THE euro is a grand experiment, a paper
currency without a government. And that
lack is one reason the euro has sunk far
below any reasonable level.
Early this week, Romano Prodi, the president of
the European Commission and, as such, the
closest thing Europe has to a president, called
for intervention in the foreign exchange
markets to support the euro. The markets
yawned. Traders know that Mr. Prodi has little
power.
Nor does anyone else. Europe has a central
bank, but the euro has 11 national governments.
None of them can set policy for the area as a
whole, and each of them can disclaim
responsibility for what happens to the currency.
When the euro was being planned, advocates expected the currency to be
strong. No longer would an Italy, say, be able to just let its currency
weaken. To stay competitive, it and the other governments would have to
adopt structural reforms. Rigid labor markets and high-cost government
pension plans would inevitably wither away.
Just the opposite seems to be happening. Taxes are being cut, but other
reforms are coming slowly, if at all. The currency markets can no longer
cast a vote on any one government's policies, so the easy way out is not
directly punished, and the hard way is not going to be directly rewarded. It
should come as no surprise that governments under pressure tend to choose
the easy way, as France did to buy off protesters who wanted lower fuel
taxes.
One way to fight a falling currency is to intervene in the currency markets.
That can be a good tactic when, as now, currency values are clearly out of
line. But for intervention to work, it should be large, internationally
supported, backed by a government making credible policy changes and
seen as likely to continue if necessary. Yesterday's European Central Bank
announcement that it was buying $2.2 billion worth of euros fails on all
counts. [Page C3.]
Raising interest rates is another method to support a currency, and one that
poor Wim Duisenberg, the president of the European Central Bank, has
tried. Unfortunately, it is equity capital flows that now dominate the global
investment scene, not bonds. Europe needs to find a way to persuade
investors to buy stocks and businesses. Higher interest rates would slow the
economy without helping the euro.
Mr. Duisenberg never expected anything like the current situation, in
which the United States can run an unprecedented current account deficit
- now at 4.3 percent of gross domestic product, or more than $1 billion a
day - while the dollar rises."In the long run, such a deficit is
unsustainable," he told a European parliamentary hearing. But for now, he
added,"the Americans have no difficulty in having that deficit financed,
basically by us, Europe."
That current account deficit is being exacerbated by high oil prices, which
may yet slow the entire Western world and make American investments
look less attractive. Eventually, Mr. Duisenberg will be proved right. The
dollar is overvalued, and will decline. Someday.
But the euro may not have that much time to wait. Already the euro
disarray is damaging hopes that Denmark will vote to join the currency
union. Such a vote would damage the euro even further, and strengthen
British opposition. In that environment, a European recession might stir
nostalgia for good old marks and francs. But Europe's rules bar any country
from abandoning the euro.
A strong government for the euro region could fight those trends. But this
currency has 11 governments, which for some purposes is the same as
having none.


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