Downside to the euro's strength

"Euro-phoria:" the word was on every currency trader's lips and every continental newspaper's front page Jan. 5, a day after Europe launched its new single currency, the euro, to enthusiastic acclaim from financial markets and political leaders.

The euro rose against the US dollar and the Japanese yen on its first full day of trading Monday, although volume was light. Stocks across Europe, now denominated in the new currency, surged by an average of 5.3 percent.

The market's welcome to the newcomer reflected confidence in Europe's economic outlook, analysts said, though some warned it was still too early to judge an untried currency. Politicians, meanwhile, hailed the euro as a harbinger of greater political unity across a continent that has struggled to find a common voice.

But the new currency's very success raised broader, long-term questions about the future: Close to home, economists warned that a strong euro would make European exports more expensive and harder to sell, dampening job creation. And pundits worried that if the euro came to seriously rival the US dollar, the ties of transatlantic friendship could be frayed.

Technically, the unprecedented currency launch - tying 11 national currencies into an economic and monetary union - went without a hitch. Bankers and traders worked over the New Year holiday weekend redenominating bonds and converting currency balances, while central bank officials added the finishing touches to months of preparations.

The smooth transition was "a sign of the quality of the preparatory work carried out in the past months and years by the community of central banks and by private operators in the financial markets" declared the European Central Bank, the Frankfurt-based institution that will oversee the euro.

The euro is still a virtual currency - no bills or coins will be circulating for another three years - but all euro-zone stocks and government bonds are now denominated in euros, and consumers will be able to pay euros for goods that they buy with credit cards or new euro checks.

Getting used to euros

If the shopkeeper will accept euros, that is. So far, few European businesses are set up to process payments in the new money, although more and more of them are pricing products in both their local currency and the continental one.

Until Jan. 1, 2002, when euros become hard cash, firms can choose whether or not to accept them. "The only advantage to having a euro checkbook for the moment is that by using it you get used to euros more quickly," says Martine Euvrard, a Paris branch manager with French bank Crdit Lyonnais.

One fire brigade in the German town of Offenbach, near Frankfurt, is clearly not used to them, but it is trying. After putting out a Christmas tree fire, the department said the blaze had caused 15,306.12 euros worth of damage.

On closer inspection, this curiously precise figure turned out to be 30,000 marks divided by the euro conversion rate, reflecting old thinking in a new currency.

Crusaders for the new currency have been buoyed by the successful launch of the euro into making even more explicit their vision of a politically united Europe. "We are at the beginning of a great political project," exulted French Finance Minister Dominique Strauss-Kahn Jan. 4.

In Lisbon, Portuguese Prime Minister Antonio Guterres was equally enthusiastic. "I am convinced that in the first 25 years of the next century we will have a political Europe worthy of the economic Europe we have achieved," he told members of his government at a ceremony to mark the euro's launch.

It is just this sort of prediction that strengthens opponents to the single currency, especially in Britain, which has chosen not to adopt the euro for the time being. There, "euroskeptics" not only worry about the loss of economic sovereignty that joining the euro-zone would entail, they see the money as a stalking horse for a federal "United States of Europe."

"People aren't stupid - they know when they are being sold a pig in a poke," said Lord David Owen, a former British foreign minister, as he launched a new campaign to keep the country out of the single currency Jan. 3. "Effectively this is a big step towards greater integration."

Although antieuro feelings are nowhere as visceral as in Britain, where 52 percent of the electorate opposes the project according to a newly published poll, the level of enthusiasm varies across the Continent.

In Southern countries such as Italy, Spain, and Portugal, citizens are generally delighted to have rid themselves of weak and vulnerable currencies, and to find their economic futures harnessed so firmly to that of Germany.

The French strongly support the idea too. The French TV newscaster who announced Dec. 31 that "the franc is dead, long live the euro" shocked few viewers. Such a declaration about the mark, however, would have been unthinkable in Germany, where nostalgia for a strong and reliable currency runs deep.

Challenging the dollar

Support for the euro has also come from some distant and unexpected quarters. Cuba, which this week celebrated the 40th anniversary of Fidel Castro's revolution, welcomed the money. "The birth of a strong new currency will undermine the dollar's hegemony, for the good of humanity," Francisco Soberon, president of the Cuban central bank, told the official Cuban news agency Prensa Latina.

Such fears for the dollar's future were not shared, officially at least, by senior US policymakers. "We've said many times, if it's good for Europe, it's good for the US," insisted Treasury Secretary Robert Rubin. "I have no doubt that markets will fluctuate as they always do, that is not where our focus needs to be."

But market analysts have no doubt that central banks worldwide, along with institutional investors, will move some of their assets out of US dollars and into the euro. "People have had only one choice for many, many years," says Paul Horne, an analyst in London with Salomon Smith Barney, Citigroup's investment banking arm.

"Once the technical systems [of the euro] are confirmed, you'll see central banks and international institutions diversifying into the euro," he predicts, pointing to the Bank of China's announcement that it would move 20 percent of its reserves into euros.

"It will be a prudent, measured transfer, over the medium term," adds Mr. Horne. "But it will have some very important implications."