It is always best to think relatively long term when it comes to world currency values - and to link them to the underlying performance of their respective economic geographical areas. This advice applies a fortiori to the launch of a major new currency, the euro, at the beginning of this year. Initially it was heralded as a strong currency in the very short term - and this just at the point where its major competitor, the dollar, was reflecting in its strength the continued buoyancy of the US economy, as well as the skill with which it was being managed - to the benefit of the world economy as a whole.
Events have moved on since then. Within weeks of its launch, the euro had settled down to a rather weak value vis-a-vis the US dollar, confounding such expectations, including those of financial speculators. As it approached parity with the dollar on several occasions recently, there was a rash of ill-informed comment that the euro itself was to blame, rather than the economic fundamentals in Europe and the US.
In fact the new currency has performed effectively and creditably in the technical sense. There have been problems with loose talk by senior politicians about whether Italy can remain a member, justifiable disquiet over the indulgence with which that country's budgetary overshoot was treated by EU finance ministers, and continuing dissatisfaction with the transparency and political accountability of the European Central Bank. These are either running issues or ones around which future policy will be developed in a normal political learning curve. They are decidedly not ones that put the whole euro project in question.
Nor does the fact that for five months it was so weak against the dollar. Granted, financial markets operate autonomously according to their own dynamics and expectations, in which risks are taken against guesstimates of future economic performance. Within that framework, parity between the euro and the dollar would have triggered large-scale institutional computerised selling. But it should have been clear to more rational market players, that precisely because of sluggish European growth, a weak euro has in fact suited the major economies such as Germany and France. The recovery of their manufacturing exports is unsurprisingly reflected in a stronger euro. This coincides with renewed speculation in the US that higher interest rates may be necessary to curb inflation. Unexpectedly high US wage rises suggest that the Federal Reserve may opt to raise rates as indeed, according to Mr Herbert Hax, the leading German economic advisor, might the European Central Bank so that economic growth in Ireland, Spain and Portugal remains under control.
Commentary and analysis would be better directed towards ensuring the shift, now under way, is properly managed. Macroeconomic policy-making in Europe has understandably been inward-looking during the first few months of the new currency. Now that it is operating effectively, it is time that more attention be paid to co-ordinating policy between the euro zone, US and Asian economies. Just as US policy over the last year has been credited with shepherding the world economy through a difficult period of transition after the Asian economic crisis, so it may fall to Europeans to show similar sagacity a year later.