Funeral services were held in Luxembourg Friday for a man called the "Father of the euro," the 12-nation European currency. Pierre Werner, a former prime minister of Luxembourg, died this week at the age of 88. He died just as one of his dreams was close to being fulfilled: Europe's new currency, the euro, was approaching parity with the dollar.
Pierre Werner served as Luxembourg's prime minister for about 20 years, mostly in the 1960's, '70's and early '80's. However, outside Luxembourg, he is probably best known for his plan for the nations in what was then the European Economic Community to develop a common currency. The proposal was not taken seriously when Mr. Werner first offered it, in 1970. But it is now a reality.
The euro, which is used in 12 of the 15 European Union countries, was introduced as a hard currency at the beginning of this year. It was trading as low as 86 cents against the dollar in early March, but in recent weeks it has gained strength, and is now approaching the psychological barrier of one-to-one with the U.S. currency.
The quick rise has surprised many financial observers. Lucien Thiel, general manager of the Luxembourg Bankers' Association, attributes the rise of the euro more to the weakness of the dollar than to the strength of the euro.
"It depends on which side you are looking. The dollars is weak for the time being for several reasons. And as soon as the one currency is going down, the other is automatically going up. In this case, it has nothing to do with the euro itself, but more with the dollar," Mr. Thiel said.
Mr. Thiel blames the decline of the dollar on the falling U.S. stock market, which has been hurt by accounting scandals in such major corporations as Enron, WorldCom and others.
But the stronger euro is not necessarily good news for the European economy, according to Mr. Thiel. He said Europe's economy depends to a significant extent on exports and those exports will now be more expensive.
"Until now, the European economy was quite comfortable with a low euro, because a low euro means that you can push your exports. Now this will change a little bit. And since a lot of goods produced in Europe are produced for the export market, this will create a problem now, because these exports will increase in price," he said.
Daniel Gros, director of the Center for European Policy Studies in Brussels, says exports make up about 15 percent of the euro-zone economy, a sizable percentage. He agrees the higher euro will slow the European economy.
"It means that European policy-makers for five minutes will feel great because they have a stronger currency. And then, they will have to live with the fact that exports from the euro-zone (the 12 nations that use the euro) will also be hit, not very strongly, but somewhat. And that means that the recovery in euroland will also be less strong than originally hoped for," Mr. Gros said.
Mr. Gros and others say there is a slight positive effect from the high euro. Oil, which is priced in dollars, will be cheaper in the euro-zone. But this savings will be overwhelmed by a much larger loss in exports.
Mr. Gros says the real danger would come if the dollar falls too far, and pushes the euro up to $1.30. In this case, he said, there would be no economic growth in the euro-zone for a couple of years, and more turmoil on financial markets.