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Ailing euro seeks a cure
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April 28, 2000: 2:52 p.m. ET
Higher U.S. rates may help currency, European markets in short term
By Staff Writer Jamey Keaten
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LONDON (CNNfn) - European politicians are in a tizzy about it and labor union officials are denying any responsibility for it, but economists say the continued softness of the euro currency may bode well for Euroland economies and markets, especially if European Union governments get their acts together.
Despite an interest rate hike by the European Central Bank Thursday and a recent batch of strong euro zone economic data, the 16-month old currency, like an unruly child, continued to defy the logic of currency market elders and fell to its third record low this week of $0.9031 Friday before rising slightly.
Currencies, like stock markets, rarely can defy the laws of gravity for long, even those currencies that now appear to be relative bastions of strength compared with the euro. The dollar struggled in the mid-1990s and the Japanese yen was a laggard in 1998.
What sets Euroland apart is a public perception that unless the member countries rally around structural reform, or other economies weaken, the euro will continue to struggle. European Central Bank policy makers, while applauded for their rate moves, are said to have contributed to the euro's troubles by not laying out their policy plans clearly enough.
So what's to blame for what some say is its surprising 23 percent drop against the dollar since the euro was launched in January 1999? The U.S. economy, experts say. Many economists expect the euro to return to parity with the dollar over time, but say the U.S. economy will have to ease first.
In its record-setting ninth year of uninterrupted expansion, the world's powerhouse economic engine still is growing faster than Euroland's. The U.S. gross domestic product growth during the first quarter came in earlier this week at 5.4 percent, and while lower than in the fourth quarter of last year, it still outpaces Euroland's 2.2 percent expansion in 1999 and an expected 3.5 percent climb for 2000. 
"Even though the European numbers are getting better and better, the U.S. numbers are still pulling the bigger rabbit out of the hat," said PaineWebber economist Allison Cottrell in an interview with CNNfn.
The U.S. economy - and its eye-popping markets - have lured European investors, who poured their money into Wall Street to cash in on the technology boom that, until just recently, had enriched many.
They have had to buy dollars, and sell euros, as their price of admission.
For their part, American investors have been soaking up the overseas cash, but they haven't responded by putting money into the European markets. But that could change with the euro at rock-bottom levels.
The Fed may hold Euroland's cards
Some experts say the declining euro could revive buying of European securities, even by well-heeled American investors - because it offers a chance to buy euro-denominated issues when they're relative cheap. It also can provide a double bounce if the currency revives and the value of the euro-based security rises too.
Economists say it all comes down to the U.S. Federal Reserve. If the Fed raises interest rates faster to head off inflation - and U.S. reports Thursday showed those inflationary pressures may not be as remote as once thought - then European securities markets may come back into fashion.
"The flow of capital into the U.S. market has been more consistent than anyone would have thought," George Magnus, chief economist at Warburg Dillon Read in London, said.
But, Magnus added, "If we continue to see spurts of inflation and interest rates in the U.S. rise, investor psychologies are going to change. They may see that the opportunity in other markets may be more interesting. This isn't the tech nirvana the U.S. is, but we have a fair share of tech companies."
Reform still the mantra
Others, including Germany's Juergen Donges, one of the five "wise men" economists hired by the government as independent policy analysts, repeat the mantra that "structural reform" is what's needed to cure the ailing euro - things like reform of tax, labor and pension policies that can drag on economies.
But those changes won't come about overnight.
The fall of the euro, like any two-sided coin, has its upside. Foremost among the benefits, experts say, is that it revives the exports that could drive the economies of the euro zone's member nations. A weak euro makes exports from the zone less expensive for consumers abroad.
"At this point, real wages are falling [and] profit margins are rising, so the offset to the stupid behavior on the part of the governments is that business profitability is improving, and that's all connected to the euro going down," said Charles Dumas, an economist with Lombard Street Research.
However, a weaker euro also makes imports into the euro zone more expensive, which could lead to inflation. Still, most economists say that's remote, because Euroland inflation currently is 2.1 percent, and much of that increase is due to an irregular spike in oil prices earlier this year.
Euro woes for Britain
"Unless there is serious reform there, the euro won't regain investor confidence," said Ruth Lea, head of the policy unit at Britain's Institute of Directors, a trade organization representing members of executive boards, who said U.K. companies are beginning to suffer because of the euro's woes.
Automaker BMW, based in Germany, the euro zone's biggest economy, claimed the euro's weakness against the pound - and Britain's unwillingness to join the common currency - was partly to blame for its decision to sell its ailing U.K. Rover car unit. The weak euro made operating Rover's plant too expensive in euro terms, the automaker's executives insisted.
Roughly half of all British exports of goods and services are to Euroland.
The saga has led to a round of finger-pointing among British politicians, who are grappling with ways to save jobs that could be lost as a result of a decline in exports or reduced foreign investment in the country.
Lea said the chance the U.K. now may seek to join the euro zone is even more remote because their business cycles are moving further apart. 
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