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The Euro, Still A Weak Currency

Every day. the inhabitants of the Eurozone are fed exchange rate news, good and bad ones, according to the originator's perspective. The dollar is crumbling, the euro too high. Cheap imports are flooding the market; exports are hampered by Europe's unfavorable exchange rate. Overseas holidays are inexpensive; jobs are outsourced even faster. Many countries are now replacing dollars with euros in their currency reserves. Will the euro become the leading global reserve currency?

Despite the spectacular rise of the euro during past months, exports don't seem to be suffering a lot. The Eurozone's exports continue to grow at a healthy clip as if there was no exchange rate problem.

Pundits are creative in explaining the apparent contradiction. It's the growth of the global economy that keeps the export industries of the Eurozone busy, according to one opinion. No, it's the fact that 60 percent of the exports of euro countries are absorbed by other euro countries; therefore no currency problem. The world needs the European products and is not deterred by the exchange rate effects, another school believes. No, many European companies have hedged against a declining dollar and their export receipts are therefore protected.

Instead, a closer look at the facts reveals that we don't need these creative explanations because the euro is in no way the strong currency we are made to believe. The new pride of the inflation-battered Eurozonians in their currency is humanly understandable but unfortunately not justified.

The euro continues to be the weak currency it was from the start; its only strength is that it is currently less less weak than the greenback. The Greek adhesion scandal; the long held and probably justified doubts about Italy's monetary statistics; the German and French budget deficits and their efforts to disembowel the Stability Pact: all these news are not helping the euro to gain global respect and confidence.

In fact, central banks around the globe are cautious in not taking too many euros in their portfolio. They are increasing the euro share to fifteen, perhaps twenty percent of their total reserves, not more. If the euro was really as strong as the Eurozone media try to make us believe, there would be a rush of central banks into the new currency.

Looking at a basket of currencies it becomes apparent that since the beginning of 2004, the euro has risen much less than other currencies against the dollar. Only the Australian dollar and the Japanese yen performed worse than the euro. In the case of the yen it reflects the policy of the central bank to absorb lots of dollars in order to protect export industries by artificially lowering the exchange rate of the yen against the dollar.

Sterling, Swiss franc, the Nordic currencies and the Canadian dollar made much more headway against the dollar. Canada's dollar, for instance, rose over twice as fast as the euro. However, some eastern European currencies achieved the most impressive results. The exchange rate of the Polish zloty rose three times as much as the euro.

Small wonder that the Eurozone's exports do not seem gravely affected because possible losses in the dollar zone of the Americas and parts of Asia are compensated by gains in non-euro Europe, Japan and the rest of the non-dollar world.

There is no justification for complacency. The Eurozone governments and the European Central Bank need to enforce honesty in public accounting, fight their budget deficits instead of fighting the Stability Pact and do all the other well known things that should be done to keep a currency healthy.

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—— John Wantock