Outlook: Euro weakling

JUST FIVE months ago as the Euro was launched on a tide of balloons and Beethoven, it was a commonplace to say the new currency would shortly rival the mighty dollar in status. Central banks the world over would buy it for their reserves; the creation of a single European financial market would give euro assets the liquidity of US Treasury securities, attracting international investment; the European Central Bank would swiftly establish its anti-inflationary credibility; and not least the creation of an economic colossus to rival the US would generate the fundamentals to underpin a strong euro.

Instead, we have had sluggish growth on the Continent in contrast to the stellar performance of the American economy, a blistering row between Oskar Lafontaine and the ECB about the level of interest rates, and general ineptitude on the part of Wim Duisenberg in handling the financial markets. Central banks have refused to treat it as a reserve currency and to cap it all, the politicians have started misbehaving again, giving the Italian government the thumbs up to relax its efforts on budget control. Admittedly, there have been some promising steps towards full financial market integration, but this is really the only part of the euro dream to have lived up to expectations.

The only time the markets have voted unambiguously for the currency was when Red Oskar resigned unexpectedly. The boost lasted less than a week. As the months pass, dollar parity looks all too possible. Which is why now might be the right time to switch out of dollar into euro assets. Don't believe the hysterical triumphalism of the eurosceptic press.

The European economy is not a busted flush. Britain, it should be noted, will be the weakest economy in Europe this year, projected to grow only half as fast as Germany, France and Italy. Nor has the Euro lost its fundamental appeal. Nor should the euro yet be written off as as a flawed endeavour.

It is important not to lose a sense of perspective. The slide in the euro since 1 January takes it back to the level it would have had last July if it had existed then. The pound declined just as much in a shorter period last summer, and has more than made up for it since.

None of this is to belittle the scale of the challenge facing the euro zone. The most serious worry must be the outlook for fiscal discipline, or lack of it.

The problems of co-ordinating budget and interest rate policies are clearly unresolved, both practically and politically. Just days before news of the new Italian budget fudge emerged, the ECB issued a stern warning that governments must get serious about cutting their underlying deficits if they ever wanted to have room to boost growth. But nor should we underestimate Europe's determination to make the project work. Sell Wall Street and bank the euro might be a reasonable punt right now.

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