HOW strong will the euro be? With first the yen and then the US dollar suffering bouts of dramatic weakness on the foreign exchange markets the need for a strong, stable international reserve currency is becoming more urgent. US investors have already begun to show signs of nervousness over the extent of the rises seen in the US stock market and concern that the runaway growth in the economy cannot continue. In Japan, the new government has yet to convince financial markets that the much-needed economic reforms will be implemented with the rigour and determination being demanded. In the meantime, the launch of the euro is little more than four months away, and investors who have built exposure to the euroland 11 currencies are asking how safe their assets will be once the euro is launched. Europe is still plagued with structural deficiencies, with heavily ingrained labour market practices and a strong union movement in some countries. In addition doubts remain about the sustainability of the euro project and the effect that centrally planned interest rates will have on countries that are more prone to inflationary pressures if borrowing costs are low. So far, these are concerns most commentators and economists have dismissed as negligible in the short term and resolvable in the long term. The strategic decision by the European Union to ensure that the euro will be exchanged for the ecu on a one-for-one basis has immediately eliminated any market risk. The fact that the ecu is made up of all 15 EU currencies, while the euro will account for only 11, means the recalculation could have led to a devaluing of the euro, but the pre-ordained exchange rate has eased concerns about potential currency volatility at the start of the euro's life. In addition, the governing single interest rate that will influence the performance of the euro once all 11 currencies are subsumed into one is expected to be at a healthily low level when the euro is launched. As a consequence, investors in the euro-11 countries are likely to see a dramatic increase in asset prices fuelled by the benign interest rates. Given the so-called core euro countries such as Germany, France and Belgium, sport average interest rates of about 3.3 to 4 per cent, the single euro interest rate is expected to converge about that level, with the so-called peripheral countries, such as Spain and Italy seeing their rates fall sharply, and suddenly benefiting from a flood of capital into assets such as equities and property. An investor in Ireland, for example, will see his former punt denominated assets increase significantly in value, once the euro is launched, given that official rates are about 6 per cent, and will therefore fall sharply to come in line with euroland rates. 'I think the euro will be a strong currency, much stronger than the market is anticipating,' said Nick Shamim, currency bond strategist at ANZ Investment Bank. 'Euro interest rates will be at a low level and everyone should benefit from that,' added Tim Fox, chief treasury economist at Standard Chartered. Some analysts are concerned that one potential stumbling block to fast rising asset prices will be subdued consumer demand. Several key European economies are known to have structural weaknesses, particularly long-term unemployment, that might serve to subdue consumer spending and limit asset price gains. In France and Germany, although gross domestic product growth has been similar, consumption growth rates have differed due, some suggest, to labour market differences. Last year, consumption growth in Germany was almost stagnant, barely building on 1.3 per cent growth in 1996, and this year, despite some signs of a pick-up, economists still only expect consumption to grow 1.9 per cent. In stark contrast, French consumers recently buoyed by their World Cup soccer victory last month are building further on strong growth that was evident in the economy, and it is estimated that private consumption growth could rise 3.1 per cent this year in real terms. The reason for the divergence is blamed on labour market performance in France and Germany. Strong employment and wage growth in France means consumers have felt more confident about spending. Despite apparently rising unemployment in France, due to an increase in the labour force, employment has actually been improving, with official data showing employment in the business sector growing about 1.5 per cent between March 1997 and March 1998. Does this mean that the sluggishness in Germany will continue to hamper the domestic economy and act as a potential lag on euroland? Employment, last measured for July shows that the jobless rate in Germany stood at 10.9 per cent, down only from 11.8 per cent on a seasonally adjusted basis. Economists say fears of lasting joblessness in Germany acting as a depressant on euroland growth are unfounded. Aided by low interest rates private consumption is forecast to rise markedly providing a firm base for accelerating asset prices and making the euroland among the best-looking investments for the next 12 months.