One for All, and All for One

Europe is about to conduct one of the most ambitious monetary experiments in history. Here's hoping the single currency stays in the right hands.
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On Jan. 1, 11 European nations accounting for 25% of world output will begin one of the biggest economic experiments of modern times.

Germany, France, Belgium, the Netherlands, Luxembourg, Italy, Spain, Portugal, Ireland, Austria and Finland will adopt a single currency called the euro. The new currency, it is planned, will coexist alongside national currencies until 2002, when it becomes the only currency in circulation.

All in all, Europe's leaders must feel pretty pleased with themselves, having constructed something as grand as the single currency in just over 10 years. But if any of the 290 million Europeans adopting the euro are having prelaunch nerves, history provides them with little in the way of comfort.

For Europe has been the site of many ambitious projects that have ended up in the trash can. The euro, if it ends up in the wrong hands, will prove as economically ruinous as socialism, as internally divided as the

League of Nations

and as pointless as Esperanto.

This sort of skepticism is certainly not widespread in Europe amid the prelaunch hype. The majority of the continent's businessmen see the single currency as a way to make their region more competitive and prosperous. And it's hard to argue with such goals.

But the single currency was not born out of an overwhelming desire to set up a


single currency zone in which businesses could thrive. Instead, it was chiefly

Francois Mitterand's

way of hemming in a reunified Germany.

That's not to say that the single currency scheme will not have significant economic advantages -- it undoubtedly will. The absence of foreign exchange transaction costs will save 0.2%-0.5% of euroland GDP per year, according to one

Economist Intelligence Unit

report. Already, the lower interest rates that have come with the euro have slashed the cost of capital in many countries. And competition will surely get a boost when all goods and services are priced in one currency.

In addition, the Germans and the Benelux countries have made sure that countries adopting the euro have their economies in order. The so-called


criteria demand that, under normal growth conditions, budget deficits are kept below 3% of GDP. Yes, some countries cheated in meeting some of the criteria -- and some were let off altogether on others -- but, overall, the belt-tightening has been impressive.

What's more, the newly formed

European Central Bank

will be run by proven technocrats with hard money reputations. For proof, read Ned Stafford's profile of

Wim Duisenberg

, the ECB's first president, who represents the epitome of this ideal.

But a common currency is not a cure-all, and when it comes to competitiveness and job growth, Europe looks decidedly worse off than America. What's most worrying is that Europe is now run by people who favor economic policies that could seriously weaken the credibility of the euro, and undermine public support for the currency.

That's a key risk: Around 70% of the people in the euroland countries support the euro, according to a September poll. Considering that the unemployment rate in the eurozone is still 11% -- more than double the rate in the U.S. -- and has been above that level for many years, that's pretty amazing.

That high jobless rate is partly due to the tight fiscal policies and monetary policies that were needed to set the stage for the euro. But it's also because of Europe's rigid labor markets and the high costs of doing business there.

As Europe's rate cut in early December shows, central bankers are now willing to loosen monetary policy -- and quite rightly, as the winds of deflation are strong. But Europe's new leftist leaders show very little sign of grappling with the continent's structural problems, despite the fact that, in the U.S., market liberalization has led to an amazing -- and noninflationary -- jobs boom.

Germany's finance minister,

Oskar Lafontaine

, made it clear earlier in December that he wants to use the European Union to raise tax rates in member countries that have lower tax burdens than Germany. And he has plans to deprive the right of dissenting countries to veto such proposals. This is a clear shot aimed at the U.K.'s more progressive tax policies, and France's socialist government is backing him all the way.

That the Franco-German alliance is heading in this direction bodes ill for the euro. The single currency can only work in the long term if the markets believe that the new union is to be backed with sensible free market policies and has the support of the people.

The pro-euro sections of the business community have placed all their hopes on the currency staying in sensible hands. A November letter signed by more than 100 U.K. business leaders and published in the

Financial Times

called for Britain to join the euro. But it was on the grounds that it would bring prudent fiscal management, low inflation and low interest rates -- certainly not higher taxes.

But it's always worth remembering that many of the individuals who built the euro were never interested in setting up a new gold standard. It wasn't just locking Germany into a pan-European structure. The original euro-visionaries wanted to build a huge power center in Brussels that would protect Europe's social democracy and advance the building of a full-blown United States of Europe.

As early as 1988,

Jacques Delors

, the former head of the European Commission and a socialist trade unionist, gave a speech in which he talked about a "quiet revolution" that would mean 80% of socio-economic and financial legislation "flowing" from Brussels in five years.

Delors-like Federalists are alive and well in Europe and they have had more room to act since

Helmut Kohl

, the more sober-minded former German chancellor, was voted from office.

Clearly, the battle for the soul of the euro is not going away.

One currency means many fights.

This story was originally published on Dec. 9.