The Euro Causes Concern

An important psychological barrier has been breached with the euro slipping below the dollar for the first time, reaching an …

An important psychological barrier has been breached with the euro slipping below the dollar for the first time, reaching an all-time low early yesterday. The currency recovered marginally to close just above parity with the dollar on European markets yesterday but it could come under renewed pressure next week. It is important to keep these current difficulties in perspective. The euro is down but it is by no means out. Most market analysts expect the currency to appreciate in value as the euro-zone economy picks up pace and as concerns mount that the strong US economy may be overheating.

The general expectation is that the euro will significantly increase in value over the medium term. For all that, the current situation is a long way from the euphoria which accompanied the launch of the new currency last January. At that time, there was great optimism that the euro would before long take its place alongside the dollar and the yen as one of the world's strongest currencies. But, with market sentiment still working against the currency, the euro has, clearly, still to convince the international markets.

The fall in the value of the euro this week is being blamed on the German government whose willingness to provide state aids to a loss-making construction firm did little to inspire confidence in economic recovery. The European Central Bank president, Mr Wim Duisenberg, commented sharply that this kind of apporoach hardly sent the signal that Germany was a forward-looking, dynamic economy. But, over and above this episode, the euro's current weakness reflects continuing uncertainty about the euro-zone economy. All the indications may point to a sustained recovery in the medium term but, for now, there are only tentative signs of renewed economic growth. For the Irish economy, the continued weakness of the euro presents some dangers, chiefly the concern that the higher cost of imports will push up inflation. But there are wider implications, not least the manner in which the current weakness of the euro may undermine the case for British membership of the euro zone. For the euro-sceptics, the continued weakness of the euro has been a considerable blessing, since it has made it much easier to argue against British membership. Sterling membership of monetary union would be very much in the Irish economic interest. Sustained signs of growth in the euro-zone economy is essential if the euro is to rise in value. But stronger political and economic management must also be an integral part of the recovery programme. There have been spectacular own-goals, with Italy allowed to overshoot its budget deficit target and what might be mildly described as some loose talk about the currency and the euro economy from leading policymakers, both within the European Central Bank and outside it. A firmer approach is required if the euro is to achieve the ambitious objectives set by its founding fathers.