December 28, 2003	Sunday	Ziqa’ad 4, 1424

FRANKFURT, Dec 27: The euro, launched five years ago in January, confounded naysayers by becoming a worthy rival to the dollar but today finds its sheer strength threatens to nip the eurozone’s budding economic recovery.

Whether it be in commercial trade, financial markets, central bank reserves or foreign exchange markets, the single European currency has been gaining in importance throughout the world.

The euro hit a new all-time peak of $1.2469 on Wednesday.

It far outstrips the total power of the 12 national currencies that it replaced in January 1999.

After the Internet bubble burst in 2000, the eurozone benefitted from an uninterrupted return of capital that has been bolstered since 2001 by the most attractive interest rates for investment.

In October, the eurozone bond market had a net capital inflow of 13.4 billion euros, and equities drew 13.1 billion.

On a global scale, the volume of euro-denominated bonds issued from mid-2002 to mid-2003 surpassed the volume of those in dollars.

And a growing number of central banks are using the euro in their foreign reserves, notably in Asia. While the dollar continues to dominate, with more than 64 per cent of foreign reserves, the euro’s share climbed to 18.7 per cent last year from 16.4 per cent in 2001.

In trade, the euro is increasingly being used, while the dollar continues to be the currency of reference for oil deliveries, for example.

Almost half the trade in goods and services between eurozone countries and others takes place in euros, the ECB noted in a recent report, adding that the trend increased after euro notes and coins were introduced on January 1, 2002.

In fact the successful introduction of euro cash has cemented the new currency’s reputation. Eighty-four per cent of its users say they have no or few problems in using the euro, according to a recent survey by the European Commission.

Furthermore, 52 per cent of those surveyed said the euro was advantageous for their country.

However, this level of satisfaction has steadily fallen since 2002. The reason: a perception that the launch of euro cash pushed up prices and weighed on the economies of the eurozone.

That is the great paradox of the currency’s success. Its exchange rate has climbed about 20 per cent against the dollar since the beginning of the year and 50 per cent since its historic low reached in October 2000, all without the basis of strong economic activity.

The eurozone continues to lag behind the recovering United States, with growth of 0.5 per cent this year and 1.8 per cent in 2004, compared with US growth of 2.3 per cent and 4.0 per cent, respectively, according to the Organisation for Economic Cooperation and Development.

The euro’s strength is deceptive, in fact, since it derives largely from the tacit decision by the US government to allow the dollar to fall to help sustain the US economic recovery.

Meanwhile, eurozone companies exporting abroad are feeling the pinch of their suddenly more expensive goods.

Within the European Union lies another problem. The success of the monetary union has not been accompanied by the expected parallel coordination of eurozone budget policies, as was seen in the recent EU public deficit crisis over the 1997 Stability and Growth Pact that underpins the euro.

The euro has not proved the stimulus for further EU political integration its backers had wanted.

The political disarray was in evidence after an EU summit this month failed to agree a first constitution. The dispute highlighted the internal fault lines of the union, gave ammunition to the EU proponents of a simple free-trade zone and resurrected the idea of a “multiple speed” EU, where some states could choose faster integration.—AFP