BREAKING THE FALL

	September 22 , 2000
	Ray Suarez discusses efforts to prop up the sagging euro.

RAY SUAREZ: It came after days of growing fears, today's move by the U.S. Federal Reserve and its European and Japanese counterparts was aimed at stemming the fall of the Euro. U.S. Treasury Secretary Lawrence Summers spoke in Washington this morning. LAWRENCE SUMMERS: At the initiative of the European Central Bank, the monetary authorities of the United States and Japan joined with the European central bank in concerted intervention in exchange markets because of their shared concern about the potential implications of recent movements in the Euro for the world economy. RAY SUAREZ: The European union's single currency debuted with smiles, optimism, and at a $1.17. The Euro is not a freely circulating currency. For now it's just a measurement, a basis for non-cash transactions between banks and other financial institutions. People aren't walking around with Euro notes and coins in their pockets yet. They are set to begin circulating in January 2002. Then it's good-bye to French Franks German Marks, Pesetas, Gilders, and the rest. Eleven of the EU's 15 countries agreed to adopt it right away-- Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Britain, Sweden, Denmark, and Greece decided to stay out. Denmark is set to vote again next Thursday. Recent polls suggest anti-Euro sentiment remains strong. Each country using the Euro has been assigned a conversion rate, which is permanent and unchanging against specific European currencies. For example, one Euro will always be worth 6.56 French Francs, or 1.96 German Marks. Against foreign currencies, however, the value of the Euro fluctuates on international markets. Since its introduction, the Euro has lost almost a third of its value, hitting a record low of 84.38 cents on Wednesday. While the Euro has been weakening, there are signs of an economic slowdown in Europe. Most recently, rising oil costs have added to Europe's woes. Since oil is sold in dollars, a weaker Euro drives prices even higher. And Europe's problems have begun to affect the U.S. After markets closed yesterday, computer chip giant Intel warned a falloff in demand in the European market would hurt its third-quarter sales. RAY SUAREZ: For more on the Euro, we're joined by Richard Medley, President of Medley Global Advisors, an international consulting firm for hedge funds and investment banks; Jose Luis Guerrero-Cusumano, professor at Georgetown University's School of Business and a consultant to several international companies; and Richard Wolffe, Washington correspondent for the "Financial Times." Richard Medley, let me start with you. Why is the Euro in trouble? RICHARD MEDLEY: Well, the Euro has been in trouble mainly for two reasons. One is the U.S. economy has grown faster than the European economy, so people have felt they could make a lot more money in the United States than in Europe, so they put their money here. Secondly, European countries have been on a huge consumption binge of U.S. Companies, like Daimler buying Chrysler. And European investors have been buying the American stock market and American corporate bonds in record numbers, double the rate we've seen any time in the last decade. RAY SUAREZ: And Richard Wolffe, today we heard about the intervention. What is an intervention? RICHARD WOLFFE: The intervention is, in this case, a concerted action by central banks in Europe, America and Japan, to prop up the currency. It's an extraordinary moment, particularly in Washington, because there's been so much skepticism from the Fed and from Treasury about these kinds of interventions. The feeling is that they don't really lead to any long-term advantage. But Larry Summers and Alan Greenspan seem to have come out in support of the Euro today. RAY SUAREZ: So Jose Guerrero, is it the right thing to do and the right time to do it? JOSE LUIS GUERRERO-CUSUMANO: Well, I think it is a contradiction in many ways because we know that Secretary Summers wants a very strong dollar. That's I think the image that he wanted to protect, but at the same time a weak Europe is not going to be bad for Europe but is going to be bad for international markets. We are looking at the stock market right now all over Europe and the United States and there is a lot of volatility. And this is what they are trying to do from an economic point of view, to try to minimize the volatility, perhaps create a solid Euro. Evidently the Euro at the moment this is currency that does not exist in the pocket of people. This psychological factor sometimes is creating in many countries in Europe a lack of trust to it. But I think we need this sort of intervention in order to create an image of global stability. RAY SUAREZ: Should the Euro be valued as low as it is based on the fundamentals and what currencies are supposed to be trading