BANKING ON THE EURO
FEBRUARY 24, 1997
The European Union recently released the design for the Euro, the single currency scheduled to begin implementation in 1999. Paul Solman explores the cultural, political and economic issues surrounding Europe's attempt to unify its economic systems.
JIM LEHRER: Still to come on the NewsHour tonight a Gergen dialogue and a Rosenblatt essay and Europe's effort to create a new currency. Our economics correspondent Paul Solman of WGBH-Boston has the Europe story.
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PAUL SOLMAN: Introducing an economic newcomer to the media. This is the Euro, the new currency that will supposedly serve as Europe's sole form of money a few years from now. First, in January 1999, the European Monetary Union and its central bank, housed in Frankfurt's just-completed Euro tower, will take control and freeze the value of member countries' currencies relative to each other.
After much wrangling over which national heroes would appear on them, colorful, faceless Euro notes will start circulating in 2002. By the middle of that year all national currencies will be canceled.
No more Deutsche mark? Farewell franc. For patriots, this could be quite a blow. So why is it happening? Well, for one thing, to streamline daily life. Right now, with 14 currencies in Europe and no fixed exchange rates, even simple transactions can be a pain. Imagine yourself as the belt seller here, facing the constant threat of ever-changing exchange rates, the need for new price tags to keep up with them.
JACQUELINE GRAPIN, European Institute: It's very much like if you have 50 states in the United States and you had 50 different currencies, and you see how continental it would be and how explosive.
PAUL SOLMAN: Even though exchanging currencies is no longer labor intensive, an estimated $20 billion a year in finance charges would be eliminated by having a common currency. Now there are broader reasons behind Europe's march to monetary union, For example, one unified currency makes it much easier to do business throughout the continent. If European firms have a bigger market to sell to, that means less red tape, lower costs, and ultimately more efficient firms. That's the theory behind other regional trade arrangements like the North American Free Trade Agreement, but Werner Hoyer, a deputy foreign minister of Germany, told our reporter, Murrey Jacobson, that Europe hasn't come together yet. And that's a problem.
WERNER HOYER, Deputy Foreign Minister, Germany: The Europeans do not really realize what the--what the pressure of the competition in the year 2000 and beyond will be, how important it is to get the European act together if we want to bear the brunt of that competition coming from Asia or North America.
PAUL SOLMAN: Or from the world economy in general. Now, in fairness, Europe has been trying to get its economic act together for, well, about a millennium. Go back to the Middle Ages. In those days the road to market might run through not just to France or Germany but Lord knows how many fiefdoms and lordships. At the border of Any, your trade caravan might be stopped by soldiers with pikes and told to pay an arbitrary toll of who knows how much to get the pikes turned away so the caravan could proceed. Thus was born both the turnpike and the dawning awareness that for merchants to thrive they need to know the cost of doing business, and that the lower the cost, the better, so as boundaries disappear, market areas grow.
Nation states were the next step. Absolute rulers created huge countries like England and France. These were the broadest markets to date, with lower, more predictable costs than ever before. As a result, the landlordly aristocracy was weakened, the commercial classes strengthened. In a sense, that's how capitalism was born and continued to grow for centuries.
Then, after the devastation of World War II, the drive began for a broader market still, a common market throughout all of Europe. Out of the war's ashes came the dream of putting, for instance, national coal and steel industries under a common authority. That was followed by the creation of the six-member European Economic Community in 1957. Since then, with a number of name changes, the addition of more members, and plenty of naysayers, Europe has edged ever closer to the goal of the unified economy. A common currency would be a next major step in that direction. There's one more economic reason behind the push for European Monetary Union, or EMU for short, in a word, self-discipline. Stephan Richter is a U.S. consultant to German Banks.
STEPHAN RICHTER, TransAltantic Futures: The Europeans really need to shape up. They need to do what we have done here in the United States, the ardent work of restructuring. And the EMU and the Euro are just name plates to get this message across. They are excuses, convenient excuses, for the politicians to transact the agenda of economic reform and change.
PAUL SOLMAN: And such change it's now felt is just what Europe needs. Every modern nation faces troubling temptations to please various constituencies by spending government money and thus risking the budget deficit, for instance, or to create jobs by spurring the economy, thereby risking inflation. In this respect, the European Monetary Union is designed to play the role of disciplinarian. The idea is to keep individual countries from spending too much money, for instance, in running big budget deficits. Thus, according to Monetary Union rules, each country's cumulative debt cannot exceed 60 percent of yearly economic output. Annual budget deficits can't top 3 percent. The union is to be located in Germany because it is the biggest and most disciplined economy in Europe, with the most independent monetary authority, the Bundesbank.
