The value of the euro, the European single currency hailed at its birth as the proudest achievement of European unity, hit a record low today in its uninterrupted slide downhill.
The currency of 11 Western European nations is now at near-parity with the dollar. It began life five months ago worth $1.17. It fell today in New York to $1.0361, after officials squelched rumors that the European Central Bank would intervene to bolster the euro.
"I think the markets have sensed this is a project that has got profound flaws in it," said David Lascelles, co-director of the Centre for Financial Innovation in London. "The markets have now smelled blood."
Economically, a falling euro is not a bad thing for Europe. A weak euro attracts foreign tourists because hotels and restaurant meals cost less in dollars when charged to most dollar-based credit cards. (The euro is not yet available in cash -- that will happen in 2002. It is at present an accounting unit whose rate is fixed to member counties' currencies.) And a weak euro makes European exports cheaper elsewhere.
There are some economic dangers inherent in a weak currency though, such as higher inflation. But prices are rising only very slowly here and there is little sign anything will push them up faster.
Politically, however, the fall of the euro is a deep embarrassment to its founders. One reason the 11 participating countries -- Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain -- chose to combine their moneys into one was to create a currency to rival the international power of the U.S. dollar. The hope was that the euro would someday rival the dollar as a reserve currency, in which countries and companies around the world hold their financial assets because they are sure of preserving their value. The fall of the euro makes a mockery of that idea, for the moment at least.
The European Central Bank, which governs monetary policy for the euro countries, did not take any action to support the currency, saying that its decline was the result of a strong U.S. economy relative to the weaker combined economies of the euro countries.
In fact, ECB officials and those from the governments of member countries have been trying to talk up the euro for weeks. Today, ECB President Willem "Wim" Duisenberg said that the euro "is a currency firmly based on internal price stability and therefore has a clear potential for a stronger external value."
There is no "cause for concern" added Klaus Gretschmann, chief international economic adviser to German Chancellor Gerhard Schroeder.
Many analysts, on the other hand, are forecasting that the euro soon will equal the dollar. "We are getting closer to the crisis zone," said Ulrich Schroeder, senior economist with Deutsche Bank Group in Frankfurt.
"I think there is certainly an image problem," said Herve Goulletquer, chief economist for the Credit Lyonnais bank in Paris. "The idea is you are supposed to have confidence in a currency. At its base should be strong economies and strong institutions. Today we don't have either one."
In essence, he said, Europe is missing what nearly every other money on earth has: a government. Without central institutions, other than a central bank, Europe will never be in a position to fully challenge the United States economically, he said.
"There's going to be a slow grind down; the euro could go below $1," said Duncan Webster, head of the global strategy group for HypoVereinsbank in Munich. While the euro has been falling virtually since it came into existence at the beginning of this year, its pace of decline has accelerated lately. The recent fall was touched off last Tuesday when Italy said it would not be able to cut its budget deficit as much as expected.
Because the euro links its members' economies closely together, Italian fiscal profligacy has ramifications for interest rates and inflation in its 10 partners as well. Currency investors make their investment decisions in part on whether the currency is well managed; countries with big budget deficits often have weak currencies.
So the euro began to slide as soon as other European countries indicated that the lack of Italian budget rigor was acceptable.
At the same time, the war in Kosovo has also pushed down the value of the euro. Investors, whose currency trading decisions determine the exchange rate, fear that Europe's war expenditures will raise their budget deficits, interfere with commerce and create a generally less stable environment.
Most important in the euro's fall, however, has been the continuing reality that the economy of the United States has grown faster and for longer than have the combined economies of the euro nations. While some participants, such as Ireland and Spain, are showing healthy growth, others, especially Germany and Italy, are extremely weak.
Even before the creation of the euro, the currencies of the 11 countries tended to move in the same direction against the dollar, and the euro's current rate is not unusually low against the dollar by historical standards. Duisenberg noted in his news conference in Frankfurt today that the currencies of the euro nations were this weak in the spring of 1998 and in the summer of 1997.
CAPTION: Euro on the Decline (This chart was not available)
CAPTION: European Central Bank President Willem "Wim" Duisenberg indicates at a news conference yesterday that the bank would not intervene to bolster the euro.