0

The Euro and the Dollar

PARIS: Oskar Lafontaine's resignation has only brought a brief respite to the Euro. Its weakness will now continue. If things keep going as they are going, the Euro will soon stand at a value of less than one euro to the dollar. This is a threshold fraught with symbolism: within just a few short months of its birth the "strong" euro that its architects seemed to prophecy will have transformed itself into a weak euro.

All sorts of old wounds will inevitably open up if the euro falls so far so soon. Many European inferiority complexes toward America, which the advent of the euro were supposed to banish forever, could easily reappear. In Paris, the suggestion is growing that Washington must be made to stabilize exchange rates between the main currencies, in particular the euro/dollar exchange rate.

Replace the euro with the French franc, and the dollar with the DM, and the discussion evokes a strong feeling of déjŕ vu. So one must now again repeat some old truths that many Europeans seem to be deliberately forgetting. Just as the strong franc, the so-called franc fort of the 1990s, did not imply an economically strong France, a strong euro should not be equated with an powerfully growing Europe. The exchange rate is a price, not a score in the last game of the World Cup. Like all other prices, it must sometimes increase, sometimes decrease, according to market demands.

It is true, of course, that exchange rates are different from many other prices in that they are directly influenced by central bank policies. As a result, the Federal Reserve Bank and the European Central Bank do possess the means to stabilize the exchange rates. But it would be a grave mistake to embark on that course.