Europe's New Rival to Mighty $
EU leaders meet May 2 for final decisions on launch of common currency. Many ask, will it be boon or boondoggle?
PARIS — Not since the Roman Empire has Europe seen anything like it.
At a summit this weekend in Brussels, European leaders are set to launch a common continental currency that will eventually do away with the French franc, the German mark, and nine other currencies.
Starting next January, nearly 300 million Europeans from the Arctic Circle to the southern Mediterranean will begin thinking in euros. As they learn the unfamiliar arithmetic, they will be laying the foundations for an ever-closer political union among once-sovereign nation states.
The euro is a high-stakes endeavor. If the new currency collapses - unlikely - or if the economic rigors it imposes prove more than voters will bear, "in the final analysis it could well threaten the European Union itself," warns Jerome Sheridan, who teaches at the American University in Brussels, the EU headquarters.
"If EMU (Economic and Monetary Union) fails, the whole experiment of European integration begins to unravel," adds a senior United States official.
But if it works, say euro-boosters, the currency will give the continent major new clout in world affairs - sufficient to one day challenge Washington, perhaps - and spur member governments into making difficult reforms to modernize their economies.
"The euro will give Europe a voice that corresponds to our weight in economic and commercial affairs," predicts Patrick Child, adviser to Yves Thibault de Silguy, the European Commissioner in charge of EMU. "And the discipline members will face will give them an extra incentive to push through necessary structural reforms," he adds.
At their summit, EU leaders will formally announce the 11 countries due to join EMU in the first round (see box, left). Those countries will then irrevocably link their exchange rates to create instantly the second most powerful currency in the world after the US dollar.
To start with, European consumers won't actually see any euros, and will go on using their own money until 2002. But the euro will be used in cashless transactions, such as stock market trades, bond purchases, and trade deals. Airbus, the European airplane consortium, will fix its next sale to the Belgian carrier Sabena in euros, for example, and banks will begin sending customers their monthly statements in euros as well as French francs or Dutch guilders.
The euro will be the currency for an economic player on the world stage that rivals or outstrips the US in output and trade. In the long run, analysts on both sides of the Atlantic agree, the euro is likely to challenge the dollar's status as the world's pre-eminent reserve currency.
Keeping the euro strong will be the job of a new institution, the European Central Bank (ECB), based in Frankfurt, Germany. And as member governments give up a large measure of their sovereignty to the bank, it has become the focus for sharp disagreements. At Germany's insistence, the ECB's absolute priority is to keep inflation under control; Bonn was not about to swap its ironclad mark for a weaker currency.
But strengthening the euro is likely to require high interest rates, and high rates stifle economic growth. This is bad news for some EU member states, whose unemployment rate is running at nearly 12 percent and whose leaders are looking to growth to create jobs.
Nowhere is this issue more pressing than in France. At every turn in the negotiations leading to the euro, Paris has matched Bonn's stress on stability with its own demand for growth.
This fight has crystallized into a battle for the presidency of the ECB, between the former Dutch Central Bank chief Wim Duisenberg - backed by Germany and most other EU governments - and Jean-Claude Trichet, the head of the French Central Bank.
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.
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.