Europe's New Nutty Money

I HAVE ALWAYS AVOIDED WRITING ABOUT SOME SUBJECTS--despite their importance--because they seem technical and irrelevant to Americans. One of these has been Europe's plans to create a single currency (the Euro) by 1999. It's a lunatic idea but, to be honest, one that I thought would collapse of its own stupidity. Unfortunately, it hasn't, and so here goes. I write about it now not because it's bad for Europe (an old notion) but because it may also be bad for the United States and everyone else.

By now, Europe's economic distress is well known. At year-end 1996, the unemployment rate for the 15 nations of the European Union--the old Common Market--exceeded 11 percent. But what ails Europe has nothing to do with its multitude of currencies. After all, the same currencies existed in 1970, when unemployment averaged 3 percent. Europe suffers from an obsession with economic security that translates into economic stagnation. It overregulates industry. High wages and payroll taxes penalize hiring. The European Monetary System (EMS) fixes exchange rates and forces countries to adopt Germany's high interest rates.

Even Europeans don't contend that a single currency would automatically cure these ills. The argument is that the requirements establishing the Euro would force countries to make reforms that would revitalize their economies. These requirements mandate that countries reduce their budget deficits to 3 percent of national income (gross domestic product), have a national debt (the total of past deficits) of no more than 60 percent of GDP and maintain low inflation and stable exchange rates.

Though seductive, the logic won't wash. If all Europe's countries met these requirements, it's questionable whether their economies would surge. Their problems stem from excessively restrictive taxes, regulations, labor practices and welfare programs that wouldn't necessarily be affected. But even this doesn't really matter, because--as a practical issue--many European countries won't meet the requirements any time soon. Italy's debt, for example, is 124 percent of its GDP. In 1996, only one country complied with all the requirements: Luxembourg, with a population of 400,000 out of the EU's 370 million.

The requirements will almost certainly be relaxed, then. If they aren't, the single currency will never replace more than a few national currencies. And that would defeat the project's central purpose, which is more political than economic. That aim is to foster a European identity--a step toward more "unity" and nationhood--through the symbolism of a continental money. The idea is plain foolish, especially given the evidence from other societies (the former Soviet Union, the former Yugoslavia) that it doesn't work. Euromoney won't turn Belgians and Italians into "Europeans" any more than rubles changed Chechens into Russians.

No matter. France regards a single currency regulated by a single European central bank (the equivalent of the U.S. Federal Reserve) as a way of subordinating Germany's economic power to a larger European will. Germany views the single currency as another symbolic disavowal of World War II and the danger that it might again try to dominate Europe. Says Fred Bergsten of the Institute for International Economics: "The Europeans have a bicycle theory of integration--it's got to go forward or it stops."

Why should we care? One reason is that, in trying to make their new money succeed, the Europeans might trigger global protectionism. "The majority European view is that the Euro is going to be a weak currency," says Bergsten. If so, its exchange rate would drop against the dollar. European imports would become cheaper, and U.S. exports would become more expensive. Europeans hope the devaluation would revive their economies. It probably wouldn't, because 60 percent of Europe's trade is within Europe and wouldn't be affected. But the currency depreciation might fan U.S. protectionism, as imports surged and exports stagnated.

It must be said that not all Europeans want a weak Euro. The Germans especially prefer a "strong" currency, with little inflation. To achieve that, Europe's new central bank might have to maintain high interest rates to persuade skeptical multinational companies and foreign-exchange traders to hold their new money. High interest rates in turn might further depress Europe's economy. The consequences could be more social unrest and protectionism. This picture isn't pretty either.

A single currency (the dollar) works in the United States because wages are flexible and workers are mobile. Workers move to find jobs; uncompetitive industries cut costs. Europe lacks these advantages. Wages are rigid, and workers stay put. The French don't migrate en masse to Germany. One way countries can offset differences in competitiveness is through flexible exchange rates. Less productive countries have lower exchange rates. A single currency would eliminate this possibility. The fixed-exchange-rate system of the EMS already shows how this can hurt countries. It partly explains the contrast between Britain and France. France fixes its exchange rate and has unemployment of 12.7 percent. Britain doesn't and has unemployment of 7.9 percent.

The great potential tragedy here is that, if adopted, the single currency would probably backfire politically. It would spawn disunity. Europeans--and especially the Germans and French--would quarrel over who's to blame for the single currency's failing to meet its inflated (and unrealistic) expectations. There would be disillusion with the larger idea of Europe. And that, too, would be bad for us: a weakened, resentful Europe would not make the partner America needs in the 21st century.

What can we do? Not much. American officials ought to stop treating the project with a respectful silence and express the skepticism that it deserves. Otherwise, our only hope is that the Europeans will come to their senses. The single currency is an economic version of the Maginot Line, the long string of fortresses that the French thought would prevent World War II. Like the Euro, it was a grand delusion.