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Tuesday, 25 April, 2000, 16:47 GMT 17:47 UK
Q and A: Euro currency slump

Europe's single currency, the euro, has dipped to its lowest value against the dollar and is now worth about 20% less than it was at its launch just over a year ago. But what does it mean for those outside the Eurozone? Our economics reporter Chris Giles explains.

Why is the value of the euro falling?

People, particularly global investors, are taking money out of the Eurozone and buying assets in other countries, especially in the United States.

At the moment the economic signals from America are much stronger than expected - far too strong in fact - and that makes interest rate rises over there a certainty, making the US an attractive place for investment funds.

Even though Europe's economy is getting healthier, the signals from the European Central Bank are mixed and certainty is something investors like more than anything else.

Is there anything Euroland countries can do to stop the slide?

There is little they can do in the short term. In the longer term, if their economies continue to grow strongly with low inflation, it is almost certain the euro will rise strongly from its current lows.

The dollar is also riding for a fall - America has a huge trade deficit and in the long term that normally means the dollar will fall. But predicting when that will happen is a mugs game.

Is the euro dragging down other European currencies?

There are still French, German and Italian notes and coins in circulation but they are just parts of the euro. So when the euro falls in value, so do they.

France, Germany, Italy and the other eight countries in the Eurozone gave up their national currencies in January 1999 but they will only give up their notes and coins in 2002.

In the interim, the single currency is mostly used by global investors, bankers and business.

What does a lower euro mean for British firms who export to Europe?

A lower euro means exporting companies find it harder to compete because their products are more expensive abroad. Other British companies also face difficulties because they compete with cheaper imports from the Eurozone.

But some companies, who buy from abroad, such as retailers, can often increase their profits as the euro falls because their imports are cheaper but they do not change the UK price of goods they sell.

Should the UK be worried?

We should be worried if a temporarily high pound against the euro forces some viable British businesses into bankruptcy.

It also makes the economy unbalanced - manufacturing and exporting industries suffering at the expense of services.

But for many people in Britain whose jobs are not affected by the high pound, a low euro is beneficial. Imported goods are cheaper to buy, as are foreign holidays.

How much more will the pound buy abroad for British tourists this year?

Last summer 1 bought about 1.5 euros, now 1 is worth 1.578 euros, a rise of 5%. With inflation rates in Europe and Britain more or less the same, it means if exchange rates don't move, Britons will be able to get 5% more for their money when they go to France, Spain, Italy or other Eurozone countries.

Are the doubters right - will Britain be better off in the long term outside the Euro?

The economics of the euro are extremely complicated and most honest economists will say they don't know.

Joining the euro would benefit many businesses because it would guarantee certainty of exchange rates with most of our trading partners.

It would also strengthen business links between Britain and Europe. Consumers would probably gain because it would increase competition and force companies to price goods more similarly across Europe.

The price for such benefits is losing control of interest rates. European interest rates might not be right for Britain because they would be set for the continent as a whole. So joining the euro could increase instability in the economy.

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See also:

19 Apr 00 | Business
Euro on shaky ground
11 Apr 00 | Business
George: 'Keep euro options open'
07 Apr 00 | Business
The UK's euro dilemma
30 Mar 00 | Business
Growing business divide over euro
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