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Kosovo Conflict Takes Toll on Euro

April 21, 1999

LONDON (AP) _ The economic fallout from the conflict in the Balkans extends well beyond burned-out villages in Kosovo and abandoned factories in Belgrade.

Fears that the strife may spread already have taken a toll on Europe’s new single currency, the euro, which is limping along at a level well below the expectations of its 11 member nations.

In addition, economists see investor confidence fading for projects in countries bordering Yugoslavia, and European governments face bigger bills to support and resettle a growing number of Kosovar refugees.

One of the best indicators of business confidence in Europe is the value of the euro, which has steadily retreated since its introduction Jan. 4. Some economists say the turmoil in the Balkans is at least partly to blame.

The euro fell to a new low of $1.0590 during trading Monday and was at $1.0610 in New York trading this morning. It rose as high as $1.1877 on its first day of trading.

Neil Parker, an economist at The Royal Bank of Scotland, said Tuesday that an erosion in confidence due to the conflict has probably shaved 2 1/2 U.S. centsoff the euro’s value. The bombing and burning is far too close to home, he said.

``It’s undermined confidence and stability in Europe as a whole.″

And while the economic costs have been somewhat limited, physical distance from the conflict is no guarantee of immunity from its effects. If the euro continues to slump against leading world currencies, exporters 1,000 miles away in Britain may soon feel a competitive pinch from less expensive goods that are priced in euros.

Britain has chosen not to join the common currency for now.

``If the value of the euro gets dragged down relative to sterling, then that’s going to affect the U.K.,″ said Douglas Godden of the Confederation of British Industry, an employers’ lobbying group.

Nations paying the highest price are those closest to the conflict. Hungary, Bulgaria and other countries that depend on waterways for much of their trade have suffered disruptions in growth since the Danube River was closed to commerce, said Glenn Davis, chief economist at Credit Lyonnais U.K.

The fighting has also discouraged Western investors.

``A lot of people have been very badly burned in Asia, Latin America and Russia over the last few years, and you’re going to look very stupid if you put money into a war situation,″ Davis said.

In Germany, Europe’s economic linchpin, the effects of the Kosovo crisis have been mild so far.

But Germany has already accepted 10,000 refugees from Kosovo, and payments for additional humanitarian efforts could eventually put pressure on a federal budget already stretched by the costs of integrating the former communist East Germany, said Thomas Mayer, a Frankfurt-based economist for the investment bank Goldman Sachs.

Other countries likely to become destinations for displaced Kosovars _ Italy, Austria and Switzerland _ could come under similar budgetary pressures.

The United States and Britain, which have contributed the largest forces to the military campaign against Yugoslavia, have seen their leadership roles translate into a strengthening of their respective currencies. Parker of the Royal Bank of Scotland said this trend is a function of short-term euphoria more than financial logic.

Traders seeking a safe haven for funds have also bid up the value of the Japanese yen.

If the conflict drags on into the summer, governments may have to consider cutting spending or, a less likely prospect, raising taxes, analysts said.

But not everyone is feeling economic pain.

Exporters based in Germany and elsewhere in the countries that share the euro are likely to benefit from a cheaper euro when they try to sell in overseas markets.

Defense-related industries may profit from NATO’s need to replenish stocks of cruise missiles and other high-tech ordinance.

``It depends on how good the Serbs are at shooting down NATO planes,″ said Malcolm House, an economist at the Federation of the Electronics Industry, a London-based trade association.

And in the long run, companies that make constructions materials and consumer goods might be in a position to profit once Serbs and Kosovars begin rebuilding their lives.

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