Europe's New Rival to Mighty $

It is not clear whether this weekend's summit will be able to name the new bank's president; failure would be an embarrassing way to launch the euro, but neither Paris nor Amsterdam seems ready to compromise.

However that dispute is resolved, the euro is going to be a great equalizer, making it easy for customers to compare prices from country to country. If increased price transparency promotes greater competition, however, this will require greater efficiency from European producers, and that will require streamlining by both governments and companies. The likely result: reforms to modernize the labor market - making jobs less secure - and to slim down state welfare systems - cutting pensions, unemployment, and other social security payments.

"The euro is a fig leaf which the politicians will use to help them make hard choices on adjustment and reform," says Kinka Gerka, an economist with the Peace Research Institute in Frankfurt. "One of the first hits of the euro is going to be plant closures because we'll need consolidation," acknowledges Alan Watson, vice chairman of the European Movement in Britain and a strong supporter of the common currency. "The short term is going to be very tough on the labor market," he says.

How will the citizenry of Europe respond? A number of governments - especially in southern Europe - have held out the euro as a panacea, suggesting to voters that if they use the same currency as the Germans they will soon be as rich as the Germans.

When that turns out to be illusory, worries Simon Serfaty, a European affairs analyst with the Center for Strategic and International Studies, a Washington think-tank, "I am concerned about the ability of national governments to sustain the austerity that will be necessary to make the euro work.

"The next three years will see turbulence in the streets and in the markets that will challenge the decisions that will be made" this weekend, he predicts.

On board for Euro launch

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain - 11 European Union member states - will participate when the euro takes effect Jan. 1, 1999.

Three other EU members - Britain, Sweden, and Denmark - have decided against joining for now. Greece failed to meet the criteria for membership.

How Countries Were Chosen

If a common currency is to be strong, the countries using it must have similar and fundamentally sound economies. To ensure this, countries had to meet a set of convergence criteria, a sort of economic report card, in order to be admitted to the currency. The criteria included:

* A budget deficit of not more than 3 percent of gross domestic product (GDP).

* A stable exchange rate.

* Low and stable inflation.

* A debt to GDP ratio of 60 percent or less.

Not all countries met the debt target. Some were accepted because they are reducing debt levels. Doubts remain about whether all members - Italy in particular - will be able to sustain low budget deficits.

THE TIMETABLE

May 2, 1998: Formal announcement of the first 11 member states.

Jan 1, 1999: The euro comes into existence. Participating currencies become merely denominations of the euro (the way cents are subunits of the dollar) but continue to circulate. Prices are marked in both the national currencies and euros.

Jan 1, 2002: Euro bills and coins to be introduced.

July 1, 2002: National currency bills and coins will no longer be legal tender.

Page: 1 | 2