The New Coin Of The Realm

The other day I visited my local bank and bought $30 each of French francs, German marks and Italian lire. I have no immediate need for them or the Spanish pesetas, Greek drachmas or Dutch guilders that I might also have purchased. I just wanted some historic mementos, because after Jan. 1 the national currencies of 12 European countries with 305 million people are scheduled to disappear in favor of the euro. Although I have long doubted the euro's benefits, the moment is undeniably historic.

Never before have so many people in so many countries simultaneously adopted a new money, says Guenter Burghardt, the European Commission's ambassador in Washington. Since 1999 stores and banks have priced in both euros and national currency; now people get the real stuff. The conversion is a massive operation. The European Central Bank (ECB) has minted 52 billion new coins (170 for each person in the "euro area") and printed 14.9 billion bank notes (49 per person). The total value is 649 billion euros, which, at present exchange rates (1 euro = 90 cents), is about $584 billion. What a chunk of change!

Throughout history, money--its creation or destruction--has always been a political act. Indeed, the euro isn't Europe's first single currency. "Charlemagne had a common currency in Europe. He made every part of the Holy Roman Empire use the penny, which was about 90 percent silver," says economist Angela Redish of the University of British Columbia. This was in A.D. 794. His Holy Roman Empire stretched from northern Spain and Italy through France and Germany to parts of eastern Europe.

Once the empire weakened, the power to mint coins splintered among local lords, princes and bishops, says Redish. A prime benefit was profit: the ability to put less silver or gold into coins than the metals were worth. (Extracting profits from the manufacturing of money is called seigniorage, after seigneur--"lord" in French.) When French kings later consolidated their power, coinage became a royal monopoly in 1360. Thus does politics rule money.

The euro has been controversial precisely because it engages vast political ambitions. To critics, it represents a step toward "a European super-state that will submerge the individuality of the European nations in an unwieldy federation, hobbled by bureaucracy [that imposes] a crippling burden of regulatory and other costs on Europe's economies," wrote one British commentator. Having reservations, three of the European Union's 15 members--Britain, Denmark and Sweden--have so far rejected the euro.

To its enthusiasts, the euro means economic vitality and political unity. Companies won't have to convert all those different moneys. Easier cross-border price comparisons will compel firms to become more efficient. As cross-border investment rises, money will increasingly go to the most deserving companies. Economic success will strengthen a European consciousness. "People will now have it [the euro] in their pockets and feel it," says Burghardt.

Let's hope he's right. But I'm skeptical, because I fear that (a) the euro won't create major economic gains and that (b) it will trigger a political backlash. So much economic power is being centralized in Frankfurt and Brussels--the homes of the ECB and the European Commission--that local and global economic discontent may focus increasingly on "Europe" as the villain.

The euro doesn't address Europe's two main economic problems: high unem-ployment and expensive welfare states, threatened by aging populations. Even after several good economic years, the EU's unemployment rate averaged 7.6 percent in 2001. Governments cling to social protections (restrictions on firing, high jobless benefits, steep payroll taxes) that, perversely, discourage companies from hiring and the unemployed from seeking work. Only last week the EU required companies with 50 or more employees to "consult" with workers before layoffs--a humane-sounding measure that will further damage job creation.

It's likewise unpopular to trim benefits for retirees, even though government budgets (as a share of gross domestic product) are 50 percent higher than in the United States. And pressures will intensify. By 2050 there will be only two members of the working-age population (15-64) for each retiree, estimates the European Commission. The ratio now is four to one.

Of course, you can't expect the euro to solve all of Europe's problems. The trouble is that it may solve hardly any. A single currency tends to work best if labor is mobile and wages are flexible. People move from places with few jobs to places with many jobs. Wages fall in places with high unemployment. Unfortunately, this doesn't describe Europe, which remains compartmentalized by language and culture. A monetary policy--the ECB's regulation of interest rates--that suits countries with high unemployment may spawn inflation in countries with low unemployment.

These conflicts may unleash more bad feelings than good. The problems will multiply if--as expected--the EU admits many of the 13 other countries that want to join, from Poland to Estonia to Turkey. It will be hard for them to qualify for the euro and, if they do, harder to manage the currency. And a badly managed euro would be bad for the world. Already it may have aggravated the global recession. The ECB has kept interest rates fairly high to dampen inflation and demonstrate that the euro is as sound as the old German mark and the dollar. Unfortunately, this has curbed Europe's ability to offset the U.S. slump. The ECB "greatly underestimated the slowdown," says economist David Hale of Zurich Financial Services.

The euro seems a triumph of common sense--one currency for one market. But it may be a case of overreaching. The controlling delusion is that destroying a standard symbol of a country's sovereignty (its money) can create a European consciousness. Opinion surveys by the European Commission periodically ask whether people feel more national or European. The results consistently affirm the stubbornness of national identity. In one poll, 89 percent said they felt attached to their country, only 56 percent to Europe. Succeed or fail, the euro won't soon change that.