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If Euro Fails, Effect Could Ripple

January 5, 1999

NEW YORK (AP) _ As Europe heralds the birth of its new currency, advocates are hoping that the prosperity it could unleash on the continent will also spread to the United States and other parts of the globe.

But should the ambitious project falter, critics warn, the damage would spread just as easily beyond Europe’s borders.

If the euro strengthens too much against the dollar, it could lure global investors away from U.S. financial markets and force interest rates higher in America. If the euro weakens sharply against the dollar, it could hurt U.S. exporters who would have to compete with cheaper goods from European rivals.

Worst of all would be if the whole euro system itself runs into trouble. If certain European countries can’t abide by the economic rules they’ve set for membership in the currency club, they might be forced to pull out of the system, which could lead to financial turmoil in Europe and exacerbate the continent’s protracted unemployment problem.

U.S. government officials have long supported the euro endeavor. President Clinton issued a statement welcoming the euro’s debut Monday, saying ``a strong and stable Europe, with open markets and robust growth, is good for America and for the world.″

Having just one currency to deal with instead of 11 could make it much easier for U.S. companies to sell products to Europe’s 290 million consumers. And if the euro has the hoped-for effect of boosting economic growth, those consumers will be even more likely to buy U.S. goods. The more the euro rises against the dollar, the more affordable American-made products would be for Europeans.

``This is a great market opportunity, especially for smaller companies who have fewer currencies to deal with,″ said Wolf Brueckmann, who handles European affairs for the U.S. Chamber of Commerce in Washington. ``European consumers will be easily able to compare prices, and this will help U.S. companies that are competitive.″

On the other hand, some economists worry that if the euro is strong over the long term, it could begin to challenge the dollar’s position as the world’s most widely accepted currency.

The dollar’s unchallenged dominance as the global reserve currency has had great benefits for the United States, especially in the U.S. government bond market. Huge inflows of money from foreign investors who have no better place to park their dollars have kept bond prices high and interest rates low, keeping borrowing costs low for the U.S. government as well as homeowners and car buyers.

But if those international investors had other places to put their money, such as a strong European bond market, some say it could erode the value of U.S. Treasury bonds, pushing up interest rates in America.

``I believe the euro is going to be a rival to the dollar,″ said Clyde Prestowitz, president of the Economic Strategy Institute, a public policy research institute. ``It is likely to raise interest rates in the U.S. and could result in a somewhat weaker dollar.″

Others, however, are doubtful that the mighty dollar can be unseated anytime soon as king of the global currencies. During the 1980s, some feared that the new economic dominance of Japan would help push that nation’s currency, the yen, to a new status as a global reserve currency. But that never came to pass.

``At this early juncture, it’s a little bit naive to believe that they’ve got a super-currency, a dollar-killer,″ said David DeRosa, a former currency trader who now teaches international finance at the Yale School of Management.

Of far greater concern, DeRosa says, is the possibility that internal economic problems in Europe might lead to a complete or partial breakdown of the currency union.

Possible culprits could include severe regional recessions in one or two countries which could tempt governments to ratchet up spending in an effort to create jobs. But excessive deficit spending is prohibited under the fiscal austerity treaty that the 11 countries signed in order to keep the currency stable.

``If the currency project ever breaks up, I look for a meltdown in the European bond market and much higher interest rates in southern Europe. That could bring on a recession there and then our export industries could get hit,″ DeRosa said.

``We should wish our friends in Europe all the best, but this euphoria over the euro is unwarranted because the project has definite risks to it,″ he said. ``It’s going to have benefits as long as they can hold it together.″

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