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Drop in Value of US Dollar is Bad News for EU - 2003-05-23

Europe's single currency has surpassed its launch value against the dollar as it reached nearly $1.18 on currency markets Friday. But the newly-found strength of the euro is not being welcomed by European manufacturers and exporters.

When the euro made its debut more than four years ago, it was worth $1.17. But it almost immediately began to decline in value and reached a low point of $.82 at the end of the year 2000.

In early 2002, when euro notes and coins were introduced, the 12-nation currency began recovering its value. And now, with the dollar steadily weakening, the euro is being seen by European officials as a serious alternative to the U.S. currency.

The European Union's executive commission says a strong and stable euro is beneficial. But the single currency's resurgence comes as Germany, the biggest country in the euro zone, is bordering on recession.

Ironically, Germany's ability to revive its economy is hindered by strict EU rules on budget discipline that were originally designed, at Berlin's insistence, to foster confidence in the euro.

The dollar has been weakened by accounting scandals at big U.S. corporations, worries about the cost of the Iraq war and its aftermath, and anxiety over the fragile health of the U.S. economy.

But analyst Michael Lewis at Deutsche Bank in London says the rise of the euro does not mean that the European economy is performing better than the U.S. economy.

"This whole appreciation of the euro is a reflection of what's going on in the United States," he said. "It's nothing to do with a stronger, more dynamic European economy. It's all about the bubble in the equity market in the U.S. bursting, and, now this dollar over-valuation bursting. The magnitude of this dollar fall is nothing extraordinary. We've seen it many times before, and it looks like this is a process that won't be exhausted until 2004, even 2005."

Other European economists say the steadily weakening dollar is a sign that the Bush administration is determined to spark a domestic economic recovery. They note that U.S. Treasury Secretary John Snow indicated last week that Washington is comfortable with a weaker dollar. They say that, with the value of the dollar declining, U.S. consumers are encouraged to buy U.S. products, which are now cheaper than European imports.

European manufacturers like the Dutch electronics group Philips have warned that their sales in the huge U.S. market will inevitably suffer. German manufacturers are worried that the strong euro will price their products out of many markets.

Since the mid-1990s, says the investment bank Morgan Stanley, the United States has accounted for about two thirds of global economic growth.

One EU official says he suspects the Bush administration has tired of urging Europe and Japan to undertake structural reforms aimed at stimulating domestic demand and making their own contribution to growth. So, this official says, Washington has decided to let the shift in exchange rates force its trading partners into taking such action.