TIME EUROPE
November 27, 2000, Vol. 156 No. 22
TIME FINANCE
Speak No Evil
E.C.B. president Wim Duisenberg has taken the rap for a weak euro. That's not entirely fair
By JAMES GRAFF Brussels
page 1 | page 2
Alas, not for the euro itself. "The E.C.B. keeps on saying that the euro is undervalued for some fundamental reason," says Tony Norfield, global head of foreign exchange research at ABN AMRO in London. "However, the E.C.B.'s own data show precisely why the euro is low: because of the large amount of funds going out of Europe toward the U.S. and elsewhere."
European governments have not done all they could to provide an equally conducive environment for growth, one that might have kept that money at home. Labor market rigidities contribute to a eurozone unemployment rate of 9%, compared with only 3.9% in the U.S. Though Europe's jobless rate has fallen steadily since 1997, its nagging persistence not only reduces consumption in Europe, but also commits significant government resources to supporting and retraining the unemployed. European leaders pay lip service to the need to rein in high social and regulatory costs and bring taxes down, but action has been slower in coming.
It is beyond the E.C.B.'s brief to dictate economic policy, and you can only imagine the uproar if Duisenberg got much more explicit than noting the need to "address longer-term issues" and avoid "any loosening of fiscal policy." His relations with finance ministers aren't the best as matters stand. Given the immense prestige factor of the euro's dollar exchange rate, the E.C.B. has little choice but to continue trying to prop up the currency by way of market interventions.
Yet the success of such actions is far from clear. When it intervened on Sept. 22, with the support of other major central banks, the euro rallied. But less than three weeks later it plummeted after Duisenberg's interview. Several interventions the central bank undertook alone since then have stanched the decline, perhaps, but hardly engendered a recovery. Should the bank try harder? The answer depends on what you consider the fair value of the euro. The currency market itself has remained committed for months to a range in the mid-80s. The Paris-based Organization for Economic Cooperation and Development sets its purchasing power parity at $0.94, while others go as high as $1.17. The Economist's "Big Mac" index — which charts currencies against the constant of that universally available commodity — yields a value of $0.98.
"The E.C.B.'s committing a substantial amount to intervention over a long time could, I believe, bring about a reversal in the euro's fortunes," says Richard Portes, a professor of economics at London Business School. "It has ample reserves." But intervening and failing to move the currency much further undermines the E.C.B.'s already wasting authority — and provides politicians with another excuse to pile on. "The problem is the lack of adequate structural reform in the euro area sufficient to make it attractive for investors to put money into it," insists ABN AMRO's Norfield. "The E.C.B. is letting politicians off the hook by getting involved with this kind of action."
The fundamentals that could end up speaking loudest in the next few months are American ones. As the U.S. boom settles, emphasis on some of that economy's shakier attributes — its gargantuan current account deficit, for instance, and the high level of indebtedness of its corporations and consumers — is likely to increase. If the E.C.B. manages to act and talk prudently, that could offer a short-term chance for the euro to appreciate. "It has to happen within 12 months," says J.P. Morgan's Dugan. "That's the window of opportunity where the U.S. economy will slow, because the current account deficit will struggle to be funded through flows of capital."
But Europe can certainly do better than standing idle while the American economy determines the euro's fate on the currency markets. The euro is currently trading in a moderate range. Back in 1985, an equivalent basket of its precursor currencies only cost $0.69; in 1979, it traded at more than $1.40. Those values are a reminder of just how much cooler a view can be taken of the euro's current travails. The advantages the new currency has wrought for European businesses that can now market, merge and raise funds in a single currency will only increase as the euro moves toward coins and bills in early 2002. If Europe's politicians would build on those advantages with deeper economic reforms, the E.C.B.'s job would be much easier. And maybe Duisenberg could get back to the kind of jawing with the press that he clearly enjoyed in the past — though he'd be wise to do so with considerably more care.
— With reporting by Andrew Rosenbaum / Amsterdam and Christine Whitehouse / London
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COVER STORY
Long Wait
There are lessons to be learned by the candidates, the teams and the people as the process goes on and on
EUROPE
Back to the Ballot
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Great Pretender
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Mind Lab
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From Fast Forward Europe: How a venerable Hanseatic port shed its Old Economy image to become Germany's hottest city for digital media
MIDDLE EAST
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Despite some reforms, Egyptian election results warn the President of increasing voter discontent
AFRICA
Damage Control
South Africa's Thabo Mbeki moves to repair damage done by his comments on foreign and domestic issues
Nation Renovation
After years of violence, Somalia is rebuilding itself
TIME FINANCE
Speak No Evil
E.C.B. President Wim Duisenberg has unfairly taken the rap for a weak Euro
When Your Broker Is A Bookie
Something called spread betting is a new kind of investment strategy
Bourse Battles
Vienna's New Europe Exchange challenges Eastern Europe's budding stock markets
Made in Switzerland
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BUSINESS
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THE ARTS
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DEPARTMENTS
On Your Own Time
Hong Kong Havens: Where those in the know go to find calm and cuisine in Asia's busiest city
Worldwatch
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