Is the crisis over? Perhaps. At least the Fed seems to have helped to put a floor under the euro as economists scrap their predictions that it could sink to 80. But that’s a far cry from turning into a euro cheerleader. In fact, that same afternoon U.S. Treasury Secretary Larry Summers, while expressing concern for the weak euro’s impact on the world economy, quickly added that the strong-dollar policy remains unchanged. At Saturday’s G7 session, finance ministers stressed their concern over recent movements in the euro, but at a press briefing afterward Summers again emphasized American support for a strong greenback. On Thursday the Danes vote on joining Euroland; a “no” would be a psychological blow to the euro. And an OPEC meeting and more fuel-price protests scheduled this week will keep the soft euro on the agenda. “The Europeans are hoping for a turning point, but the Americans are just trying to freeze-frame things,” says Allison Cottrell, chief international economist for Paine Webber in London. The bottom line: the euro’s rough ride probably isn’t over yet.
Oddly enough, despite all the angst, the euro has never really been hammered. It just sort of drifted down 28 percent against the dollar since its debut January 1999, as optimistic investors were repeatedly disappointed. Only recently has its weakness been considered alarming. In fact, speculators had–if anything–been betting on a rise, and just got tired of waiting. But then the gas crisis hit. Manufacturers buying dollar-denominated oil squealed in pain. And other than a heftier bill for vacations to Florida, it was the first time that ordinary people were exposed to the costs of a weak currency. With voters suddenly riled up, the politicians listened. “The euro is not an economic problem, it’s a psychological-political problem,” says Ulrich Schroder, senior economist with Deutsche Bank in Frankfurt.
The political pressure is not about to let up. French Prime Minister Lionel Jospin capitulated on gas-tax cuts. Then, after a dismal showing in opinion polls, he cut even farther last week. Morgan Stanley Dean Witter economist Eric Cheney fears such moves could induce wage inflation. Italy is in danger of falling into the same trap. Industry Minister Enrico Letta promised tax rebates to truckers, but he infuriated farmers, taxi drivers and commercial fishermen, who say they have lost 35 percent of their income. “We can’t even afford to get in and out of the port with the cost of fuel,” laments Francesco Zizzo, a Sicilian fisherman and head of l’Agci Pesca, the commercial fisherman’s union. And with the euro halving the value of his catch, “it’s hardly worth getting in the boat,” he says.
We haven’t heard the last from the truckers either. Italian truckers and taxi drivers now threaten to shut down major cities and roads early this week if they don’t get promised tax rebates. Some 1,000 German truckers will hit the road to Berlin on Tuesday to demand fuel-tax cuts, and thousands more will stage a slowdown nationwide. “Nobody has to die quietly,” says Peter Roeskes, 31, the third-generation owner of a small trucking company outside Dusseldorf. Even in Spain, where the economy is pretty strong and the euro is considered a blessing compared to the peseta, transport workers have called a three-day strike for Oct. 4, and farmers plan to disrupt traffic in all the provincial capitals on Oct 12.
With all this turmoil, it’s no wonder the Danes may decide they don’t need such headaches. The other great Euroskeptics will pay close attention. Swedes tend to share the view that a small, smoothly running Scandinavian economy can go it alone, thank you. A poll by SKOP in mid-September showed that 59 percent of Swedes oppose joining Euroland, up from 47 percent one year ago. In Britain, where Prime Minister Tony Blair has no plans to call a vote, a “no” by the Danes would bolster the isolationist crowd. “This is not simply about economics, it’s about who governs one’s country,” says Lord Stoddart of the Danish Referendum Campaign, a British group that supports the anti-euro cause.
When it comes to the soft euro, though, it’s all about people choosing where they think their money will get them the best return. Every time Alcatel buys an American high-tech company, or Deutsche Telekom goes after a U.S. wireless jewel, the dollar gets another boost. Just look at the July data that came out last week. The EMU-11 posted a current-account deficit of 2.2 billion euros, a net outflow of direct investment of 11.3 billion euros, and a net outflow of money into stocks and bonds totaling 5.9 billion. “It has sweet nothing to do with mad speculators or weird market psychology,” says Tony Norfield, head of currency research for ABN Amro in London. “The European area is not seen as a great place to invest.”
It doesn’t help that Europe still doesn’t speak with one voice. Politicians praise a weak euro for boosting exports, horrifying ECB officials. But the biggest problem is Europe’s Old Economy trimmings. Economists call them “rigidities”–the high taxes, inflexible labor markets and cushy welfare benefits that have prevented Europe from keeping pace with the New Economy in the United States, where people could quickly shift to new careers as the Internet took off. In fact, it’s finally sinking in that the whole idea of a powerful euro rivaling the dollar as a reserve currency was a nonstarter. “People are starting to recognize the U.S. for what it is, and don’t expect the euro to outperform the dollar,” says Johnathan Bayley, currency analyst for BNP Paribas in Paris.
It’ll take a lot more than a bunch of central bankers to persuade real investors that Europe is a better buy. “[The Fed intervention] is entirely a political gesture to Europe,” says Allan Meltzer, a veteran monetary economist at Carnegie Mellon. “Only a shift in perceived investment opportunities can reverse the euro’s slide.” And only Europe’s political leaders can make a difference. But until they give the world good reasons to buy euros, the dollar will continue to rule.
