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Monday, 18 December, 2000, 14:58 GMT
The euro: Still in the doldrums
By BBC News Online's Tim Weber
The euro's performance during the past year has been a turbulent drama in three acts.
As a dramatic opener, the EU's single currency fell below "parity" with the US dollar. At one point a euro was worth less than 83 cents (US) - 30% below the launch value of $1.17.
The second act depicted a running battle, with the European Central Bank (ECB) repeatedly ambushing investors and speculators by intervening on the currency markets.
The third act saw a surprise finale. After hitting a record low, the euro suddenly began to rise again, gaining more than 7% in just two weeks. As the curtain falls, nobody is sure whether next year's sequel will be a glorious tour-de-force or a tragicomedy.
But by 18 December, the euro had recovered to above 90 cents, as fears grew of a US slowdown.
The euro debate
In European politics, meanwhile, a fierce discussion has been raging as to whether the single currency has been a success or a failure.
Public support in key euro countries has been plummeting - especially in Germany, where in just 12 months the beloved Deutschmark notes and coins will be swapped for euros and cents.
Outside the eurozone, the British public is more hostile to the euro than ever before, while Sweden's politicians and voters are decidedly queasy over whether to opt for the single currency or not.
Denmark went one better, rejecting eurozone membership outright in a hard-fought referendum.
The euro's failures
For the second year running, the euro has now failed to meet the promises made by many politicians and some currency strategists, who had forecast a strong revival for for 2000.
Every plunge of the euro on the financial markets, meanwhile, was greeted with glee by its critics, who saw the weakness as a proof of failure.
And at times, the situation looked grim indeed. The market mood turned against the euro, with some currency traders and speculators, including George Soros, predicting that it would soon fall below $0.70.
When things got really bad in September, the European Central Bank (ECB) intervened four times to prop up the currency - but to little avail.
Consumers suffered. The euro's weakness and high oil prices combined to push up inflation and force up interest rates.
While the eurozone's big countries - France, Germany and Italy - found it difficult to boost economic growth, some countries on the fringe of the region were close to overheating.
Ireland, Finland and Portugal and their bullish economies experienced inflation rates of 5% to 8% - well above the target rate of 2% set by the ECB.
Combined with the ECB's relatively low interest rates, the situation was worrying enough to allow the euro's critics argue that the "one-size-fits-all" interest rate policy of the eurozone was a desaster.
To cap a woeful year for the single currency, the European Central Bank had serious difficulties establishing its credibility with the markets.
When the ECB intervened on the markets, it was supported only once by the world's leading central banks. Three times it had to go it alone.
Investors, meanwhile, complained that the bank's monetary policy was not transparent enough.
It did not help when the ECB's president, Wim Duisenberg, suddenly became too transparent and in a newspaper interview let slip confidential details of the bank's policy on currency interventions.
The euro's successes
But all these 'failures' do not amount to real trouble, say the fans of the single currrency, who believe the past year demonstrated the euro's success.
And taking a long-term view, the euro is not as weak as it seems. Germany's mighty Deutschmark, now locked into the euro, dropped even faster against the US dollar between 1995 and 1997 then it did as part of the euro during the past two years.
And compared to 1985 - when the dollar was at its strongest, the euro is still in pretty good shape.
The euro's weakness, say the euro fans, actually helped the eurozone economy, boosting its export industry.
And many Irish and Portuguese analysts argue that eurozone membership has kept their economies growing, while avoiding wild currency swings that used to be the order of the trading day.
The euro has certainly delivered price stability - with low inflation in much of the 11-country eurozone.
The single currency has also been forcing eurozone governments to embark on a programme of structural reform.
Germany, the region's largest economy, has begun to overhaul its tax and pension systems, changes long demanded by economists.
France has lowered taxes as well, while Italy and other countries reigned in their budget deficits.
The biggest success, so has been the bond market. Living in one large currency zone has allowed eurozone companies to raise huge amounts of money to finance investments and expansion.
The euro bond market has overtaken the dollar bond market in size, and given the region's industry a huge boost.
But whatever the supposed failures or benefits of the single currency, many will still see the euro's value on the financial markets as the key measure of its success.
And here some analysts are detecting a new trend.
During much of the summer, investors were ignoring all good data from the eurozone, and latched on to the bad news. The eurozone's economy was accelerating, but ignored - in the shadow of the economic powerhouse United States.
Now it is the other way round. With the US economy running out of steam, the euro is slowly moving towards dollar parity.
Some economists are even predicting a "hard landing" and a recession for the US, which could give the euro a dramatic boost.
But the key, some experts say, will be capital flows.
Eurozone companies have been on a buying spree lately, snapping up rivals based in the US and other countries.
To do the deals, they had to buy dollars, thus driving down the value of the euro. Analysts predict that the merger and takeover wave will have run its course soon.
And as the US economy is slowing, some eurozone investors will also think twice before shifting their assets into US shares and treasury papers.
This time round, though, the currency strategists are more careful. Gone is the talk of a euro rampant.
They predict a modest recovery at best, with a 12-months target of $1.05 or thereabouts.
Judging from the analyst's past performance, these forecasts could either hail a euro crash or a boom well above launch levels.
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