The euro looks set to remain under pressure on the currency markets this week, with many forecasters believing that it is only a matter of time before it falls to parity with the dollar. Further gloomy economic figures from Germany towards the end of last week highlighted the weakness of one of the main euro zone economies. Meanwhile, the latest US unemployment figures showed a tight jobs market and suggested that an increase in US interest rates may be in prospect in the months ahead. Economic weakness in the euro zone and growth in the US is the combination which is leading investors to sell euros and buy dollars.
Just how much further the euro will fall is anyone's guess. Economic forecasters are in little doubt that its decline will continue for some time. History suggests, however, that currency forecasting is an exceptionally tricky business; remember many of the same analysts were, just a few months ago, predicting that the new single currency would rise on the markets. In any case, Europe's policy-makers can do little to prop up the new currency in the short term. Instead, they should be concentrating on the underlying economic problems which are being reflected by a weak euro.
Gathered in Cologne last week for a summit meeting, EU leaders made a bit of a mess of dealing with the euro issue. First they considered a draft text which commented in some detail on the currency and which said they were not overly concerned with its weakness. Then they realised that issuing such a statement was, in itself, evidence that they were worried about the currency and opted instead for a one line comment on the benefits of a stable currency. Naturally everyone soon found out about the earlier draft statement and the only message sent from the summit was one of disagreement and confusion.
What is most worrying about recent developments is not the value of the currency, but the apparent confusion and lack of co-ordination in economic management of the euro zone. First, an agreement on restraining budget deficits among euro zone member states - contained in the so-called stability and growth pact - appears to have been set aside for Italy. It was the right decision to allow some latitude to the Italian government. But the finance ministers made no attempt to provide a rationale for the move or to send a message that they remained committed to budgetary discipline. Then came the range of statements on the euro's subsequent decline, some criticising the Italian decision and others expressing indifference at the currency's fall.
To restore confidence in the euro, Europe's policymakers must achieve better co-ordination in deciding on monetary policy - and on wider economic issues - and must work much harder on communicating this. Then they must turn their minds to tackling some of the longer-term problems holding back economic growth in the main euro zone economies, such as rigid labour markets and poorly designed tax and spending policies. The problem is not the precise value of the euro on world markets, it is the lack of a clear policy approach to managing the newly created economic zone.