Venice, the Euro and the Struggling Americans

"Wonderful city. Streets full of water. Please advise" Robert Benchley wired his editor at the New Yorker over 50 years ago. Today's visitor might instead inform friends, "Wonderful city. Wallet empty of money. Stay away."

The few Americans in Venice are in a state of shock. It takes about $1.50 to buy a euro. Just a few years ago we could buy all the euros we needed to pay for pizzas, tiny glass animals, enough glass beads to purchase Manhattan island, or to frequent the high-fashion shops that dominate the major shopping streets for less than one dollar. So a hotel room that would have cost an American tourist $250 in 2005 now goes for well over $400 when you add to the shriveled value of the greenback the inflation that has occurred in Italy in the past few years.

That wouldn't be much of story in itself. After all, Americans can find plenty of places to tour in the U.S., where our dollars are worth just as much as they always have been, give or take the whittling away in its value from higher food and fuel prices. Indeed, you can even visit an ersatz Venice in Las Vegas if you have an overwhelming yen to be paddled around in a gondola. Or, if you really have an itch for overseas travel, you can book a cruise, and pay in dollars for your floating hotel and restaurant, buying euros or other currencies in small amounts only to cover the costs of day trips ashore. Or go to China, where the local currency is more or less pegged to the dollar.

From the Europeans' point of view, the more important effect of the declining dollar is its flip side -- the euro is more expensive. That is hurting the hotels and others dependent on the tourist trade throughout the euro area. More important, it is opening markets to American manufacturers, and closing US markets to Europe's exporters. That has Nikolas Sarkozy in a frenzy. He wants the European Central Bank to lower interest rates even more that it has done to cope with the current credit crunch so as to drive down the value of the euro. In Italy, there is a yearning for the good old days when the lire could be devalued whenever Italian goods became too expensive for Americans and others to add to their collections of high-fashion, high-design items.

The ECB is holding firm. Its independence from the politicians was the price France, Italy and others had to pay to persuade the Germans to surrender their rock-solid deutschemark, and accept the new euro as the national currency. But Sarkozy is getting more insistent; Spain, which is on the brink of a recession caused by a bursting of its house-price bubble, wants lower rates; Italians I talk to pine for the lire, which they remember (not entirely correctly) as less inflation-prone than the euro. In short, there is tension within euroland, which once saw a strong euro as a symbol of its virility.

That intra-European tension is heightened by China's continued pegging of the yuan to the dollar, give or take a few percentage points. That means that the effect of the weakening dollar, and the consequent increased competitiveness of made-in-USA goods, is magnified by a parallel weakening of the yuan. So Chinese goods, which were already conquering many European markets, are now even more attractive in euroland, and made-in-Europe goods are increasingly expensive in China.

All of this has serious implications for America. On the plus side is the effect on our trade balance. Companies that haven't sold a widget in foreign markets suddenly find foreigners beating a path to their doors. Companies such as Boeing, which have always gone head-to-head with European competitors, find that they now have such an edge on Airbus that the European airplane manufacturer is preparing lay-offs and factory sell-offs.

Meanwhile, Europeans are flocking to America to pick the shelves of our stores clean, stay in our hotels, and snap up condos. In Manhattan, the usually dull December real estate market is being turned into a beehive of activity by Europeans realizing their dream of owning an apartment in the world's greatest city.

Better still, the Europeans have suddenly enlisted in the long battle we have been waging to persuade China to allow its currency to float to a higher value. Sarkozy traveled to Beijing to press the Chinese authorities to do just that, and even left his human rights minister at home just to be certain that he didn't antagonize his hosts. Such is the strategy required of an economic supplicant.

So Americans no longer are astride the tourist spots of the world like collossi, but our trade deficit is declining, the pressure on the Chinese to allow its currency to appreciate is rising, and the Europeans are starting to wonder if a single currency, and with it a one-size-fits-all interest rate, is such a good idea.