One Year Old: What's Next?
After a 14% decline against the dollar in its first year, some commentators are calling the euro a flop. See S. Hanke,
"Euroflop," Forbes, Dec. 27, 1999, p. 98 (www.forbes.com/columnists/hanke). On the other hand, Wim Duisenberg,
the former Dutch central banker who now heads the ECB, thinks that the euro's first year went reasonably well, and
expects that this year the euro will gain ground against the dollar. See www.ecb.int. A recent IMF study supports the
view that the euro remains significantly undervalued against both the pound and the dollar. See
www.imf.org/external/pubs/cat/longres.cfm?sk=3369.0; biz.yahoo.com/rf/000105/bba.html.
What is clear, however, is that in its first year the euro had great success as a vehicle for international finance. Figures
from Capital Data Ltd. reported this week in The Wall Street Journal ("Euro Secures Big Role in International
Finance," Jan. 4, 2000, p. A17) are quite instructive. In 1999 euro-denominated bonds were issued in the amount of
$602.2 billion on international markets, compared to $572.5 billion of bonds denominated in U.S.dollars and $174.2
billion in other currencies, including sterling, Swiss francs and yen. In percentage terms, the euro took 45% of the
market, the dollar 42% and other currencies 13%. In 1998, 48% of all bonds sold on international markets were
denominated in dollars, and only 22% were denominated in European currency units or the currencies of the 11 EMU
countries.
Neither the IMF currency valuations nor the 1999 bond issuance figures can be good news to the British or the
Japanese. In Britain's case, not only is the pound being increasingly marginalized as a major currency, but also the
difficulties of joining the EMU are mounting. For Japan, the bond statistics underline the yen's inability to gain
acceptance as a major reserve currency on a par with the dollar or the euro.
More generally, of the world's three major central banks, only the ECB appears comfortable with both the gold and
the currency markets. Japan is intervening in the currency markets to weaken the yen against the dollar. The U.S. is
increasingly believed to be behind ever more obvious manipulation of the gold market. Since Japan eschews gold as a
major component of its foreign exchange reserves and the U.S. continues to value its official gold at a derisory
$42.22/oz., neither country has much interest in an honest price, particularly if it would embarrass their currencies.
However, the ECB now marks its gold reserves to market quarterly. What is more, it has reaffirmed through the
Washington Agreement that gold will remain a principal component of its reserves and that it has at least some interest
in maintaining the integrity of the gold market. An important question for the ECB in 2000 is whether to continue to
tolerate politically motivated Anglo-American interference in this key market.
At the end of the day, the difference between the euro-bears and euro-bulls may not be as great as first appears. Steve
Hanke concludes his Forbes article: "The only thing that can stop the euro's decline versus the greenback is if it gets
lucky and Wall Street takes a dive." But in the latter event, will it be luck? Or will it be the inevitable end to an
investment mania fueled by imprudent monetary and credit expansion? Just because Alan Greenspan is unable to
recognize an investment bubble before it pops does not mean that Wim Duisenberg and the other European central
bankers cannot. Luck often smiles on those who plan for it. |
