Hello, euro: What's next?

Yesterday, the euro became the main currency in Europe. It is no longer just a unit of account in business and finance; now it takes the form of actual bills and coins.

The physical debut of the euro represents the culmination of a half-century of European leadership focused on forging closer political and economic ties. For a continent once torn apart by two world wars, monetary union is a historic step. For the United States, a successful euro could mean a stronger European partner as well as economic opportunities and challenges.

The euro in Europe - strengthening political and economic ties: From its inception, the European Union has been a vehicle for European political stability. The decision to forge a monetary union and adopt a common currency is very much in that tradition. Europeans see a single currency as cementing political ties in a way that will make war unthinkable and virtually impossible. They also see the euro eventually taking on a global role that will rival the dollar as a trading currency, as a vehicle for world savings, and as a basis for reserves in non-European central banks.

A successful euro could mean a stronger and more prosperous Europe, better able to meet global responsibilities. By deepening European economic integration, the euro could also create an even more potent competitor in markets around the world.

A common monetary policy will tend to strengthen European unity. The European Central Bank already sets Europe-wide monetary policy and is likely to stimulate gradually the development of Europe-wide technical and financial standards. The European parliament is likely to exercise expanded oversight on European monetary policy.

With prices marked in euros across Europe, consumers will have the power to reduce price differences and restrain price increases in Europe. This more-competitive Europe will stimulate efficiency and foster innovation. Economists have noted that monetary union is encouraging the development of pro-growth tax systems, lower direct taxes, and an increase in cross-border commerce. The euro is already used in a significant share of new bond issues.

The euro and the United States: Since the end of World War II, the US has supported Europe's steps toward deeper and wider integration. A prosperous and united Europe would be more able to shoulder some of the burdens of global leadership.

The euro-zone of the European Union is already a powerhouse that produces about 15 percent of the world's income. With the euro, European firms can become more formidable competitors by achieving the economies of scale routine in the US. As the euro grows in acceptance, it could gradually reduce the dollar's dominant role as the central bankers' principal reserve currency. Fluctuations in the exchange value of the euro will also affect US exports; a strong euro will make US goods more attractive while a weak euro favors European exports.

The challenges ahead: The unveiling of euro bills and coins does not mark the full monetary integration of Europe. Denmark, Sweden, and the United Kingdom are keeping their national currencies, so far.

For the 12 countries in the euro bloc, the European Central Bank faces the daunting task of defining a monetary and interest- rate policy that suits economic conditions that may vary widely. By limiting budget deficits to 3 percent of gross domestic product, monetary union has also placed limits on the use of tax and spending policies to respond to national recessions.

Europe does not have a unified fiscal policy, though monetary union may encourage more coordination of national fiscal policies. Europe also lacks the continent-wide automatic stabilizers and flexible labor force that make the dollar work as a common US currency.

The US faces challenges, too. To gain from greater European competition, Americans will have to become more productive and innovative. A more prosperous Europe will also be a more attractive market for US goods and services. A large and growing current account deficit has been financed by foreign investments in US stocks, bonds, and other assets. A more-competitive Europe will attract some of that capital, with the risk of higher US interest rates, higher US inflation, and a decline in the dollar's value. For many Americans, this could mean higher mortgage rates and higher prices in stores.

A successful euro will make Europe a more equal partner in this new century. That will require Europe and the US to take on new burdens and responsibilities combining leadership with partnership.

Lee H. Hamilton, former chairman of the House International Relations Committee, is director of the Woodrow Wilson International Center for Scholars. Kent H. Hughes is director of the center's Project on America and the Global Economy.

You've read  of  free articles. Subscribe to continue.
QR Code to Hello, euro: What's next?
Read this article in
https://www.csmonitor.com/2002/0102/p11s1-coop.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe