Rising Euro Tests European Unity
Some Countries Complain of Falling Exports; Others Cite the Benefits of a Strong Currency

By John Burgess
Washington Post Foreign Service
Saturday, January 24, 2004; Page A13

FRANKFURT -- At the front doors of the European Central Bank, command central for the euro common currency, police officers mounted a special guard on Thursday. In the lobby, an elevator was reserved. VIPs were in the building -- the bank's 18-member Governing Council, sequestered in a room on the 36th floor for one of its twice-a-month meetings.

There is plenty to talk about these days. Five years after its introduction, the first common currency in Europe since the Roman Empire is testing the limits of cooperation between the 12 countries that use it.

In recent months, the euro's value against the dollar has climbed steadily, leading such export-dependent countries as Germany to warn that it must be brought down or it will snuff out economic recovery by making European products too expensive on world markets. But such euro countries as Ireland tend to see the currency's rising value as causing few big problems for their home economies, and even bringing such benefits as lower inflation.

At the same time, the euro's two biggest countries, Germany and France, have shown that when their home economies go sour, they are willing to defy the supposedly inviolate budget rules that underpin the currency. They are spending at levels that the rules state could harm the economies of the other euro countries.

There is no political momentum toward reviving the patchwork of lira, deutsche mark, franc and nine other currencies that once governed commerce in the 12 countries. But Europeans are reminded increasingly these days that one-size-fits-all rarely fits anyone just right.

"In principle, I'm for the euro," said Till H. Hahn, who has watched in dismay over the last 18 months as the rising euro has made the museum display cases his Frankfurt company sells about 30 percent more expensive for American buyers. The rise, he said, is "awful, it's really awful," adding that he wonders why the European Central Bank hasn't taken forceful action.

In the summer of 2002, a euro was worth a bit less than $1. On Friday it took $1.27 to buy one euro on international currency markets. Many analysts say the rise makes no sense economically. The U.S. economy is reporting gains, they point out, and textbook analysis says this should lead euro holders to sell the currency en masse in order to invest in the United States, driving down its value. But currency investors often work more on hunch and whim, and the direction continues to be up.

As the euro closed in on $1.30 earlier this month, voices began to sound in parts of Europe that enough was enough. European Central Bank President Jean-Claude Trichet condemned "brutal" swings of exchange rates. The euro headed down, partly because investors feared that he might back up his words with action that could cost them money -- a lowering of interest rates, perhaps, or intervention in currency markets to weaken the euro.

But when subsequent statements by the finance ministers in the euro countries signaled to investors that the threat of intervention was empty, at least at current rates, the ascent resumed full steam.

"There's a kind of panic buying," Sabrina Jacobs, an analyst at Dresdner Kleinwort Wasserstein's commodities trading operation in Frankfurt, said this week, sitting above the firm's huge trading floor. Investors feel that if they don't buy now, they'll have to pay a higher price later.

Central banks think long and hard before intervening, and, in any case, Trichet has suggested that the euro's current value isn't really harmful yet and could be offset by new orders generated by an accelerating world economy. Moreover, having a common currency assures that there are no fluctuations to complicate the considerable trade among euro countries. But economists agree that another reason for inaction is that he has no consensus for action.

Despite half a century of integration, Western Europe remains a collection of distinct economies with unique interests and identities. New proof came recently when officials in EU headquarters in Brussels suggested that a "Made in the European Union" label might go on products in the future -- and touched off ridicule among manufacturers.

In the days before the euro, national currencies fluctuated, too, but the national governments were in charge. If the German central bank decided that the German economy needed a different rate, it could act on its own. Now the European Central Bank must balance the interests of countries as economically disparate as Greece, Ireland, Portugal and France.

The bank says that at the circular table where the Governing Council meets to set monetary policy, the debate focuses on the good of the Union. The council includes the heads of each member's central bank, but they are not supposed to represent the interests of their countries.

Still, many outsiders wonder whether the debate, conducted in strict secrecy, is quite so sublime. "People in the central bank council are only human beings, and they have certain preferences," said Friedrich Heinemann, senior economist in the Center for European Economic Research in Mannheim, Germany.

Ireland is one of the countries in which there is relatively little complaining about the euro's strength. The economy is growing and controlling inflation is a priority. A strong currency helps keep prices down by lowering the cost of imports. Inflation was 7 percent in 2000; it's now about 2 percent. "The strength of the euro is one part of that story," said Simon Barry, an economist with the Bank of Ireland, a commercial lender.

As in any euro country, some exporters in Ireland are hurting. But Barry suggests that relief is on the way without a change in the value of the euro. "The fact that the global economy is picking up is much more important than the rise of the euro," he said.

In Germany, however, the euro's value is daily news, although there are Germans who do not see a problem. Ernst Voss, managing director of Ross Europa, a Frankfurt industrial equipment company that imports components from the United States, says his business is enjoying a windfall because that gear now costs less in euros. "We have more air to breathe at the moment," he jokes.

Thorsten Spinnburg, a graphics designer in Berlin, says that as he sees it, the economy is doing fine and industry is just looking for something to complain about. And his euros go further when he travels to the United States.

But at higher levels, there is concern. The government of German Chancellor Gerhard Schroeder is hoping that higher exports will inject life into Europe's biggest economy, but fears that the rise in the value of the euro will hold exports back.

Till Hahn, the Frankfurt manufacturer of museum display cases and other glass products, agrees. "At night I dream of the euro-dollar situation, which means I don't sleep very well," said Hahn, the fourth generation of his family to be in charge of the Glasbau Hahn company.

Company officials gave an example: Two years ago an American museum ordered a case for $10,000, for delivery now. Under current exchange rates the case would be priced closer to $13,000 -- but the customer still expects to pay the old price.

Hahn's daughter Isabel, the company's marketing manager, said managers are scrambling to find ways to stay competitive by lowering production costs. They are also counting on the euro to settle back down to what they consider normal levels.

The euro is rising at a time when there are bad feelings among some countries over the Stability and Growth Pact, the 1997 agreement that functions as the constitution of the euro. A key provision of the agreement is that member countries keep budget deficits to 3 percent of their gross domestic product.

In Germany, Schroeder's government has pushed through tax cuts to revive the economy. But the cuts will also bring the German deficit to about 4 percent this year. France is also spending beyond the limits.

The two countries theoretically risked being fined billions of euros. But other members of the euro club who wanted to impose the penalties felt powerless to do so -- Germany and France working together have long been the engine of European integration. Last November, finance ministers formally forgave the two countries, after being promised they would bring their deficits back into line soon.

That created ill will in countries that endured spending cuts or higher taxes to get their own budgets in line -- often with Germany lecturing them along the way.

The fight isn't over -- on Jan. 13, the EU's executive body, the European Commission, moved to take the finance ministers to court on grounds they illegally let the offenders off the hook.

Heinemann sees long-term consequences. France and Germany have encouraged Europe to be profligate with debt and have built distrust among the smaller countries, he said.

"This conflict may block the whole negotiations on a European constitution," currently deadlocked over questions of how much influence big countries should get in a voting system, Heinemann said. The day that France and Germany formalized their violation of the pact was "a bad day for Europe."