BENEATH THE UNSIGHTLY SURFACE, DYNAMIC CHANGE

BENEATH THE UNSIGHTLY SURFACE, DYNAMIC CHANGE

The euro slipped further below one-to-one parity with the dollar to an all-time low Monday, but the smart money is still betting the infant currency will rally.

With the United States growing its economy for a record-breaking 108 months in a row, the 14-month-old, 11-nation eurozone hardly merits a glance from international investors.It's the strength of America's dot.com new economy that is largely responsible for the euro's weakness. The dollar is being forced higher by the huge inflows of funds into U.S. Internet stocks. The eurozone simply can't compete, and its currency is paying the price.

The eurozone has also shot itself in the foot. Investors have been scared off by the financing scandal enveloping former Chancellor Helmut Kohl's Christian Democrats and by the European Union's diplomatic brawl with Austria over the inclusion of the far right Freedom Party in the new coalition government.

On the surface, there couldn't be a bigger contrast between America's dynamic Internet-based economy and a Europe snarled in political issues dragged over from the 20th century.

Just below the surface, however, things are very different. Europe is undergoing dynamic economic change that will enable it to narrow the gap with the United States, and more rapidly than most forecasters realize.

The pace of change varies from country to country and between industrial sectors. But it's the euro's arrival that has been powering it.

Even as the euro fell by more than 15 percent against the dollar during its launch year 1999, the new single currency helped create a vast single capital pool. Freed from currency risks, European companies doubled the value of mergers and acquisitions to $1.2 trillion, just 30 percent short of the record-breaking $1.7 trillion of deals in the United States. And this year, Europe is likely to lead the world's M&A market.

The clearest sign of the emergence of a new Europe came with Vodafone's successful $190 billion takeover of Mannesmann, which shattered the myth of a German fortress at the heart of the eurozone.

To be sure, the first successful hostile takeover bid in German history does not mean the country is about to embark on 1980s U.S.-style merger wars. Indeed, worker shareholders in Siemens, the engineering and electronics conglomerate, are working on a plan to thwart a foreign predator.

But it may be too late. The German government's decision to scrap taxes on profits from asset sales has freed banks and insurance companies to sell their substantial cross shareholdings in the country's corporate giants (Deutsche Bank's industrial portfolio is worth over $50 billion). This has stoked speculation about foreign bids for a wide swathe of companies including chemicals firms BASF and Henkel, the supermarket chains Karstadt Quelle and Metro, carmaker BMW, industrial group MAN and even Dresdner Bank.

These developments underscored the erosion of political influence in the corporate sector, a process that got under way several years ago when governments surrendered national sovereignity to single-market regulations and handed over domestic antitrust powers to the European Commission.

Monetary union, meanwhile, has robbed governments of their freedom to set interest rates and manipulate the value of national currencies to gain competitive advantage.

But national capitals can still make a contribution to the continent's economic transformation by removing the supply-side constraints that hobble its ability to compete globally.

And there are signs that the countries that matter most, Germany and France, are ready to reform their rigid labor markets and costly welfare systems and untangle bureaucratic red tape. The smaller nations will have no choice but to fall in line.

These positive corporate and political developments are attracting the attention of international investors, which have been moving strongly into European stocks in recent weeks.

Interest will grow when investors realize that the picture of a Europe lagging forlornly behind the United States in the Internet race isn't completely accurate. A recent Organization for Economic Cooperation and Development survey showed Europe trailing only slightly behind in the so-called knowledge industries underpinning the new economy.

And Europe is catching up fast. The European Information Technology Observatory Task Force expects Europe's share of the world's Internet users to rise from 27.9 percent in 1997 to 31.8 percent in 2001 while the U.S. share will decline from 52.8 percent to 37.9 percent.

What's more, Europe could overtake the United States within five years as the mobile telephone, in the use of which it leads the world, replaces the personal computer as the key way to access the Internet.

Europe has rushed to exploit this potential with American-style zeal. The value of European technology mergers and acquisitions last year, $455 billion, was greater than the combined total for the rest of the decade; seven of the top 10 deals involved wireless telephony.

Like the United States, Europe is creating a new economy. Unlike it, Europe could be slowed by rigid labor markets and regulations more suited to the old economy.

It's up to Europe's politicians to stare down the old vested interests and give the new industries free rein.

Thankfully, they appear to be getting the message.