Euro Hobbles Along, Yet Pivotal to EU Reforms

Europeans shared an ambivalent attitude toward their single currency in the past 12 months as the euro kept plumbing record lows while spurring an export-led economic recovery, reshaping corporate culture and pressing governments to go ahead with reforms.

At the heart of Brussels' bid to tone up the weakened currency is faster structural reforms in and better policy coordination among members of the soon-to-be 12-nation euro zone.

After a poor performance in its debut year of 1999, the euro kept going down from the beginning of this year and dropped below the psychologically significant one-for-one rate with the US dollar in February and seemed to have never, ever, turned its way back.

It tumbled to about 90 cents in May and below 85 cents in September.

In November, languishing more than 25 percent below its birth value, so weak was the euro that it did not respond to consecutive interventions by the European Central Bank (ECB).

DAMAGED CREDIBILITY

The euro's nosedive mirrored the unexpectedly long-lived robust US economic growth. Last year, the euro zone registered a 2.3- percent growth, compared to 4.2 percent in the U.S.

A similar gap is likely to be notable in 2000 as the economic picture in Europe is still subdued and the forecast for U.S. growth points to but a small slowdown.

Nevertheless, presuming that the euro had been overvalued since its birth, some economists said the fact that the dollar kept soaring against the euro was a good thing for Europe. It is evident that a weak single currency brought competitive advantages for exporters in the euro zone.

But import prices rose in the meantime and investors opted for more returns in the U.S. markets. To make things worse, rocketing oil prices, which jumped to a 10-year high of US$36 per barrel in October, sirened inflation risks and sucked billions of dollars out of Europe.

The vicious circle manifested its force on people's psychology - - with much of credibility rubbed off by the prolonged fall, the euro was rejected by the Danes in their September referendum, which made it further undermined.

More frustration looms as it's evident that Britain and Sweden would most likely follow in the Danes' footsteps. It meant that the three European Union (EU) members least enthusiastic about further integration will remain outside the common currency.

WEAKENED EURO, BUT NOT FAILED EURO

The gloom should not obscure the fact that the euro has had a remarkably beneficial effect on bringing Europe's major economies closer and more competitive.

Since the euro stitched together 11 countries' financial systems and fixed exchange rates within Europe, businesses have saved a lot in the more liquid market.

It is widely believed that without the euro, the turbulence caused by soaring oil prices would have hurt Europe much more heavily.

With the single currency, cross-border mergers are facilitated and fund raising becomes easier. Amid headline-grabbing merger and acquisition waves in 2000, Britain's Vodaphone AirTouch CEO Chris Gent recognized it would have been harder to fund his 183-billion- dollar bid for Germany's Mannesmann had it not been for the euro. He paid for Mannesmann largely in euro-denominated shares.

The euro has also put pressure on governments to foster US-style dynamism.

As capital and labor tend to flow to where there is less restriction, the French, German and Italian governments have passed ferocious tax cut plans to make their territories economically more attractive.

Rules relax on part-time jobs and short-term contracts; laws loosen up on job-protection and social security contributions paid by employers. Companies are encouraged to hire more people and employees to move more freely.

As the would-be head of ECB and Bank of France Governor Jean-Claude Trichet has put it, "the single currency is per se a structural reform of extreme magnitude."

POLITICIANS STILL OPTIMIST

The embarrassed euro optimists may find more comfort toward the end of the year as the currency rose to a three-month high against the dollar in December when dealers sold the dollar following prolonged election wrangling and worse-than-forecast economic figures in America.

The steady crawl back was regarded as a sign of recovery. ECB president Wim Duisenberg said: "The euro is still undervalued ... It has reversed its trend to meet fundamentals."

Defined by the 1991 Maastricht Treaty, the single currency was launched as one of the EU's three policy pillars.

As economists hold, the health of Europe's monetary union can not be judged solely by the exchange rates of the euro.

Looking back, the euro is far from reaching its real record lows when in 1985 its predecessor -- the European Currency Unit (ECU) -- was traded as low as 69 U.S. cents.

And in the long-term view, the euro has its role to play as long as it encourages structural reforms and ensures future growth in Europe, analysts said.

Technically speaking, the euro's first step will not be completed until the middle of 2002 when euro notes and coins completely replace euro zone's national currencies.

Only at that time will it be possible to say that the launch of the euro has been fully successful, Robert Mundell, "father of the euro" and 1999 Nobel laureate in economics, said recently in an interview with Europe's Business Week magazine.

As they have always been, those who oversaw the birth of euro are still confident that it will grow to be a rival to the US dollar as a major reserve currency.

"Many things still have to be done. But many have been changed already," the ECB's Duisenberg was quoted as saying, "Europe is on the move. But we have to keep moving."

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