Banking on the euro to gain in value requires patience

January 11, 2001|By Jack Seymour

WASHINGTON -- Next Jan. 1, citizens of the 12 countries that have accepted the euro will have euro coins jangling in their pockets, euro notes stuffing their wallets.

By the end of February 2002, dual circulation will have ended and the old marks, francs, lira and other national currencies will have disappeared, good only for scrapbooks.

The euro has existed until now only as a "shadow quote," in the words Gunter Burghardt, the European Union's chief representative in the United States. It is cited only in bank statements and in shops and restaurants alongside the equivalent amounts in national currencies.

The euro's early dive and continued floundering in the financial markets since its introduction Jan. 1, 1999, has bolstered the arguments of many skeptics in the 15-member EU and abroad. Predictions of a strong euro challenging the dollar and vexing financial managers in the United States and Japan proved false. Instead, doubts have continued about the euro's viability and the problems it can pose for fiscal management in the euro countries.

The European Central Bank and a committee of finance ministers of the members of the European Monetary Union (EMU) manage the euro. Transfer of authority from national banks to the central bank weakens the monetary tools that a government can use to rein in a hot economy or stimulate a lagging one.

But the hope is that over time the increased transparency of pricing that comes with a single currency and the efficiencies of eliminating exchange transactions will strengthen the single market of goods, labor and capital.

Critics have pointed to Europe's many barriers of language, culture and tradition that prevent the kind of flexibility enjoyed by the U.S. economy. For example, American workers in a depressed area can move relatively easily to a booming one, helping to even out economic ups and downs.

But European labor market rigidities may be easing. Surprising improvements in labor mobility have developed in the past decade. Ireland, for example, has experienced growth rates not seen in living memory. As its economy takes on a high-tech edge, workers, especially young people, have been streaming back to the "Celtic Tiger."

Short-term problems -- both political and institutional -- remain for the euro and the EMU. In the EU, only Britain, Denmark and Sweden remain outside the EMU, fearing loss of sovereignty or flexibility over fiscal management.

The question of whether to join is central in British politics, and London's continued hesitance is a divisive factor in the continent-wide debate about Europe's future.

EU enlargement eastward will bring additional members that may have difficulty meeting the stringent requirements of fiscal and budgetary control to qualify for the EMU, although the ability to qualify remains technically a condition of EU entry .

For the longer term, prospects for the euro and the EU look bright. Successful enlargement will add 100 million people to the existing market of 375 million.

Americans will benefit from greatly facilitated currency transactions next year and, later this decade, from an enormous growing market for their goods, with a single currency covering much of that market. Tourist and business transactions will be easier. Introducing the euro as a real currency will provide a "psychological boost" to Europeans, Mr. Burghardt predicts.

He expects the euro, its value rising in the markets, to reach parity with the dollar in 2002.

Jack Seymour, a retired diplomat formerly posted at the U.S. Mission to the European Union, is a consultant and senior fellow at the Atlantic Council of the United States.

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