- The Washington Times - Thursday, September 28, 2000

It doesn't happen often, but today Denmark will be center-stage in global economic markets. Should the Danish people decide to reject the euro as the national currency in a referendum, the European currency could come under attack and that would affect the bottom line of U.S. companies that export to Europe. If Denmark embraces the euro, the currency would get a helpful boost at least in the short term. Polls have shown that support and opposition to the euro in Denmark are neck and neck.

One measure of how important the euro has become is that on Friday, the industrialized countries in the Group of Seven (G-7) intervened in world currency markets to shore up the euro, the official common currency for 11 European countries. The euro, which had been testing new lows with each passing month, had lost about 28 percent of its value since its introduction in January 1999. The intervention briefly boosted the currency more than 5 percent, but the currency then fell from its highs and stabilized at a lower figure.

Some observers believe the G-7 intervened in support of the euro just in time for Denmark's euro referendum, to convince the Danish people the G-7 is prepared to come out in defense of the currency in times of trouble. G-7 countries have plenty of reason to try to bolster the euro. In the last three months, high oil prices have nudged the euro region's inflation rate over 2 percent, which is the European Central Bank's target inflation rate. A weak euro exacerbates inflation by making oil and other imports denominated in dollars or other foreign currency more expensive. U.S. firms, such as Goodyear Tire & Rubber Co., Gillette Co., and McDonald's Corp. have announced this month that the lagging euro was hurting their European export revenue.

But Europe must follow up on the intervention by reforming tax, labor and regulation legislation to maximize growth in the region and fortify the euro. This year, the U.S. economy will probably expand 5.2 percent, while growth in the euro area is expected to be around 3.5 percent, according to the International Monetary Fund. These growth expectations are prompting investors to favor U.S. assets, luring critical capital out of Europe and undermining the strength of the euro. As of mid-August, U.S. firms spent just $33 billion to buy European companies, while European companies spent $220 billion in U.S. acquisitions, according to Salomon Smith Barney.

Euro countries must make additional fundamental changes to support their currency over the long run. Germany's decision, for example, to cut corporate taxes and its top income-tax rate is worthy of emulation. In the meantime, the backing of Danish voters wouldn't hurt either.

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