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ECB officials defend euro
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January 28, 2000: 7:52 a.m. ET
Currency at record low, but has potential to recover, central bankers say
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LONDON (CNNfn) - Senior European officials spoke up in defense of the euro Friday as the embattled single currency slid almost two cents below parity with the dollar - the second time it has done so in as many days. The currency now stands 16 percent below the level at which it was launched amid much ballyhoo in January 1999.
The euro was quoted around 98.63 cents Friday, off an earlier record low - its third this week - of 98.27 cents, after Bank of France governor Jean Trichet, in Davos, Switzerland for the World Economic Forum, insisted the euro has strong potential for appreciation.
His remarks were seconded by Bundesbank President Ernst Welteke, who asserted the euro's weakness is more a psychological than an economic problem.
"The depreciation of the euro was against our expectations and many other forecasts that had predicted a stronger euro," Welteke said, adding that for the new currency, "it's a question of people's confidence and a psychological problem."
Trichet and Welteke are both members of the European Central Bank's governing council, which sets monetary policy across the euro zone.
The latest weakness in the euro comes against a backdrop of concerns over the relentless U.S. economic expansion. Some currency analysts have suggested that European political and financial leaders' failure to offer expressions of support for the currency in recent days may also have undermined the euro.
Some of that silence may be deliberate.
On the one hand, a weak euro potentially helps economies of euro-zone countries by making local companies' exports more competitive outside the single-currency bloc. At the same time, it makes euro-denominated securities less attractive to international investors in Asia, Latin America and the United States.
The latest slide in the euro further dashes the hopes of those who once talked up the euro as a viable reserve currency for the 11-nation euro-zone against the dominant dollar. Some economist now say the currency may slide as low as 90 cents - a level at which serious rifts could begin to develop among ECB officials and politicians.
Stephen Lewis, chief economist at Monument Derivatives, attributes the currency's slide to the failure of political structures in many European countries to keep pace with economic modernization. In many euro-zone regions, national governments still hold sway over many aspects of economic life.
"Although we are now seeing modernization of business practices within Europe we are not seeing a similar modernization of the political system. We have a new breed of company managers."
Lewis also believes that some European politicians may privately relish the euro's weakness.
"Some politicians feel that the interests of European industry are paramount and that the exchange rate needs to fall further in order to ensure a future for European industry against competition in other parts of the world," he said.
"If we got down to (90 cents)," he added, "we would see very significant tensions building up within the leadership of the EU...I think we will see the wrangling at the top of the euro-zone going on and this will keep the euro under pressure for a while to come." Lewis said he believed net investment outflows from the euro-zone were also driving down the euro. 
--from staff and wire reports
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European Central Bank
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