at? JOSE LUIS GUERRERO-CUSUMANO: The European community is very stable right now with respect to an economic point of view. The growth, unfortunately, is not as high as we want it. Right now it's 3.5%. This is what is expected. We have to be careful. We want a strong Euro because America and the rest of the world is totally linked to a global economy and a global competitiveness. So I think what we need right now is a stronger Euro so Europe could really lower inflation that is going to be generated, unfortunately, by this weak Euro and the strong dollar. RAY SUAREZ: So, Richard Medley, how do we know? What do we have to look for in the part of buying the Euros on the part of the central banks worked, whether it helped out the currency? RICHARD MEDLEY: Well, first we have we have to say two things. One is that it's no mistake the U.S. did the SPR, the strategic petroleum release and the Euro in the same day. There were really feelings that something was coming vaguely unhinged. There were whiffs of 1998 and that kind of crisis period although clearly we're nowhere near that. There were whiffs of -- RAY SUAREZ: You mean 1988? RICHARD MEDLEY: No. I mean 1998. RAY SUAREZ: What crisis are you referring to? RICHARD MEDLEY: The Thai crisis in 1997 and the Russian crisis in 1998. And there were hints that the market had some kind of trouble. The Committee to Save the World, which is what "Time" Magazine called Greenspan, Rubin and Summers at that time was reassembled and you came in and had a major intervention in the oil markets, the same day you had a major intervention in the currency markets. And I might say it was the first currency intervention the U.S. participated in since June of '98 when we intervened to soften the yen. RAY SUAREZ: But is it meant to really pick up a currency that's traded by, you know, 200 million people or is it meant to be sort of a statement of confidence in the future of the currency? RICHARD MEDLEY: It has to be meant to pick the currency up. If the currency... if the Euro trades below the 85 level versus the dollar in the next week or so, it will be a failure and it will be a huge embarrassment for the United States. And it will kind of leave the Euro undefended in the world. So they're going to have to be back in and supporting it and make this a success. You asked what's a failure? A failure is that it trades below 85 cents. RAY SUAREZ: So Richard Wolffe, what should people be looking for in the coming weeks? The Euro went up a little bit today, but then it started to slide down toward the end of the day. RICHARD WOLFFE: Started to fall back, that's right. I'm not sure how much of a major intervention this really is. This really is a statement of support, ultimately political, for the European authorities and what they're trying to do. Sure people want to see a stronger Euro. More than anything else, the whole future of the European single currency project is at stake here. If it carries on falling, then the momentum to have these other European countries join the single currency will fall away. Look at the Danish referendum coming up. All of that is at stake. So it's an important signal for Washington to send to its European allies that, yes, there is that fundamental support. But I think if you scratch just below the surface in Washington, you'll find officials expressing quite a lot of skepticism about the long-term impacts here. The other thing is they want to support European structural reforms; that is, the tax cuts and the changes to the labor markets in Europe that America would like to see and slowly Europe is getting there. RAY SUAREZ: We're talking about central banks and treasury secretaries and so on. Let me try to bring this down to street level a little bit. Jose Guerrero, you consult with foreign companies. If you are a manufacturer in Europe, what does a weak Euro mean to you? JOSE LUIS GUERRERO-CUSUMANO: I think the American participation is a recent thing. I think Europeans tried for a long time to convince the American interests to support the Euro. There was some apathy in the past. But then when big American companies like Intel, Dupont, and Gillette begin suffering indirectly with the lack of demand or lower demand than expected, we begin to realize that even though Europe has become an export machine, because the Euro, given that it's weaker, evidently it's much easier for them to export, but also the trade deficit in America began to increase because they're going to buy more imports. So we have to be careful in the idealization that a weak Europe is good or is bad. I think what is happening right now is hurting many American companies, international companies, for an international point of view, many trade in blocks that thought in the past of adopting a common currency imitating the Euro, also they are very disappointed and disillusioned. So right now there is