By David R. Francis, writer of The Christian Science Monitor
The Christian Science Monitor
Money trouble is rattling Euroland as the euro - common currency for 11 countries - hits a rough spot two months after its launch.
The skid could end before it has time to deeply impact trade. But if Europe can't afford US goods, American industry takes a hit - even as the dynamic dollar gains from its popularity in world markets.
For now, while the euro has lost some 7 percent of its value in relation to the dollar, raising questions about Europe's early success at forming a powerhouse monetary union, the drop doesn't appear to trouble European economists. "The euro should be in the future a bit stronger," says Ulrich Ramm, chief economist in Frankfurt of Commerzbank, one of Germany's largest banks. What's happened, economists explain, is that the economic paths of Europe and the US have dramatically diverged: The US direction is up. Europe's economic outlook has slipped. That difference has helped make the dollar more attractive on foreign-exchange markets. On Friday, the US Commerce Department revised upward the annual growth rate for national output after inflation to a fantastic 6.1 percent in the fourth quarter of 1998. It was the fastest pace in 15 years. For 1998 as a whole, US gross domestic product (GDP) - the total national output of goods and services - rose a real 3.9 percent. That's the third straight year with growth above 3 percent. And economists have been boosting their forecasts sharply for 1999. The consensus now calls for still-handsome 2.5 percent growth this year. In Europe, economic growth numbers are being cut. J. Paul Horne, European economist for Salomon Smith Barney in London expects after-inflation growth in the 11 euro-zone economies to run about 1.8 percent this year. By some estimates, Europe's dominant economy, Germany's, shrank at an annual rate of 1.8 percent in the fourth quarter of last year. However, Commerzbank's Mr. Ramm predicts Germany's real growth for all of 1999 will be positive. Germany's unemployment rate stands at 11.7 percent, typical of euro-zone nations. The US jobless rate is a mere 4.6 percent. On Wall Street, Friday's GDP news raised concern that the Federal Reserve might decide to hike interest rates to prevent a renewal of inflation. As a result, bond prices rose and stock prices fell. In Germany, Finance Minister Oskar Lafontaine has been urging the European Central Bank (ECB) to lower interest rates. European politicians "might do themselves a favor" by putting less public pressure on ECB monetary policymakers, says Mr. Horne. The bank, which took over monetary policy from the 11 national central banks at the start of the year, is trying to establish itself as a tough inflation fighter. …