Wall S Journal
Wall Street Journal December 31, 1998
The advent of the euro arguably will be the most ambitious monetary experiment since the launching of the Bretton Woods system at the end of World War II. Its effects on Europe and the world financial order will be anything but modest.
But all this is predicated on the ability of Europeans to make the new European Monetary Union work for them. And even if it does, there's nothing in the euro's user kit that explains how it will halve 10% unemployment rates, produce 3.5% annual GDP growth or create a European Microsoft.
The present outlook for 1999 is not especially bright. By some estimates, economic growth is expected to slow to 1.5% from 2.9% in 1998, a year in which Europe was said to be in "recovery." As the magazine the European asked this month, "If the best that can be offered at
the apex of the economic cycle is a fall [in unemployment] from 11.8% to 11.2%, what hope is there in a recession?"
Rising unemployment in Europe could trigger a strong anti-euro backlash that national politicians will have to respond to. The European Central Bank, whatever the wisdom and prudence of its board, will be a target and indeed already has claimed the attention of Germany's feisty finance minister, Oskar Lafontaine.
Tax harmonization, however, is not inevitable. Nor is the feared integration juggernaut that, according to the Euroskeptic caricature, flattens elected government as it rolls unaccountably toward its superstate agenda. Anyone who doubts this ought to sit in on a Euro-summit to see how much more disagreement than agreement arises on any given issue.
In many of their concerns, however, Britain's Euroskeptics are more than reasonable. They are right in noting that Europe's political leaders see the euro as a stepping stone to further economic and political integration--or "ever closer union."
They are right in questioning the wisdom of measures that would restrict the ability of EU members to pursue competitive advantages.
And they are right in asking not just what the economic consequences of such measures would be (which are predictably adverse), but what are their implications for democratic accountability, and for the flexibility that is so central to competitiveness.
But they are misguided in thinking the worst inevitable, and they have grossly underestimated the potential benefits in terms of improved economic efficiency from a single currency by simplistically dismissing euroland as a problem currency area. They are too often prone toward dispensing the proverbial baby with the bath water: The EU holds together not merely because of treaty commitments, but because on balance those commitments still bear a relation to the political and economic interests of the members. It is hoped that those most wary of the euro will not forfeit their much-needed influence over these important debates by remaining, arms crossed, on the sidelines.
Monetary union may be unprecedented, but its success is not so much a matter of serendipity as sound macroeconomic management by national governments. Germany and France have been arguing for a link between the dollar and the euro through trading bands. As a step toward a more stable global monetary system, it is an idea with much to recommend it. But considering the source, it more likely stems from a fear that a "strong" euro will hurt European industries. European industry has far more to fear from high taxes and labor market regulations than from a strong euro.