Leading Article: The euro may be down, but it is far from being out

THE FINANCIAL markets are a macho sort of place. A declining currency is "weak" or "soft" and therefore bad, especially if it is the euro. On the other hand, one that is "firm" or even "hard" is good. Unless it is the pound, which those who rejoice in the limpness of the euro would prefer to be a bit softer too in order to help out struggling British exporters. Wait a minute - is confusion a side effect of an excess of testosterone?

The rhetoric of what passes for debate on the subject of the euro is dominated by the notion that a currency is a virility symbol. Of course those handbag-carrying Europeans have a weak currency. One euro will now only just buy one US dollar, compared with the one-and-a-half dollars a pound will buy, so our pound is bigger than their euro. We Britons are well out of it!

The reality is less neanderthal, however, than this lads' magazine interpretation so favoured by both Eurosceptics and currency traders would suggest. It is certainly true that the euro has been weak since its launch - down 15 per cent against the dollar between 1 January and yesterday. It has fallen to a succession of what pundits and headline writers like to describe as lifetime lows and looks as though it will reach the symbolic level of one euro to the dollar. The currency markets are ratcheting it towards this parity. In a high-stakes game of ring the doorbell and run away, traders are testing whether the resistance of the European Central Bank to supporting the euro through direct intervention will finally break.

European politicians discussed this downward drift again at the regular finance ministers' meeting in Brussels yesterday. Publicly they spoke of the need for closer co-operation on policies between the member states, the importance of sticking to tough government budget targets, and similar platitudes. These were all the right things to say after their atrocious display of confusion, chaos and indiscipline at the EU summit in Cologne last month.

Privately, those same finance ministers will have been rubbing their hands with delight. Two of Euroland's biggest economies, Germany and Italy, are just emerging from recession. A weaker exchange rate, alongside the European Central Bank's 2.5 per cent interest rate, is just the kind of relaxed monetary policy that they need to boost exports and growth. Many economists are recognising this, and becoming more optimistic about the prospects for growth and jobs on the Continent.

The weakness of the euro has to be kept in perspective, too. The separate national currencies that merged on 1 January had a previous life; they strengthened in the run-up to launch day, so the euro is only a little below where it would have been a year ago had it existed then. Swings of 15 per cent up and down between the world's major currencies are neither here nor there in the financial markets; indeed, reducing the impact of such volatility among member countries was half the point of creating the single currency in the first place.

The US dollar lost more than 50 per cent of its value in about two years during the early 1980s. Nobody claimed then that the American economy was a decrepit wreck in need of total restructuring and its currency a failure. The dollar's decline against the European currencies was recognised as a typical financial market over-reaction to American policy errors and the state of the economic cycle.

It would be silly, when unemployment remains above 10 per cent, to pretend that economic performance across the Channel is all it could be. Euroland could use a dose of Viagra in the form of supply-side reforms to employment and competition rules. But it is equally silly to claim the euro will be weak for ever. As growth continues to pick up, the currency will rise and in another six months could have traded places with sterling in the virility stakes.