Europe's Four-Star Currency Failing at the Box Office

But even if the euro reaches parity with the dollar, conditions for the single currency have actually improved since January.
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In some ways, the euro has become the

Ishtar

of the foreign currency world. Just as the all-star cast of

Warren Beatty

and

Dustin Hoffman

couldn't keep that movie from flopping at the box office, so the best efforts of the 11 members of the

European Union

can't seem to stop the euro from weakening in relation to the U.S. dollar.

The euro hit its lowest point Thursday, as foreign exchange traders, smelling blood, attempted to push the currency ever closer to parity with the dollar. Whether that's warranted doesn't really concern the traders, for whom market sentiment is more important than the underlying fundamental conditions. From its highest point of $1.18 shortly after its debut at the start of January, the euro hit $1.0175 in early Thursday trading.

Part of the slide is easily explained by events such as the war in Kosovo and better prospects for U.S. growth. However, if anything, the economic and fiscal fundamentals for the euro have gotten better since the beginning of the year.

With Friends Like These

To be sure, the euro hasn't been getting much help from its so-called backers, with Europe's politicians making gaffe after gaffe and then engaging in some top-drawer damage control to keep the currency from spiraling out of control.

In June,

Romano Prodi

, the former Italian prime minister and future president of the

European Commission

, made some

remarks which sparked fears that the boot-shaped country might be thrown out of the currency union at some point down the road. And then on Tuesday, French Finance Minister

Dominique Strauss-Kahn

had to deny a newspaper report that France was hoping to ease the euro nations' budget-deficit and debt criteria.

While traders seized on those political goofs to push the euro lower, the fundamental economic picture should actually be pushing them in the other direction. Prospects for euroland's growth, dampened in the first half, are expected to take off in the second part of year, helped in part by the euro's weakness which is boosting exports of Europe's goods abroad.

And contrary to the French flap about weakening the debt and budget criteria in the

Maastricht Treaty

, which binds the union together, Euroland's governments are much better positioned to tow the fiscal line than they were six months ago. Germany, which makes up one-third of the entire euroland economy, is once again leading the way.

The German Question

Germany's former socialist finance minister

Oskar Lafontaine

has been out of the picture for a few months now. And after the unabashed leftist abruptly departed so too did the threat Germany would give up its traditional role as minder of the Continent's fiscal rectitude and "hard" euro policies. Lafontaine's replacement

Hans Eichel

is known as the "Anti-Oskar" in the German press because of his fiscal zeal. Only last month, Eichel unveiled his

plans to cut the German budget deficit by $16 billion next year as well as outlining a path to a balanced budget within six years.

The Italians, for all the ruckus they caused in June when the government said it would not meet its euro-related budget deficit target this year, have also announced a tighter fiscal policy recently. On June 30, officials in Rome released plans to cut 11.5 trillion lire ($6.1 billion) from the 2000 budget, less than the 16 trillion that had been expected, but enabling the country to meet its 1.5% of gross domestic product budget deficit target next year.

And the French, as Strauss-Kahn pointed out Tuesday, have no intention of attempting to relax the euro's stability pact criteria -- especially in light of the French economy bouncing back better than either the German or Italian economies. After distancing the government from the research agency policy paper that caused the euro's latest slide, Strauss-Kahn said France's economy is expected to grow between 2.2% and 2.5% in 1999 and between 2.5% and 3% in 2000.

"As far as the governments' deficit policies go, there has been overall positive developments for the euro," says Thomas Mayer, euroland economist for

Goldman Sachs

in Frankfurt. "The market has instead chosen to focus on erroneous information like this latest French news."

But even if the euro were, heaven forbid, to weaken below parity with the dollar, we still wouldn't be talking about the euro being as soft as the Italian lira, or even the Turkish lira for that matter. If the German mark is considered the benchmark for the euro's hardness, there's still a lot of leeway to be had. Thursday's level of $1.0175 to the euro is equivalent to 1.9120 marks to the dollar -- nowhere near the 3.4614 marks vs. the dollar hit back in 1985 and still less than the 2 marks to the dollar hit in the late 1980s.

Ignominious as the euro's start may have been, the currency's fortunes may improve faster than many traders now imagine. Even after the humiliation of

Ishtar

in 1987, Dustin Hoffman went on the next year to win an Academy Award for

Rain Man

.