Pride and the Euro

A weaker euro versus the dollar should boost Euroland's economy, but for some Europeans, the truth hurts.
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FRANKFURT -- The euro has slipped more than 6% against the dollar since being born Jan. 1 into the cold, cruel world economy.

But so what? For despite its recent

gains, the dollar is still below the highs reached last summer before the Russian financial crisis hit the fan and splattered across global markets.

To put current dollar/euro levels in better perspective, take a quick look at the former European benchmark, the German mark.

The euro today was hovering near $1.10, a level equal to a dollar/mark rate of about 1.7780. That is still well below the 1.8100-to-1.8300-mark range the dollar hit early last July. And don't forget that last summer several European central bankers hinted that a euro launched at around $1.0850 (or 1.80 marks) would be ideal. But instead, a bad case of europhoria helped puff up the euro, and the new currency started way too strong, at $1.1743 (equal to 1.6650 marks to the dollar).

The general silence about the dollar at the weekend

G7

finance ministers' meeting sent a powerful signal that the

European Central Bank

and European finance ministers are content with the euro's slide. And it might even signal that G7 power brokers would allow further dollar gains against the euro, and the yen, as the price to be paid to help Japan out of its financial crisis and stabilize the global economy.

Despite a few scattered howls of disapproval from U.S. exporters about dollar gains,

Fed

chief

Alan Greenspan

and

Treasury

Secretary

Robert Rubin

might see powerful benefits. The two are now confronted with a

sizzling U.S. economy and worries of possible inflation down the road. A strong dollar might be just what the doctor ordered to cool things off; a mild dose of medicine instead of a traumatic rate hike operation.

ECB President

Wim Duisenberg

and

Bundesbank

President

Hans Tietmeyer

are facing the opposite problem -- that of slowing growth. For them, a weak euro might prop up the vital European export sector enough to make a rate cut unnecessary.

Stefan Bergheim, economist at

Merrill Lynch

in Frankfurt, said, "At the moment, the ECB is happy with the euro level." Merrill sees the euro at $1.08 in six months, and $1.06 in 12 months, which is equal to the 1.85 dollar/mark level that in the past made Bundesbankers nervous.

Bergheim believes the ECB would accept an orderly euro decline to around $1.06, but not much more. "At $1.06 I would expect Duisenberg to start talking up the euro," Bergheim said.

Gerhard Grebe, economist at

Bank Julius Baer

in Frankfurt, agrees that the ECB has reluctantly accepted a weaker euro for the good of the Euroland economy. But he believes the slide has been painful for EU officials, especially for German central bankers and politicians who repeatedly reassured German citizens that the euro would be as strong as the beloved mark. (As anyone who has lived in Germany knows, the exchange rate for the mark is a matter of intense national pride. Everyone discusses it, and evening TV newscasts always post dollar/mark levels.)

"The ECB is not happy with euro weakness," Grebe said. "The euro is like the shares of a company. When share prices go down, the company's executives are not happy. And when the euro goes down, the ECB is not happy."

Duisenberg alluded to these ambivalent feelings at a Feb. 4 press conference (a transcript of which can be found at

www.ecb.int/key). Asked by

TheStreet.com

whether he would welcome further dollar strength, Duisenberg answered:

If you ask a European, "What does the euro do?" he will answer: "Well, today it was $1.13, yesterday it was $1.14." He will give you a precise answer.

If you ask an American: "What does the dollar do?" the answer you will get: "A dollar? A dollar is a dollar." And we have to learn, I think, in Europe also to say more than we have done so far: "A euro? A euro is a euro."

In his statement, Duisenberg, painfully aware of the politics of euro exchange rates, was trying very delicately to make an important point. He was asking Euroland to adopt a more American attitude toward their new currency, to not take euro weakness so seriously.

In those few words, Duisenberg gave a green light for an orderly decline in the euro.

But if the euro keeps sliding, at some unknown trigger point the harmful effects -- higher import prices, inflationary pressures and damage to Euroland's prestige -- would begin to outweigh the stimulative benefits to the economy.

But well before we reach that trigger point, you can be sure that Duisenberg, Tietmeyer or other ECB heavyweights will turn on the flashing yellow caution lights. They will clearly let markets know the euro has slid far enough with statements like: "Current euro weakness does not match fundamentals." Or: "The dollar is clearly overvalued."

But they haven't even come close to uttering such a statement. In other words, the mighty dollar -- powered by a tech-charged U.S. economy that won't slow down -- still has a green light.