Outlook: Euro weakling

HOISTED BY their own petard. When the euro was launched, European finance ministers insisted on reversing the old convention under which the D-Mark and the franc were quoted in terms of the amount of each currency a dollar would buy, and instead have the euro denominated the other way round - in terms of the number of dollars each euro bought.

The difference might seem an unimportant one, but for the pompously minded men of Europe, it has (or rather had) a certain symbolic significance. Quoted against the dollar in this way, the euro is worth more than one, and therefore might be seen to denote superiority.

Furthermore, because the euro was expected rapidly to establish reserve currency status, and strengthen against the dollar, this method of quotation would more easily illustrate rising value and therefore increased superiority. Embarrassingly, it hasn't worked out that way. The euro has been sinking ever since it was launched. The way things are going, it won't be long before parity is reached. Sacre bleu!

However, as luck would have it, a weak euro is just what the doctor might have ordered for near recessionary Europe. The euro's weakness may be a tad embarrassing for supporters of the new currency, but while it makes Europe's exports cheaper and imports more expensive, nobody's complaining too much.

Nobody, that is, except the Americans, and to a lesser extent, Britain, also labouring under the burden of a strong currency and growing trade deficit. The US plans to give it to the Europeans with both barrels at next week's meeting of the IMF and World Bank in Washington. The US, with its Everest of a trade deficit, seems to be shouldering the entire burden of the world's economic ills right now, or that's what its policy makers think, anyway, and it wants Europe to take some share of the strain.

Unfortunately, it is hard to see how this can occur; there seem to be no policy tools left open to the Europeans. Interest rates have already been cut to a lower level than anyone dreamed possible, while with most euro-zone countries beginning to knock up against budget deficit ceilings, there isn't a great deal of scope for tax cutting either. Deregulation of labour, capital and industrial markets will eventually help stimulate demand, but the full benefit of these measures are going to take many years to come through. For all these reasons, the euro is likely to remain a weak currency for some while yet.

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