire to imitate the dollar in this way was one of the main motives behind the desire to create a single European currency in the first place.

Germany, too, might be happy with a weak euro to help get it out of its economic doldrums. And it's worth remembering that some German leaders had been very frustrated with the mark's strength. In 1997, the then-German Foreign Minister

Klaus Kinkel

said that the euro could provide relief to German exporters who, he claimed, were being stifled by a strong mark, implying that he wanted the euro to be weaker than the mark.

With the unsubtle

Oskar Lafontaine

now ousted from the Finance Ministry, such a policy can be pursued quietly without the ECB being suspected of acting under political pressure.

But the eurozone is bigger than France and Germany. Inflationary pressures are building up in Ireland and Spain, where the euro's low interest rates are the opposite of what their overheating economies need.

And if the few policies that their government can use fail to dampen it, then the very centerpiece of the Maastricht treaty on monetary union -- its cast-iron commitment to ensure "price stability" across the eurozone -- will start to look as hollow as the over-hasty political predictions of the euro's strength.

John Laughland is a commentator on European political and economic affairs. He has written for several British national dailies and published two books, The Death of Politics: France Under Mitterand and, most recently, The Tainted Source: The Undemocratic Origins of the European Idea.