a crisis, a crisis of faith in the idea of a currency. Remember that the dollar, the dollarization of Latin America many times were thought as a solution for Latin American problems. What is happening right now, American companies are worried, because what is going to happen that many of the profits that they were able to get in Europe, even though Europe is very stable from an economic point of view, they wouldn't be able to obtain. If those companies are going to begin to report losses or lack of profit in Europe, that is a very stable market, what is going to happen with the rest of the world? This is going to create turmoil and volatility in the market and evidently the American government doesn't want that. There are too many problems. The elections are coming and that's... with the price of oil increasing, so the situation is very complicated. They thought that perhaps a small intervention, $5 billion, what is $5 billion in today's economy? That's absolutely nothing. It was an act of... a labor of love, in many ways, to show that perhaps we could give Europe a little help and see what happens. But you saw -- it went to 0.9 and now it's 0.88 and .879 and so it didn't last for a long time. What happens in the coming days, but... But I think the people in Europe are skeptical about the whole situation. RAY SUAREZ: Richard Medley, if you're building earth moving equipment for Caterpillar in Illinois or writing software for Adobe in California or selling wheat to Italian pasta makers and you live here, you work here in the United States, what is your stake in the value of the Euro? RICHARD MEDLEY: It's a big deal if you're doing any of those things you're competing against a currency that lost 30% of its value against people who you're competing on head to head in most world markets. This is a very important intervention for the U.S. as well as for Europe. Notice that the dollar has appreciated, has gone up in value on a trade-weighted basis by over 15% this year. So it is starting to really impact American companies. We have had profit warnings. The American stock market has really been weak over the past month as these profit warnings come in and people begin to say wait a minute. We aren't doing as well in the rest of the world as we were. Everything isn't coming up roses. Maybe we need to take another look at our cooperation and our willingness to put up with a steadily rising dollar I think that comes on top of the broader geopolitical concerns, and is a very important element in why we did what we did today. RAY SUAREZ: So when Larry Summers cites world economic impact, he's also doing this for Uncle Sam and the American economy when he fronts an intervention like this. RICHARD MEDLEY: He is our treasury secretary. He has to have American interests in mind. And he did. And just like with Secretary Richardson with the oil companies, you know, we have to take a stand. There are certain times where governments have to stand up to the business community and say enough's enough -- enough selling of the Euro, enough speculation on the upside on oil. We need to come in and be a stabilizing force. I know that's not a popular opinion, but I've seen it for 20 years working in currency and other markets. Sometimes markets need to have officials come in and say, "enough, stop all of this." RAY SUAREZ: Now, Richard Wolffe, notably Britain stayed out of all of this. Yet, at the same time, there's pressure on Britain to get in even though there are probably people patting themselves on the back for staying out right now. RICHARD WOLFFE: Opinion is horribly divided in Britain as it is in several European countries about the Euro whether to be in-- is it a good idea? The Conservative Party in the UK today has said that the intervention, the need for intervention is a classic example of why Britain should never join the Euro. You know, there are two different kind of political debates... political and economic debates going on right now. On the business side of things, you're seeing a lot of suffering among British companies who are trying to export, a lot of foreign investors questioning why they're in Britain when the British pound has been very strong against the Euro. It makes it quite expensive to be in Britain right now. On the other side, there is a grassroots feeling, part of the British nature, I'm afraid, a proud island nation, typically skeptical about continental Europe. It needs to have an overwhelming reason for joining in with its European friends and brethren. And that argument hasn't really been settled. And I think you're seeing something similar in Denmark where there are the countervailing forces between a pro-business, pro-European approach, and something that is much more grassroots, much more gut and instinctive, a kind of distrust for Europe and the European project. RAY SUAREZ: Gentlemen, thank you all.