-Caveat Lector-
Poor globalists.
Just what does a guy have to do to
invent a global economy?
Ailing single
currency struggles
to bridge credibility
gap.
Special report: economic and
monetary union
Mark Milner and Charlotte Denny
Saturday March 24, 2001
The Guardian
The Stockholm summit has been
confronted with an unpleasant reality:
the euro, centrepiece of closer
economic integration, has failed to
establish its credibility.
The bloodbath on Wall Street and
America's slide into recession should
have been tailor-made for the euro to
rival the dollar as the world's premier
currency.
Instead Europe's single currency hit a
three month low against the dollar
this week as dealers and investors
decided that a shell-shocked US
economy was a better bet than the
eurozone.
The latest demonstration of the euro's
fragility left European leaders, not for
the first time, reduced to berating the
fickleness of financial markets.
The mood was summed up by the
economic affairs commissioner, Pedro
Solbes, who claimed that foreign
exchange traders were backing the
wrong horse.
"Europe is the economic safe haven of
the developed world at the moment
and this has to be recognised by the
markets," he said.
He was backed by the commission
president, Romano Prodi, who told an
Italian newspaper: "If I had money I
would still bet on the euro without
any difficulty."
The euro has had a rough ride from
the foreign exchange market since its
launch. Its initial exchange rate
against the dollar was $1.17 but
America's zippier economic
performance compared with that of
the 12-nation eurozone - at least until
late last year - saw it sink like a stone,
hitting a low of little more than 82
cents.
Though it subsequently recovered to
95 cents, the recent turbulence in the
financial markets has seen it slump
back to below 90 cents.
"There is certainly a paradox in the
dollar being seen as a safe haven
when it is the US stock market which
has been leading the way down," said
Ken Wattret, an economist at the
French bank BNP Paribas
Euro supporters can draw some
comfort from the knowledge that the
strength of the dollar could be a
kneejerk reaction as investors favour
the greenback in order to buy US
government bonds - traditionally
regarded as probably the world's
safest investment.
The market mood may be influenced,
too, by a belief that America's
slowdown will prove short-lived and
that the recovery will be more marked
on that side of the Atlantic than in
Europe.
But as Mr Wattret points out: "You
have the US stock market falling and
very serious worries about a
recession in the US, yet we still have
the euro being sold against the dollar.
It is a symptom of the credibility of the
euro that it is still struggling."
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