SYNOPSIS: The Euro's drop was purely predictable
So this is the way the euro begins: not with a bang but a whimper.
Many enthusiasts for Europe's new unified currency, introduced only 16 months ago, expected the euro to quickly become a powerful rival to the dollar; they also expected the euro to be a very strong currency, largely because of its international role. This never made much sense if you thought it through; but anyway, it hasn't happened. Introduced at a value of roughly $1.17, the euro has been more or less steadily declining ever since; last week it briefly fell almost to 90 cents before staging a modest recovery.
As it happens, when it comes to the euro I am an ugly American. That is, I am one of those naysayers who was never convinced that a unified European currency was a particularly good idea, and always suspected that Europeans were enthusiastic about monetary union because it gave them an excuse not to think about other problems. So you might expect me to be gloating over the euro's slide. But the truth is that the weakness of the euro is not a sign of economic malaise. European economies are actually doing somewhat better than most outsiders, myself included, expected. And the currency's decline despite that good news says more about the rationality of markets than about Europe's monetary experiment.
Europe's three fundamental problems -- the problems that monetary union gave Europeans an excuse to ignore -- are jobs, jobs and jobs. An old joke among economists is that the European definition of a boom is a year in which the unemployment rate rises less than usual. Behind this poor employment performance lies the phenomenon of "eurosclerosis": a labor market so clogged with government rules and regulations that European companies have had little incentive to create new jobs -- especially the low-wage jobs that in the United States provide the young and minority groups with a first step into the world of work. Europeans have, of course, been caustic about the American model. And this rhetoric, whose implications we ugly Americans in turn tend to ridicule as a policy of no jobs at good wages, continues unabated.
But if you look at what is actually happening in Europe, you discover that in the last couple of years quite a lot of job creation has in fact taken place -- and much of it involves the creation of precisely the kind of low-wage employment that European governments supposedly oppose. The telltale sign is what is happening to output per worker; in the countries where employment is expanding fastest, like Spain, productivity is actually declining. This is, believe it or not, a good sign, an indicator that marginal workers are finally finding jobs.
What na´ve Americans failed to understand, it turns out, was the talent of at least some European societies for creative hypocrisy. The government of France, for example, continues to talk the talk of horror at the brutal American model of capitalism. In reality, however, even as the French government introduces seemingly anti-market policies like a mandated reduction in the workweek, it has quietly allowed companies to exploit loopholes in the system -- using the shortened official workweek as an excuse to scrap old rules about worker scheduling, employing vast numbers of part-time workers, and so on. The result is that while unemployment in much of Europe is still extremely high by U.S. standards, and especially so among the young, it is finally starting to come down.
Does this mean that the weakness of the euro is unjustified, that markets are not giving Europe enough credit? In a word, yes. Look at the interest rates: 10-year euro bonds yield about 5.2 percent, not much less than the 6.1 percent yield on dollar bonds. So anyone who buys a dollar bond instead of a euro bond is in effect forecasting that the euro will be worth barely more 10 years from now than it is today. This is just not plausible when you bear in mind that the United States is running a huge trade deficit -- and has inflation that, while not severe, is significantly above the rate in Europe.
The weakness of the euro, then, is not a verdict on the European economy. It's just one of those things that markets do now and then; and it, too, shall pass.
Originally published in The New York Times, 5.3.00