The Sliding Euro

For some months now there has been speculation about whether the euro would slip below the US currency in value

For some months now there has been speculation about whether the euro would slip below the US currency in value. The single European currency slipped briefly below parity in December, but over the past couple of days it has, for the first time, gone well below the $1 level. It was still on the decline last night and many believe it could slip further in the days ahead. Just because the euro is falling does not mean the currency is a "failure". As the European Central Bank's chief economist Mr Otmar Issing is fond of saying the euro "is worth a euro." The euro zone economy is more closed and less reliant on external trade than any of the individual countries were in premonetary unions days. This limited the overall inflationary impact of a falling currency value for the euro economy as a whole, although not for smaller open economies such as ours.

The majority view among financial analysts is still that the euro will bounce back in the months ahead. The consensus forecast is that it will end the year at around $1.10, although such predictions could yet prove wide of the mark. The problem for Europe's policy-makers is that the euro has not yet won credibility in the markets. The euphoria which surrounded its launch, when there was great optimism that it would take its place with the dollar and the yen as a strong currency, has so far proved misplaced.

Such has been the decline that it now appears that the European Central Bank is at least considering intervention to boost the euro, meaning it would step into the markets and buy the currency. Of course such a move would have to be well targeted. Even then, there is no guarantee that it would work, but it would at least put a halt to the criticism that the predominant attitude to the euro among the authorities is one of benign neglect.

For the Irish economy the continued weakness of the euro against both the dollar and of course sterling does present problems, as higher import prices from the US and UK can add to inflationary pressures. This is particularly worrying against the background of the latest year inflation figures, showing a 3.4 per cent annual rate in December. When combined with what is likely to be a 15 per cent general pay round over three years in the current pay talks and a booming housing market, the possibility of economic "overheating" rises. The fortunes of the euro will recover at some stage - which will be welcome for Ireland. The question, however, is when?