The Kosovo peace agreement had a dramatic effect on the euro. After sliding for weeks towards parity with the US dollar, and reaching a low of US$1.026 as it became clear the original deal over the previous weekend had begun to fall apart, the unit surged to more than $1.05 as the pullout agreement was clinched later in the week. Yet, the most dramatic rise came midweek, not on news of diplomatic breakthroughs, but in response to better than expected German economic figures. The war in Yugoslavia is regularly cited as one of the reasons for the European currency's decline. So the end of the fighting, the promise of greater stability in the Balkans and the hope that some refugees at least would return home before winter, was bound to give it a boost. In the longer term, however, the agreement in Kosovo will have only minor impact on the currency's fortunes. The fighting was costly - at an estimated 4.5 billion euros (about HK$36.58 billion), far more than originally expected. But the cost of rebuilding, which will fall mainly to the Europeans, is expected to be much more of a burden on the economy. The European Commission estimates the cost of a 'Marshall Plan' for the Balkans at about 15 billion euros. The destruction of Serbia's infrastructure will place a heavy burden on the road and river transport of its neighbours, including eurozone member Austria, and Greece, which hopes to join the euro in two years. However, the euro does not stand or fall on events in what to the international currency markets is a remote corner of southern Europe. What counts is the performance of the key eurozone economies and European Central Bank (ECB) monetary policy management. The euro staged its biggest recovery in four weeks as Germany, which accounts for a third of eurozone output, announced first-quarter growth of 0.4 per cent compared with the previous quarter. Not much, perhaps, but twice as high as economists predicted and enough to keep the country from sliding into technical recession. In October to December last year the economy shrank by 0.1 per cent. But the figures also showed that exports had risen an unimpressive 0.7 per cent compared with the year before. One of the arguments regularly used by politicians attempting to calm public fears over the falling euro has been that its weakness will boost exports and so help eurozone economies recover. It is taking longer than expected to do the trick. One of the effects of freezing exchange rates within Europe has been to reduce the competitive benefits of a falling currency. Germany's eurozone exports are still overpriced, even if the devaluation has helped make all eurozone goods more competitive in Asia, the United States or Britain. Germany's exports account for 25 per cent of gross domestic product. The 11-nation eurozone exports just 12 per cent of joint GDP. Germany's weight in the european monetary union (EMU) makes it easy to blame the euro's weakness on the German Government's handling of the economy and its failure to bring in structural reform. Instead of creating employment, it has destroyed thousands of jobs by demanding social security contributions and taxes on low-paid or part-time work. It has raised taxes on business, while promising tax cuts in future. And instead of stimulating growth through government spending, new Finance Minister Hans Eichel has imposed swinging spending cuts to reduce the budget deficit. Arguably, EMU is part of the problem. The rigorous membership criteria enforced by the ECB means Germany not only entered the exchange mechanism in the depths of an economic downturn with an over-valued currency, but it is neither able to lower interest rates nor kick-start its economy with deficit-financed government spending. Those EMU criteria were introduced at Germany's own insistence and it is hard now for politicians of any hue to argue against them. The ECB is, itself, modelled on Germany's own austere Bundesbank, an institution which, in years gone by, grimly held interest rates high at the cost of massive collateral damage to weaker EU economies. But the euro's troubles cannot be blamed on Germany alone. Confidence in the currency was undermined last month when EU finance ministers agreed to allow Italy to relax its budget deficit target from the 2 per cent allowed under EMU rules to 2.4 per cent. Eyes then turned to Belgium, which has not yet requested a relaxation of its budget deficit, but, like Italy, has a ratio of public debt to GDP of more than 115 per cent. The EMU target is 60 per cent. ECB president Wim Duisenberg has been careful not to add his voice to the clamour for a strong euro. But even Mr Duisenberg expressed concern at the Italian deal, warning that if other countries followed the trend it could be damaging for the euro. Yet relaxing the rules might be good for the euro. The flip side of the one-currency-fits-all concept is that the European unit fits no country properly. It is as uncomfortable for high-growth economies such as Ireland's as it is for laggard Germany and Italy. Forcing all of eurozone into the ECB's strait-jacket this early in the currency's development may slow recovery and adjustment all round and weaken the euro's long-term prospects.