EURO'S WEAKNESS TESTIFIES TO ITS STRENGTH

EURO'S WEAKNESS TESTIFIES TO ITS STRENGTH

Another week and another all-time low for the euro.

Only this time it was worse because Europe's single currency kept losing its value against the dollar in spite of an interest-rate hike by the European Central Bank - the fourth in six months. Even the recent volatility in U.S. stock markets failed to enhance the euro's investor appeal.Not for the first time, bankers, brokers and currency analysts say the 16-month-old currency is testing uncharted waters after it hovered around 90 cents. But that's what they were saying, too, when it was testing one-to-one parity with the greenback.

In fact, the euro's weakness testifies to its strength.

The 22 percent plunge in the euro's value against the dollar since it began trading on the foreign exhange markets in January 1999 has had virtually no downside on its economic performance.

Quite the opposite: So long as inflation is kept in check, a weak euro is a competitive euro, which has already triggered an explosion in exports and helped to pull Europe out of recession. To be sure, the low euro is beginning to push up the cost of imports and drive up consumer prices. But so far there's no sign of inflation accelerating out of control.

This relatively benign impact recalls the way the U.S. economy withstood bouts of dollar weakness. And just as most Americans were unaffected, and unconcerned by a weak dollar unless they went abroad, so the weak euro doesn't bother the ordinary European too much. And that applies when he or she travels abroad, too, as the most popular vacation destinations are in the 11-nation eurozone.

The only country in the European Union that's really hurting from the weak euro is Britain, which isn't a member of the eurozone.

The pound, which has a tendency to track the dollar, has scaled 15-year highs against the German mark and the French franc - national currencies will co-exist with the euro at irrevocably fixed exchange rates until July 2002, when they will no longer be legal tender - eroding the competitiveness of Britain's exports in its single biggest market and unnerving Japanese investors.

To be sure, the euro's collapse is generating a sense of crisis in some quarters. It is fueling calls for the European Central Bank to take more radical action, including the sale of some of its member banks' massive reserves of dollars, now totaling more than $250 billion.

But beyond the dealing rooms the atmosphere is a lot less highly charged, with most European leaders taking a relatively sanguine view of the euro's slide.

German Chancellor Gerhard Schroeder says he has no fear for the beleaguered currency because of the ''sparkling'' performance of the eurozone economy.

Europe's economy is on a roll, with growth and investment surging and unemployment falling - albeit too slowly to make a significant impact on an unemployment rate that averages 10 percent.

The European Commission, the EU's executive arm, expects economic growth in the 15-nation bloc to reach 3.4 percent this year, its best performance since 1989. And the eurozone will grow ever faster, possibly by as much as 4 percent.

''What need have we to go around in sackcloth and ashes?'' the chancellor asks logically.

The problem for Europe, however, is that the United States continues to grow faster, and that's why investors are still piling into the dollar.

Hours after the European Central Bank unveiled its ineffectual latest interest rate hike last Thursday, the U.S. Commerce Department was reporting America's gross domestic product grew at an annual rate of 5.4 percent in the first quarter.

That killed off any lingering hope that the euro was about to stage its long-awaited revival. There are very few euro bulls left.

The value of the euro is being unlinked from economic fundamentals, some analysts contend. It is driven mainly by sentiment, and it could get caught in a vicious downward spiral. But policy-makers are sitting out the current ''crisis.''

Some senior banking officials and government advisors in Germany, however, fear there is a direct link between the euro's weakeness and the slow progress toward deregulation in the EU.

Some have gone public, like Prof. Jurgen Donges, head of a committee of ''wise men'' that advises the government. He has criticized France and Italy for dragging their heels over reform. He says the euro will remain weak until there is a fundamental reform of Europe's social-security and tax systems and its labor markets.

This analysis is increasingly gaining support among policy-makers in Germany, reviving old fears about the wisdom of allowing Italy into the euro-zone. However, set against this is corporate Europe's enthusiastic embrace of Anglo-Saxon capitalism, which has happened so suddenly that it has swept up the politicians in its trail.

The reason? The arrival of the euro, which created a vast single capital market and forced European business to compete as never before.

The euro may be weak, but it's working.