New York Times, May 18, 2003
Euro Beginning to Flex Its Economic Muscles
By MARK LANDLER
1995
1996
1997
1998
1999
2000
2001
Dollar/Euro as a percentage of reserve currencies
Dollar
Mark/Euro
Yen
British
57
13.7
6.8
3.2
60.3
13.1
6
3.4
62.4
12.9
5.2
3.7
65.9
12.2
5.4
3.9
68.4
12.7
5.5
4
68.1
13
5.2
3.9
68.3
13
4.9
4
Exchange
Others
19.3
17.2
15.8
12.6
9.4
9.8
9.8
Rate
1.15
0.95
0.89
0.95
1.1
Source: New York Times, 16 May 2003
RANKFURT, May 17 — Its leaders are divided and its economies are distressed,
but Europe stands tall in one respect. The euro, its toddler currency, is growing into
a cheeky rival to the dollar, one of the most visible symbols of America's power in the
world.
After a hapless debut in January 1999, marked by a long, stomach-churning slide in its
value, the euro has made up virtually all the ground it lost against the dollar. It now trades
at an exchange rate of about $1.15 per euro, only three cents shy of its value on the first
day of trading.
More important, the euro has gained stature as a safe haven for investors and
governments.
The dollar remains the world's default currency — the lingua franca of oil traders and
bond dealers, and the bedrock of foreign reserves held by central banks from Brussels to
Baghdad. But the euro is gaining ground, both as an attractive currency in which to issue
bonds and as an alternative to the dollar for national foreign exchange reserves, notably
in southeast Asian countries with predominantly Muslim populations.
With the United States piling up vast deficits, economists say the euro has a chance to
consolidate its gains. "U.S. federal finances are coming under increased strain," said Niall
C. Ferguson, a senior research fellow at Oxford. "Money that had been invested in dollardenominated assets is shifting to euro assets. For the euro to become a little brother to the
dollar seems perfectly plausible."
Such a role would vindicate the guardians of the euro, who watch over it from the
European Central Bank's glass-and-steel tower in Frankfurt. They have always had grand
ambitions for the currency, viewing it as an alternative to the dollar and an instrument to
drive Europe's integration.
Yet an almighty euro carries risks for champions of a united Europe. It could supply fresh
ammunition to opponents of the monetary union in Britain, Sweden and prospective
members.
It could also open fissures between existing members that depend on exports and stand to
suffer from a currency that rises too far, too fast. Last week, three euro countries —
Germany, Italy and the Netherlands — reported that they were on the brink of recession.
"If it goes much beyond $1.25, we've got a problem," said Daniel Gros, director of the
Center for European Policy Studies, a research group in Brussels.
The introduction of euro notes and coins here last year was striking for how smooth the
process seemed. After a noisy buildup, the German mark, the French franc and the Italian
lira faded into history like quaint relics. In the financial markets, where the euro had
traded as a virtual currency since 1999, the transition was equally seamless, with
investors showing prompt acceptance of the new currency.
The shift toward euros is most pronounced in the global bond market. From 1995 to
1999, according to Professor Ferguson's research, 53 percent of all corporate bonds were
issued in dollars, and only 20 percent in the currencies of the 12 European countries that
now use the euro.
In the four years since the common currency began trading, however, 44 percent of new
global bonds have been issued in euros, nearly equaling the 48 percent issued in dollars.
There is also anecdotal evidence that central banks, especially in some Asian countries,
are beginning to diversify their reserves, to reduce dependence on the dollar. Bank
Indonesia, the nation's central bank, has increased its holdings of euros, currency traders
said.
"We are strongly tied to the dollar," Rizal Ramli, the former finance minister of
Indonesia, said in an interview. "But with the dollar's decline, it is wise for Indonesia to
diversify its reserves into euros."
In Muslim countries like his, Mr. Ramli said, there is a political dimension to the shift.
