Fair exchange rate is no panacea

Suddenly it is all going right. After two years on the skids Europe's single currency is rallying. All that talk from finance ministers and central bankers about the euro's weakness against the dollar being out of line with economic fundamentals is beginning to penetrate foreign exchange market thinking.

The euro is now 10 cents higher than when it set an all-time low against the dollar in October. The money the ECB - and others - threw at the market (in an attempt to at least put a floor under the falling currency) is now looking a wiser investment than it did when the intervention took place. A return to parity is in sight and, with Greece joining on January 1, membership of the euro club is about to reach a round dozen.

So all's well that ends well? Not entirely. In part the worries about the euro's plight were, perhaps, a bit overdone. Just as the trading benefits of having a weak currency tended to be overstated, so the inflationary impact - even taking account of the dollar-denominated oil price - has been less than was initially feared.

In a way, euroland's ability to cope with a sliding currency underpins one of the benefits of the project: that external exchange rates matter less in a single currency zone of such size. Those with most cause for concern are those caught in the crossfire. Just ask large parts of Britain's manufacturing industry.

The real issue for the euro was one of credibility. Inevitably, savers - especially in those parts of euroland where currency strength was taken as a fact of life - wondered whether the new scheme was all its architects had cracked it up to be.

The decline and fall of the past two years would have mattered much less if the euro had had a much longer track record. It didn't, hence attention focused on the currency itself and on the adequacies or otherwise of the institutional framework meant to underpin it.

That scrutiny might become less intense or at least less urgent if the euro continues its recovery. But the problems that have been exposed will not go away just because financial markets have realised that economic fundamentals suggest the single currency is looking somewhat oversold.

In the short run the concept of the single currency regime will continue to face questions as to its effectiveness in coping with what is, after all, a series of separate economies. The difficulties inherent in (say) Germany and Ireland having the same interest rates are all too apparent.

Behind debates about individual misalignments, however, is the much broader (and trickier) question of how long monetary policy can be run centrally - by the European Central Bank - while fiscal policy remains a matter for veto-wielding individual member states.

There is more to running a currency than the exchange rate.

Abbey attack


Anyone taking a break from the prandial excess that is Christmas Day by flicking through the TV channels might have noticed that viewers were being subjected to a new push by Abbey National aimed at recruiting current account customers.

Alan Davies, the comedian who has fronted a number of campaigns for Abbey, is leading the bank's charge, which is also being backed up by the largest-ever poster campaign that began a week or so ago.

So what? the weary Christmas reveller might ask. Banks are always trying to recruit new customers.

This time round, however, Abbey's attempt to lure current account customers, the traditional domain of the "big four" - Lloyds TSB, NatWest, HSBC and Barclays - is taking place at a crucial time.

Abbey is trying to seal a merger with Bank of Scotland but risks receiving a hostile bid from Lloyds TSB.

The thrust of Abbey's campaign is that it is offering an interest-free overdraft for a year. That is very much in line with Abbey's ambition to increase the number of its current account customers from 3m to 4m by 2003.

While Lloyds TSB will be able to cite the assault on the current account market by Abbey, and Halifax for that matter, as evidence of healthy competition in the sector, it might not necessarily appear that way to the competition authorities.

It will be their blessing that Lloyds TSB will need if it does make a bid for Abbey, and they might want to consider the implications of Lloyds acquiring a competitor in the sector.

The authorities might be prepared to ignore details of "market share" - as it did when Royal Bank of Scotland took over NatWest at the start of the year - but they may not be able to ignore a big bank taking over a smaller one which is trying to move into its traditional ground.