TCS Daily

Revenge of the Dollar

By Jean-Christophe Mounicq - June 27, 2003 12:00 AM

Ever since the euro reached and then surpassed the level at which it was launched on 1 January 1999, the European single currency has entered a new chapter of its history. For its first three years, its weakness was a preoccupation of political leaders, economists and central bankers. Now the same people consider its strength is a problem. This is life in "old" Europe: people are never happy.

It's no wonder, when nearly all politicians and journalists subscribe to the notion that Europe is a kind of socialist paradise on earth. So many people living comfortably courtesy of the welfare state, not forced to go and work every morning for "greedy" capitalists exploiting them, so many laws to protect people against the "injustice" of the market. With the "best" healthcare systems, the "best" public transport systems, the "best" retirement systems, the "best" educational systems, how dare they complain? Is it because the better the system is, the more the people complain? Sure. Just ask the French!

With all the "best" systems of the world, Europeans cannot seem to understand why they do not have the best economic growth. To a statist-minded European, a business-minded American who enjoys more freedom, pays lower taxes, has lower public spending and less social law should be less prosperous. How can an average American be richer than an average European? Why is the U.S. growth rate higher than the EU's? It has to be linked with the state. Let's see: a currency is managed by public institutions. So that's it: American prosperity is due to the mighty dollar.

With the euro, the EU was going to have an efficient tool with which to take out its revenge on the U.S. European politicians and technocrats lacked the words to describe all the marvellous effects of the single European currency. The euro was supposed to bring stability, boost economic growth, lower unemployment.

During the first chapter of its life, something went wrong: the new currency's value went steadily down. Average European growth was around 2 to 3 percent while U.S. growth was between 4 and 6 percent. European "elites" thought this was not significant. When the American economy would slow down, Europe's economy would then find its real place at number one.

With the U.S. economic slowdown began the second chapter of the euro. But something is still going wrong: the euro went up and its value is now above the dollar, but the growth rate still lags behind. During the first quarter of 2003, the gross domestic product growth rates of Germany, Italy, the Netherlands and Portugal declined. France was in no better shape as its public spending exploded.

What is the problem? Some say the rise of the euro, which went from $0.80 to nearly $1.20 -- a 50 percent increase in a few months -- is directly responsible for the fall of exports supporting European growth. This is not untrue. But it's also amusing to note that many "officials," from ministers of finance to "experts," started to really worry about the strength of the euro when it reached its birth rate: $1.18. Why were these "authorities" also complaining when the new single went down? Is there something wrong with the euro? Is it because one cannot have the same currency for different countries that have different social and fiscal systems and thus different growth rates? European politicians and civil servants never blame themselves. Because they invented it, a common European currency is an excellent idea.

Is it then because the European Central Bank is badly managed? Are interest rates too high compared to the U.S.? No. The differences are small: the main rate is slightly over one point higher than its U.S. equivalent. No, we should look on the other side of the Atlantic to find where the problem originates.

Who is responsible for any bad event -- ranging from war to economic crisis? The USA! So now some "officials" are blaming the U.S. trade deficit. In 1995, during a previous exchange crisis, German Chancellor Helmut Kohl was already blaming the American trade deficit. Over the next six years, the dollar went 60 percent against European currencies. In the meantime, the deficit increased four-fold. Not very convincing.

The real reason then is... the White House! If the dollar is going down and the euro is going up it must be because the White House wants it. Before, Washington wanted to cool down economic activity and fight against inflation; it was in favour of a strong dollar. Now Washington wants to stimulate its economy and diminish its deficits; it is in favour of a weak dollar. Politically it is a good opportunity to lower French and German exports to punish them for their opposition to the war in Iraq. I am not kidding. This is right out of the pages of France's most respected newspaper, Le Monde.

But then why do the markets follow Washington and not Berlin and Paris? Because, as La Fontaine said, "The reason of the strongest is always the best." I am not going to ask to the European "elites" why we, Europeans, are not the strongest, with so many clever ideas and clever leaders. I am not going to tell them they should lower taxes and stop building a European super-state. They might think I am as stupid as... George Bush.

TCS Daily Archives