June 1 (Bloomberg) -- The German Finance Ministry and the Bundesbank hailed the euro as a success, rejecting a magazine report that they have discussed the possibility the currency shared by 12 European countries may fail.

The weekly magazine Stern today said the Bundesbank President Axel Weber and Finance Minister Hans Eichel held talks with economists on the issue last week.

The euro was close to an eight-month low against the dollar today after French voters' rejection of the European Union's constitution and a deteriorating growth outlook undermined some investors' confidence in the economy's prospects in coming years. Morgan Stanley's Joachim Fels said today he is ``worried about the long-term viability of the euro.''

Weber ``is not taking part in any such absurd discussion,'' his spokesman at the central bank, Wolfgang Moerke, said in an e- mailed press release. The euro is ``a success story,'' he said, echoing a comment made by Finance Ministry spokeswoman Sandra Hildebrandt in a telephone interview.

The European Commission today cut its second-quarter growth forecast for the euro region to about 0.3 percent as manufacturing shrank and German retail sales dropped, increasing pressure on the European Central Bank to lower interest rates from 2 percent.

The commission projected April 4 that Germany will be the slowest growing economy in the euro region this year and next, expanding 0.8 percent in 2005 and 1.6 percent in 2006. That's in contrast to Ireland, topping the list with forecast growth of 4.9 percent this year and 5.1 percent next.

Euro Fall

The euro dropped to $1.2260 at 1:49 p.m. in Frankfurt from $1.2304 late yesterday in New York, according to electronic foreign-exchange dealing system EBS. It fell below $1.23 yesterday for the first time since October after the French referendum on May 29. A drop to $1.2224 would mark an eight-month low.

Stern said Fels, chief fixed-income economist at Morgan Stanley, took part in last week's German discussions. He declined to comment on the report of the meeting in an interview today.

Leaders of the 25 European Union nations in March loosened the rules limiting deficits and debt for the 12 euro users, aiming to spur an economy that has lagged the U.S.'s rate of expansion in 13 of the past 14 years. The European Commission, the EU's executive arm, said today budget risks are persisting in 10 of the EU's 25 countries, including Germany, France and Italy.

The euro's introduction in 1999 has led to increase financing costs for Germany, a reason why Europe's biggest economy is lagging behind other euro users, Eichel's ministry said in a report, according to Stern. ``The gap risks widening, so that the danger of an adjustment crisis is growing bigger,'' the magazine quoted from the document.

The Finance Ministry ``doesn't comment on internal papers or meetings,'' Hildebrandt said. Weber and Eichel have regular meetings with economists to discuss global finance matters, Moerke said.

Clement Call

German Economy and Labor Minister Wolfgang Clement said yesterday the European Central Bank, which oversees interest rates for the twelve euro users, should lower borrowing costs to underpin an economic recovery in the region. The ECB ``must consider stabilizing'' the economy, Clement said.

While the Maastricht treaty, the legal framework for the euro, doesn't allow countries to leave the currency union unilaterally, international law would permit all euro members together to annul the union or allow one of its members to opt out, though the latter would require legal changes, according to a legal opinion drawn up by the scientific service of Germany's lower house of parliament.

Fundamental changes that erode the inherent basis of the treaty may give member countries an extraordinary right of cancellation under international law, according to the opinion, faxed to Bloomberg News by Lawmaker Peter Gauweiler, a member of the opposition Christian Social Union, who commissioned it.

``It's understandable that in the current politico-economic environment, the possibility of a breakup of EMU is at least being discussed,'' Lorenzo Codogno, co-head of European economics at Bank of America in London, said in an interview. ``Europe seems to be drifting further away from reforms that are needed to stimulate growth while the euro's budget rules have been grossly undermined. It's a dangerous amalgam of things.''

To contact the reporter on this story: Andreas Cremer in Berlin at acremer@bloomberg.net.

Last Updated: June 1, 2005 07:57 EDT