The Fallout From The Sinking Euro

When the euro was launched on Jan. 1, 1999, it was hailed as Europe's answer to the dollar's half-century of domination over the global financial system. The new single currency was supposed to do three things. It would encourage the restructuring of Corporate Europe. It would mesh the Continent's fragmented capital markets into a single whole, allowing companies to finance themselves more easily. And it would immediately become a strong currency--a store of value that would rival the dollar.

Some 18 months later, it's clear that the euro is failing to live up to expectations. The new money did prompt a much-needed wave of mergers and acquisitions, but now investors are ditching it. If they lose confidence in the currency, it may jeopardize these impressive gains. Far from being a haven for investors, the euro has fallen more than 20% against the dollar. Even hedge-fund supremo George Soros lost big. So out of favor is the euro that the volume of bonds denominated in the currency dropped 50% in April compared with the previous year.

Part of the blame lies with the European Central Bank, which has as so little credibility that a recent 0.25% interest rate hike actually persuaded investors to sell rather than buy the euro. But Europe's complacent politicians are just as culpable. They haven't yet swept away labor market rigidities or tackled the other structural problems that prevent the European economy from achieving U.S.-style growth levels. Urgent action is needed.

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