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Thursday, 27 April, 2000, 14:51 GMT 15:51 UK
Europe and the euro
Wim Duisenberg in somber mood
ECB president Wim Duisenberg has failed to stem the currency's decline
The chronic weakness of Europe's single currency is creating an imbalance in the global economy.

Export industries in the United Kingdom, the US and other countries are moaning that their products have suddenly become too expensive and find it difficult to compete on the single market of the eurozone.

Large investment funds in the US and UK see their stock market gains on Europe's buoyant exchanges eroded when they repatriate their profits back into dollars and pounds.

A matter of confidence

Euroland has had it a bit easier.


European politicians press button to launch the single currency
When the euro was launched, it bought about $1.18, now less than 92 cents
The 11 countries that make up the eurozone do most of their trading with each other. Their exchange rates are locked into the single currency, while the cheap euro has triggered an export boom.

There is just one big economic danger lurking: Inflation. The price of imports has gone up sharply, especially for raw materials like oil. Already the region's inflation rate has edged just above the 2% target set by the European Central Bank.

However, the biggest problem is not one of economic fundamentals - which according to the mantra chanted by Euroland politicians and central bankers look good.

The real worry is psychological. If the euro is seen not as the successor of Germany's muscular Deutschmark but Italy's weak lira, consumer and business confidence could collapse.

And as every other day the euro probes new lows, across the eurozone the debate intensifies whether having a single currency was such a good idea after all.

Germany

The euro's 23% plunge against the US dollar has badly shaken the German public. Notoriously averse to the threat of inflation and accustomed to a strong currency, a majority of Germans has now turned against the euro.



The capital markets have little trust in the reform capability of the three most important Euroland countries, Germany, Italy and France.

Hans-Olaf Henkel, Federation of German Industry
The government, though, insists that things are not as bad as they look.

Chancellor Gerhard Schroeder says Europe's economic fundamentals are "sparkling" and promises reforms that will underpin the region's economic recovery and should boost the euro.

But Juergen Falter, political analyst at Mainz University, echoes comments of many German economists: "The fall of the euro leads to the fear that Europe is not ready for reform."


Frankfurt stock exchange brokers toasting with champagne
German stock brokers used to celebrate the euro with champagne
None of the major parties has yet turned euro-sceptic, but there are rumblings among the conservative opposition.

"There is nothing to stop some publicity-hungry politician taking a euro-sceptical line to boost their profile", warns one analyst.

France

French business has done well under the euro. The economy is booming, pay rises have been modest, business confidence is very close to record highs and inflation is lower than in Germany.

The euro's weakness is seen as a boon helping exporters.

However, the euro's problems have been blamed on the reluctance of countries like France to reform their economies while the going is good.


official franc-euro exchange rate notice in French supermarket
French shoppers get ready for euro notes and coins in 2002
The country has a reputation of being one of the most expensive places to do business in. A new report shows that some 0.2% of the country's highest tax payers leave the country each year for friendlier tax regimes.

Finance Minister Laurent Fabius calls it "a worrying phenomenon". To make matters worse left-wingers in parliament have just forced the socialist government to raise taxes on stock options.

Italy


Italian bank brochure informing customers about the euro
Italians are still enthusiastic fans of the single currency
It may come as no surprise that the Italian public is not too worried about a weakening currency. In polls more than 85% of those questioned are still in favour of the euro.

Politicians and companies say the weak euro has helped the economy and point to Japan, where a strong yen is strangling a halting recovery.

But the political crisis in Italy has slowed down economic reform, leading to worries that government debt - and inflation - could creep up again.

Spain

Inflation is above the European average in Spain and higher interest rates to prop up the euro have been welcomed.

The euro has brought Spain further integration with the European economy, providing a massive boost to her industries.

The man who took Spain into the euro, Prime Minister Jose Maria Aznar, just won re-election with a comfortable margin.

Scandinavia

Finland was the only Scandinavian country to join monetary union, and economic powerhouses like Nokia have done well out of it.

The focus is now on Sweden and Denmark, both outside the euro and with a tradition of euro-scepticism.

The mood changed in recent months, as the euro found more fans than sceptics for the first time. Denmark now plans to hold a referendum on euro membership on 28 September.

However, the latest currency turmoil has reignited old worries about the single currency, and it is doubtful whether either country will join the euro.

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See also:

30 Mar 00 | Business
Euro rates on hold
31 Mar 00 | Business
British businesses and the euro
07 Apr 00 | Business
The UK's euro dilemma
11 Apr 00 | Business
Europe expansion on course
20 Apr 00 | Business
Greece's euro gamble
25 Apr 00 | Business
Q and A: Euro currency slump
27 Apr 00 | Business
Europe raises rates
25 Apr 00 | Business
Euro decline continues
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