’m changing
my view on the euro.
In the past,
I’ve argued that it would continue weakening in a trend line versus
the dollar, and that euro rebounds such as the ones in December
2000 and August 2001 would be temporary. But the euro has moved
into a more stable phase relative to the dollar.
Over time,
a more stable euro will have positive implications for Europe’s
investment rate, which faltered in the late 1990s as capital shied
away from euro weakness. In the near term, however, one can still
expect Germany’s recession to deepen and Europe to fall into a mild
recession. Reasons why there was a weakening trend for the euro
included the big negative growth differential between Europe and
the U.S., the structural deficiencies in Europe’s socialism, the
flaws in the European Central Bank’s monetary policy concepts, and
the U.S. policies causing an ever-strengthening dollar. But here
are the counter-arguments for a more stable euro/dollar trendline
going forward:
•
The European Common Bank is in a position to cut interest rates
substantially in 2001 from the current 3.25% level as inflation
falls and growth weakens. You can even expect more rate cuts in
Europe than in the U.S. going forward. The ECB’s policy of targeting
the backward-looking CPI inflation rate, decidedly harmful to the
euro in 2000 and 2001, will work in Europe’s favor in 2002.
•
The ECB is in a good position to build confidence in itself and
its monetary policy. Europe’s inflation rate is falling and will
likely settle into an attractive range in 2002 — not-too-much,
not-too-little. Since its inception, the euro has held relatively
stable against gold and commodity prices, more so than the dollar.
•
The U.S. has had the sense of a sharp rebound from September 11
— but that feeling
of a rebound will be short. It supported the dollar in October
and November, but will give way in coming months to the reality
of a ragged bottoming process.
•
One of the engines behind the 1999-2000 dollar/euro trendline was
the extent of the U.S. growth advantage over Europe. While average
U.S. growth going forward will still be above Europe’s, the differential
won't be as strong as in 1999 and 2000.
•
As the U.S. dollar strengthened in 1997-2000, the U.S. benefited
from a heavy investment inflow in search of currency appreciation.
There was an overwhelming momentum play into the dollar and the
U.S. But that imbalance has subsided in the aftermath of September
11 and the resulting changes in U.S. monetary policy to break the
U.S. out of its deflation spiral.
•
Finally, the advent of the physical euro on January 1, while expected
to be inconvenient for a few days — including possible strikes
in France — will complete Europe’s commitment to the unified
currency. It will add to the benefits Europe gets from using the
euro.
For the forseeable
future, you can bank on a more stable euro/dollar trend going forward,
a positive for European and global growth as it materializes.
|
