Outlook: Dollar switching

IT PROBABLY wouldn't take all that much of a change in Continental Europe for the vast flow of funds that have been flooding into the US technology boom to switch to euro assets instead. This is not to say that the American miracle - for so it now deserves to be labelled - is in danger of coming to an end. Far from it. The real economic effects of new technologies are just beginning to be apparent.

However, in the financial markets the important question is where the next run of high returns can be found. If there is any sign that the Europeans are going to start catching up on the US in the new economy stakes, then the Continent will offer the next wave of investment opportunities. The lead Europe has in mobile Internet technology already encourages the belief that it might just do so.

For the next two or three years, the conventional economic fundamentals will help Europe relative to the US anyway. The imbalance in growth on either side of the Atlantic is already on the way to correcting itself with the recovery in France and Germany now well-established. This alone might be enough to tip some investors' portfolio allocations. The Hong Kong Monetary Authority is already on record as selling dollars to buy euro assets.

However, normal cyclical developments are not as important in encouraging this switch as the belief that the rest of the world might eventually catch up with the US. In this, the attitude of the German government of Gerhard Schroder is going to be crucial.

A recent Goldman Sachs study made the point that if the authorities were to allow Vodafone to take over Mannesmann, the transfer of funds from outside to inside the euro area involved in the transaction would be big enough to make a material difference to the euro exchange rate. Germany's hostility to the very idea of a big foreign takeover per se is symbolic. It signals resistance to all that is needed - innovation, openness and competitiveness - to drive the new economy.

The problem of German resistance to change was flagged by an unusually critical OECD assessment yesterday of government policies. Mr Schroder plainly has a political problem, with large segments of his party still Old SPD rather than New. Is he capable of resolving the conflict between old political and new economic pressures? If he is not, the euro zone is in trouble.