Euro flatters to deceive in dollar’s reality check

Published on 16/07/2002 01:00

SOME are calling it the greatest comeback since Lazarus walked out of the tomb in Bethany. The euro, once tagged by forex traders as the world’s joke currency as it plummeted 30 per cent below its much-trumpeted January 1999 launch rate, has now soared 13 per cent this year - 6 per cent in just four weeks - as the hitherto almighty dollar suffers at the hands of a succession of US corporate scandals.

The greenback finally gave up its dominant status against the euro at around midday. As the single currency forced its way through the symbolic one-to-one barrier with the dollar, there was even cheering on some trading floors. But before the European Central Bank starts uncorking the champagne, it is worth reminding ourselves that the single currency’s spectacular rise is a dollar story, not a euro one.

A combination of the collapse in US equity markets and the exodus of foreign investment, which until now flowed into America, has resulted in the ballooning of its huge trade deficit have left dollar sentiment at a low.

The wave of accounting scandals that has enveloped former corporate titans such as energy giant Enron and telecoms group WorldCom have pushed investors into putting their cash elsewhere.

The US is so deeply in debt to the rest of the world that it needs huge financial inflows, billions every day, and the drying up of that cash adds to the strain on its economy.

In 2000, the US earned $288 billion in foreign direct investment, more than the entire developing world put together. Last year, foreign direct investment into the US plummeted to just under $144 billion, half of the previous year’s figure. Federal Reserve chairman Alan Greenspan’s aggressive slashing of interest rates aimed at keeping consumers spending in the throes of recession has also encouraged speculators to switch their cash into European assets.

In addition, much of what is happening to the greenback is an overdue correction. As the US economy enjoyed its unprecedented boom during the Clinton years, the dollar increased about 25 per cent in value against a basket of other key currencies. But it was over-valued and all the above events have helped time catch up with it.

Having successfully ridden the collapse of the tech boom, survived last year’s recession unscathed and even come through the 11 September tragedy, the dollar has finally succumbed. The euro has benefited from that and nothing else. The eurozone has not suddenly found the alchemists’ stone, it is more a case of the US having lost it. Goldman Sachs head of global economic research, Jim O’Neill, warned last night: "EMU-friendly politicians should not get carried away with their exuberance that this vindicates their policies, it is just a small step in a more sensible level for the dollar."

But those in favour of UK entry into the single currency cannot fail to be warmed by yesterday’s milestone. The current strength of the euro will allow ECB chief Wim Duisenberg and his colleagues to stay their hand on increasing eurozone interest rates in the short term, allowing the fledgling recovery more breathing space.

In terms of increasing the case for scrapping the pound and joining the euro, Prime Minister Tony Blair yesterday remained defiantly on message. When asked what the euro’s rise meant for UK entry he offered the usual phrases, "five economic tests must be made" and "you cannot judge this on the day-to-day".

But Lord Haskins, a Blair confidant and leading member of the pro-euro council of Britain in Europe, made the point quite succinctly: "We are now much nearer to an exchange rate that economists believe would be suitable for Britain to join," he said yesterday. "With conditions coming right, we should not need to pay the price of isolation for much longer."

But the mood surrounding the euro remains strangely non-committal. While millions of us may look forward to the possibility of a cheaper than expected holiday to the US - sterling also fared well against the dollar yesterday - and a slightly more expensive one to the Mediterranean, there are few traders willing to bet that the euro can hold its current standing.

Borrowing a phrase from former US president Bill Clinton, it is worth reminding ourselves that the issue surrounding domestic entry into the single currency remains "the economy stupid". Or more accurately, who controls the economy and how accountable are they? No10 has made great play out of the fact that as more and more of us get used to the euro during their two weeks in the sun, opposition to the idea of scrapping the pound will fall away.

During a visit to Edinburgh earlier this year, minister for Europe, South African-born Peter Hain, waxed lyrical about how once we got our hands on the euro in the tapas bars of Spain and tavernas of Greece we would all become converts to the single currency. Well, while few would argue about the convenience of using a single currency on a whistle-stop tour of Europe, it is slightly insulting to think that that is people’s only reservation about its adoption.

The last NOP poll, published at the start of the holiday season in June, revealed that 49 per cent of Britons would vote against the euro in a referendum, with only 36 per cent in favour. The central problem with the single currency is not the whether we change one bunch of notes and coins for another, but who controls the economy and how accountable they are.

Leaving aside the crassness of Rik Mayall, dressed up as Adolf Hitler, proclaiming "Ein Volk! Ein Reich! Ein Euro!", the fundamental issue centres on democratic accountability. If Gordon Brown makes a mess of the economy, he is accountable through parliament and the ballot box. For all his laconic charm, Duisenberg is accountable to no-one, as he illustrated by his decision to delay his departure from his post by a year, despite the infamous "gentlemen’s agreement" with France.

That, along with the continuing evidence that a one-size economic policy is impossible in an area as diverse as Europe - that’s why we take holidays there, because it’s different - remains the principle reason why the euro is a bad idea, and why we remain better off outside it.