As Euro Slides to a New Low, German Chancellor Gets a Drubbing

German Chancellor Gerhard Schroeder’s not-to-worry attitude toward Europe’s plummeting common currency not only sent the euro to another record low Thursday but also exposed the German leader to a barrage of criticism that he is making a bad situation worse.

Schroeder’s observation this week that a weak euro boosts German exports by making goods cheaper in the important U.S. market served to undermine financial officials’ calls for strengthening the currency to forestall inflation and rising interest rates.

The European Central Bank already has had to raise lending rates six times since November in a futile bid to stop the euro’s plunge. The tightening of credit threatens to repress growth prospects in the euro zone.

The weakened euro is particularly damaging because of the surging worldwide price of oil, which is traded universally in dollars. That makes energy costs even higher for Europeans.

Gasoline costs more than $4 per gallon in Germany and France, and inflation among the 11 countries using the euro has climbed to 2.4%--already above the community’s self-imposed limit of 2%.

The euro’s slide--down 25% from its initial dollar value of $1.17 when launched in January 1999--has dampened popular support in Germany for swapping the deutsche mark for the European common currency. It also casts a pall over a referendum in Denmark this month on whether that European Union state should join the euro zone.

Last week, even before the European currency dipped to record lows Wednesday and again Thursday--trading for as little as 86.4 cents--nearly two-thirds of Germans surveyed by the Forsa research institute said they would rather keep their own marks than swap them for euros.

Danes, who already have rejected being part of the euro zone twice, are set to hold their third vote Sept. 28. The common currency’s recent tumble has hardly inspired confidence among the more than 13% of voters who are still undecided. The most recent Danish polls show backers and opponents nearly equal, and analysts in Copenhagen fear the flagging value of the euro will push the fence-sitters into the “no” camp.

In Britain, another EU country holding out against the euro, more than 300 prominent businesspeople sponsored a two-page advertisement in the influential Financial Times newspaper Wednesday to urge Britons to stay out of the euro zone if they want to avoid higher taxes and labor costs.

Schroeder stepped into the fray Monday by trumpeting the sliding euro’s positive influence on his country’s export-driven economy, which is expected to grow 3.3% this year.

“This should be cause for satisfaction, not concern,” the chancellor told reporters in Berlin before departing for the Millennium Summit at the United Nations in New York.

Indeed, manufacturing orders in Germany are up nearly 13% this year and expectations of booming sales abroad have sent stock prices for export-oriented products such as Porsche sports cars soaring.

But the currency has steadily tumbled further since Schroeder’s remarks. Financial analysts and political opponents have pointed to the chancellor as the man to blame.

“Fundamentally, Mr. Schroeder is correct as regards exports, as they do profit strongly from a weak exchange rate,” says Theo Schonebeck, a euro analyst with Deutsche Bank in Frankfurt. But he added that those short-term benefits are outweighed by the inflationary pressures and tightening credit. “We don’t think Mr. Schroeder chose his words very fortunately. It wasn’t wise to signal indifference to a weak euro.”

German Finance Minister Hans Eichel sought to present a more concerned mood in the government here, joining his French counterpart, Laurent Fabius, in declaring the euro “undervalued.”

Finance ministers from the euro countries will meet today in Versailles, France, to discuss strategies for bolstering their currency ahead of a weekend meeting with European Central Bank officials, who may call for another interest-rate increase to fight inflation.

With Germany poised for its strongest growth in a decade this year, Euroland is on track to post as much as 3% growth collectively this year. But that still compares unfavorably with the robust 5.3% rate of the steamrollering U.S. economy, which remains more attractive for investors.

Despite the current gloom and expectations that the euro will dip even lower, most analysts predict a rebound against the dollar this year if and when the U.S. boom shows signs of flagging.