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WAY OF EURO: UP OR DOWN?

  • 2000-09-28
The combined impact of the euro plunge against the U.S. dollar and the oil price explosion is producing devastating consequences for the real economy in Europe. Some experts even say that the euro is facing a deliberate, carefully orchestrated assault, including the propaganda campaign around crudely manipulated U.S. economic data, to create conditions under which even more foreign capital, about $2 billion a day, would make its way into U.S. financial markets.

On the surface, Europe looks feeble compared with America. Over the past five years, the euro zone's GDP has grown by an annual average of 2.4 percent, compared with 4.2 percent in America. The area's unemployment rate of 9 percent is more than double America's 4 percent, The Economist reported last week.

Still, the weakness of the euro is easily overstated. If to track a basket of the euro's constituent currencies back in time, one can find that it traded as low as $0.69 in early 1985. To compare, the current $0.86 is nothing exceptional. The recent downfall should not be seen as an obvious economic problem. On the contrary, it has given a useful nudge to the euro zone's economic recovery, as firms have found themselves more competitive.

Unfortunately, this is not the case for companies outside the euro zone, who export their goods and get paid in cheaper and cheaper euros. In the Baltics, after winning independence 10 years ago, all the newly independent states heard over and over again was: you have to reorient your exports from East to West. First, for political reasons: to be independent from "hostile" Russia. Second, for purely economic reasons: after the Russian financial crisis in 1998 the markets there could not be trusted anymore.

Now, the Baltic enterprises who were most active in doing their homework - exporting to the West, have to pay the unexpected "fines" and may even be forced out of business. In Latvia, various institutions have started to draft savior plans, but if they aren't enacted soon and the euro slide continues in a longer run, there may be no need for them.

Perhaps, the best solution to keep the three new market economies' exports above the surface would be to follow Estonia's once expressed wish to join the euro zone as quickly as possible. Latvia and Lithuania would be quick to follow, we suppose.