The values of all three leading world currencies, the dollar, the euro and the yen remain under pressure. In good times when the money trading desks of the world fizz with activity, supply and demand become an important factor in a currency’s performance. But in a recession, particularly a low interest rate recession such as now grips the global economy, when supply exceeds demand, money like any other good, declines in value.
Nevertheless, there is another important ingredient in monetary value, and that is the core economic performance of the issuing country. For the United States and Japan, that calculation is an easy one to assess. The national figures are there for all to see. There is one central bank and there is one ministry responsible for financial oversight.
Not so the eurozone. The twelve countries within the 15-member European Union that have adopted the new currency present no such unified front. The European Central Bank, located in Germany, is very far from being the towering institution of the old German Bundesbank. There are 12 different finance ministries acting independently of each other, within a set of rules, the strictness of which has been undermined again and again, almost from since the euro was announced.
The EU headquarters in Brussels has regularly tried to crack the whip, but the thongs, far from being made of leather, generally seem like strands of wool. Although on paper it can levy swingeing fines on euro governments which fail to stay within financial targets on budget deficits and debt to GDP ratios, the fact is that this power can mean nothing when two of the biggest culprits are also the eurozone’s two biggest economies, Germany and France. Thus, to the chagrin of smaller economies like the Netherlands and Austria, which have made Herculean efforts to stick to them, the rules are being relaxed with eurozone countries now being given until 2006 to get their financial affairs in order.
France is predicting a 50 percent rise in its deficit. No doubt, Paris is announcing as much bad news as it dares in the hope of claiming credit if, as it hopes, the books turn out to be better in the next few years. Germany has less room for maneuver. Europe’s strongest economy is held back by structural faults and its failure to spread prosperity to the old Communist east of the country, while the boom was still on. If Gerhard Schroeder manages to form a new socialist government, nothing in his past economic record inspires confidence that he can better address these challenges than in his first term of office.
European bankers are becoming seriously worried about the euro’s credibility in the face of all this fudge and rule breaking.
However to its credit, the bureaucrats in Brussels have behaved with unusual toughness in one key matter, which might have let most eurozone governments off the hook, at least temporarily. Since the change this January to the euro, an almost unbelievable 42 billion ($41 billion) of the 12 old currencies has not been exchanged for euros. Some governments had proposed taking these vast sums into their national accounts on the asset side, thus transforming their deficit figures. To everyone’s surprise, Brussels absolutely forbade this maneuver. There may be some hope for the euro yet.
