Why? Because members of the world business community–including Americans–have woken up to the fact that something remarkable is happening in Europe. If all goes according to plan, by 1999 the currencies of many of the major European nations will be locked into a single system. By 2002, francs, marks, guilders and maybe pesetas and liras will be supplanted by a new currency–the euro. European Monetary Union, known to all as EMU, is the biggest thing that has happened to the world financial system since the Bretton Woods agreement of 1944. To hear Europeans tell it, EMU will mark the emergence on the world’s stage of a new political and economic force. At Davos, Jacques Santer, the president of the European Commission (the central bureaucracy of the 15-member European Union) said that he looked forward to the day when the EU would be a ““global power.’’ And it’s an article of faith among Europeans that they won’t increase their standing in the world without having a currency that can look the mighty dollar in the eye.
How did the drive for a single currency come about? And what does it mean to the United States? EMU is the latest manifestation of a process of European integration that was born in the wreckage of 1945. Every phase of integration has been accompanied by the cries of those who said it would never work. But it has, because the founding fathers of the EU saw that the best way in which a passionate desire for European peace could be rendered concrete was through the least passionate discipline of all: economics.
First, the Europeans surrendered sov- ereignty over their coal and steel industries so that they would no longer be able to use them to make war. Then, in the 1950s, they built a common market that provided outlets for German industry and protection for French agriculture. In 1992, the EU created a ““single market’’ so that goods, capital and labor could flow free- ly across the continent. But so long as prices were expressed in different currencies, that market would never be perfect. Some producers would not sell in other countries because they didn’t want to be bothered with the foreign-exchange has- sle; in other cases, different currencies meant that prices fluctuated widely in different places–in the jargon, prices weren’t ““transparent.’’ On the economic level, EMU is meant to ““complete’’ the single market.
Not every European country will join EMU in 1999. (Take a breath: here comes some Euro-jargon.) Under the Treaty of Maastricht of 1991, only those economies that have ““converged’’ sufficiently will be in the first wave of members. Maastricht set out criteria to test whether convergence was real; principal among them, reducing a nation’s budget deficit to no more than 3 percent of gross domestic product. In large part, that meets the demands of Germans that other economies should be as well managed as theirs, and hence that the new currency should be as hard as the rock-solid Deutsche mark. But the downward pressure on government spending has led to yelps of pain throughout Europe, and those cries have been heard across the Atlantic, where American exporters are nervous about their European markets. ““If there’s one thing that American business should be worried about,’’ says Robert Hormats of Goldman Sachs, ““it’s that a tighter fiscal policy will slow European growth.''
In fact, until the last few weeks, few Americans had focused on the effects of EMU at all. ““We’re behind the curve,’’ says Hormats. ““A lot of people didn’t think EMU would happen. Now those people will have to wake up to the fact that it will likely happen in just two years.’’ Top American policymakers have an iron rule that monetary union is a matter for the Europeans, not for them; just last week, Treasury Secretary Robert Rubin ducked questions on EMU. Privately officials admit to a number of concerns, though none of them, at this stage, has been elevated to the level of a worry. First is the fact that the euro could rival the dollar as a reserve currency. But whether another country wants to hold another nation’s sovereign debt depends, at the limit, on the creditworthiness of the debtor. If the American economy continues to be strong, there’s no reason foreigners shouldn’t buy its debt (which could be denominated in euros as easily as in dollars). Second, policymakers wonder if the euro will really be as ““hard’’ as the Deutsche mark. A euro that was undervalued against the dollar would give European exporters an advantage, and would provoke cries of rage from aerospace and high-technology companies.
Euro-enthusiasts dismiss such fears. In their vision, the single currency happens on time, and greatly reduces the ““transaction costs’’ of buying and selling goods and services. Desperate to be considered ““full’’ Europeans, countries like Poland and the Czech Republic quickly join EMU. European governments keep their budget deficits under control, risking fines if they do not. Hitherto profligate countries like Italy are able to do this, in effect, by saying that the doctor–or, in this case, a new European central bank–ordered it. The EU reduces its costly social protections, but not to a level that its officials sniffily dismiss as ““American.’’ Economic growth takes off, benefiting American exporters as well as European producers. Since all those under 30 think of themselves as ““European,’’ they move freely to where the jobs are, whistling Beethoven’s ““Ode to Joy’’ as they go. The single currency leads to a deepening of capital markets, which provide start-up funds for the software wizards who now decamp to California. European versions of Bill Gates fall from the trees like ripe plums.
Something like that dream could happen. But so could something less pleasant. For example, EMU takes place, and most of the present EU countries join it within five years. But Italy continues to elect governments that won’t touch entrenched social benefits. Rome is first fined by the central bank, then expelled from the monetary system. Right-wing Italian mobs burn German businesses. Britain stays out of EMU, and sees a catastrophic drop in foreign investment. The euro itself is a weak currency, and American firms begin to demand restrictions on European imports. Meanwhile, the French and Germans, desperate for export markets, make economic alliances with the Arab states, Iran and China. The long post-1945 unity of ““the West’’ is fractured.
Even to sketch such a scenario is tantamount to treachery in continental Europe, where support for monetary union has become the ultimate in political correctness. As an American economist remarked at the World Economic Forum in Davos, Switzerland last week, there’s no ““plan B.’’ The whole of Europe is now absorbed with a giant throw of the dice, one that could remake, for good or ill, much of the world’s political and economic structures. Big stuff, indeed–and time that Americans started to plan for it.