The American-led war on Iraq was fiercely opposed by Indonesia. Vice President
Hamzah Haz, an Islamic leader, has encouraged local investors to switch from dollars to
euros. A similar switch has occurred in Saudi Arabia and other Middle Eastern countries,
currency traders say, though accurate numbers are elusive.
"Some people, especially in the Muslim world, think that this is not a secure asset from a
political point of view," Mr. Ramli said.
In Malaysia, Prime Minister Mahathir Mohamad recently suggested that the state oil
company, Petronas, switch to euros from dollars for its oil trading. His rationale, he said,
was purely economic. "The U.S. dollar has depreciated by 25 percent," he said in opening
a new Petronas natural gas plant. "In other words, we are earning 25 percent less."
Mr. Ramli played down the politics, noting that the yield on euro-denominated assets is
better than that on dollars. If that were to change, he said, even Muslim countries would
quickly switch back.
Some analysts caution that one should not jump to conclusions from anecdotal reports
about central banks. According to the International Monetary Fund, 68 percent of the
world's foreign exchange reserves were held in dollars in 2001, the latest year for which
it has figures.
That number has remained roughly constant since 1999, and rose from 55 percent in
1992. The 13 percent of reserves held in euros in 2001 also stayed constant from 1999.
"Incumbency has enormous advantages," said Barry Eichengreen, a professor of
economics at the University of California, Berkeley. "Sterling hung on as the world's No.
2 currency for the better part of the 20th century, even though Britain stopped having the
No. 1 economy in the 19th century."
Still, Professor Eichengreen said there was no reason the euro's influence would not
eventually match the dollar's. The euro zone already has 300 million people; it would
have more than 450 million if Britain, Sweden, and the countries of Central Europe
adopted the currency.
Most are eager to do so, believing it will help their populations. But the price of
belonging to a monetary union — obeying strict fiscal rules and one-size-fits-all interest
rates — has made some Central Europeans relieved that they will not be allowed to adopt
the euro until at least 2007.
"It would be so easy to sell the concept of the euro if there weren't these tough
requirements," the prime minister of Hungary, Peter Medgyessy, said recently in an
interview at a conference in Munich. "That is why we should be very cautious about
setting a date for joining the euro zone."
Among Western Europeans, feelings are even more ambivalent. Sweden, which is
scheduled to hold a referendum on joining the monetary union in September, has
historically been pro-Europe. But in recent polls, public sentiment has swung narrowly
against the euro.
Part of the problem is that Swedes fear a strong euro would cripple their exports. They
also point to neighboring Germany, which has limped through four years with the euro, in
part because the tight monetary policy of the European bank is arguably ill suited to its
faltering economy.
The same arguments are heard in Britain, where the chancellor of the exchequer, Gordon
Brown, is to deliver a judgment next month on whether the country has met five
economic conditions for entry to the union. His verdict is widely expected to be "not yet."
Mr. Brown's obdurate resistance has revived rumors of a rift between him and Prime
Minister Tony Blair, who favors the euro. The two men issued a statement on Friday
denying that they were are at loggerheads.
In one respect, the rise of the euro should remove a barrier for Britain. Because the
pound, like the dollar, has lost value against the euro, the danger of converting it into
euros at an inflated rate has been mitigated.
"If you lock in the pound at too strong a rate, you run into some of the same problems
Germany did," said David Walton, the chief European economist at Goldman Sachs in
London. Still, Mr. Walton said Britain's reluctance to join the union was driven less by
economics than by politics — springing from inchoate but deeply held notions of
sovereignty and national identity.
Ultimately, the success of the euro will also depend on politics. That is why the
currency's creators seem quite satisfied with its rebound. While they recognize it is
mostly a reflection of the dollar's weakness, they relish the chance to erase the memory of
its stumbling start.
"The European bank once had to come out and tell the market, `Your money is safe,' "
said Mr. Gros, recalling one of the currency's low points in 2000. "This takes away that
embarrassment."
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