WERNER HOYER: I would not argue in favor of monetary imperialism or something like that, but on the other hand, I must say that the Bundesbank was and is a good example for the independence of a successful central bank. The politicians in Germany do not have their fingers on the money printer, and we would like to keep it that way in the European Union.
PAUL SOLMAN: In fact, Werner Hoyer says the anticipation of currency integration has already begun to move Europe in a better, more disciplined direction.
WERNER HOYER: It has led to a pressure which produced economic and social reforms which would have been unthinkable without this sort of pressure.
PAUL SOLMAN: And Stephan Richter says the new Euro currency has given politicians the cover to make difficult choices.
STEPHAN RICHTER: The perhaps greatest function of the Euro is that the politicians in Europe that are faced with the terrible task of telling their citizens we can't continue on the path of wonderful benefits, long vacations, high pay. All of these things don't add up. It's a terrible message to bring home to your electorate. Politicians are in urgent need to pin the blame on something, and they've tried blaming each other, the opposition the government, the government the opposition. That doesn't work. They have found a convenient whipping boy. It is called EMU, European Monetary Union.
PAUL SOLMAN: The EMU, with its Euro, as disciplinarian. It sounds ideal. There's only one problem. Europe's various national electorates are already up in arms. Economist David Hale has thought long and hard about that problem.
DAVID HALE, International Economist: When you impose a common currency, a single currency on a group of countries with very, very divergent economies, very divergent traditions of labor mobility and labor market flexibility, you create the risk that you do all this other damage. And given how high unemployment is in Western Europe right now, especially in France, we don't have room for a lot of--to play this kind of game. If this doesn't work, French unemployment could go to 15 or 16 percent. You could have, you know, demonstrations like you had in 1968. It could become quite dangerous. We've had already in the last year lots of strikes, and the French government has been so frightened of maintaining social peace it's backed down by and large.
PAUL SOLMAN: For example, just this fall the French government gave into the demands of striking truckers after doing the same to calm disturbances by striking transport workers a year earlier. Similar strikes have hit Italy, Spain, and Greece. And even in supposedly self-disciplined Germany unemployment has just hit its highest level since 1933 and strikes have begun there too. But, say many European economists, that's because their economies need more flexibility, a euphemism for lowering wages and benefits. Werner Hoyer thinks monetary union will hasten flexibility.
WERNER HOYER: We would have to make these adjustments in our economies and societies anyway with or without a European currency. We must be much more flexible in the global competition anyway, and this is sometimes hard to achieve in a country like Germany, where it took 40 years to extend the store opening hours by 90 minutes, where sometimes we had the feeling we are going to suffocate from the rigidities of our economic and social system.
PAUL SOLMAN: Okay. So lots of European economic thinkers yearn for currency union to hasten the belt tightening they think inevitable. And as it happens, many of Europe's political thinkers yearn for it too, but for a political reason; that is, to end the nationalist nightmares and insecurities of Europe's past.
DAVID HALE: It's impossible for a German to be nationalistic because whenever a German's nationalistic, people say, oh, here's Hitler coming back. So Germans have basically subordinated their own nationalism into this European idea. European federalism has been for Germans the alternative for their own nationalism which has been taboo since 1945. And for the French, who've got this other problem that they're insecure, indefensive, because of the 100 year history of Germany being occupied or invaded three times, you know, European federalism is a way to control Germany. And for the small countries, you know, Holland and Belgium, it's a bit of that, plus it's a way to have an effective market. For Finland it's a way to prove to the Russians we're part of Europe.
PAUL SOLMAN: In the end there are forces for economic union and forces against. Which has the upper hand, it's hard to say. But of the fifteen would-be member countries, only one at the moment, Luxembourg, is meeting all the conditions of entry, while another, Greece, meets literally none of them. Everyone else is somewhere in-between. Denmark and Britain, fearful of loss of sovereignty, have already said they're unlikely to join. Sweden has also expressed doubts.
An economically unified Europe under one common currency is still no sure thing. And to some observers, that's understandable. Currency union seems to entail an absolute supranational monetary authority, unanswerable to any of its member countries. That's easier to pull off in an era of absolute rulers than today's messy democracies which leads to a skepticism both political and economic about a truly unified Europe.
DAVID HALE: To really make this thing work we have to have far more political integration. You've got to have political union, not just monetary union. And then if you're British, that means you've got to pay massive tax increases to fund the Italian pension system. And why do you want to be responsible for pensions, of all these lazy, aging Italians, who've never saved a nickel in their life? Because the government gave them everything. You know, I mean, these are real questions. They're not just abstract questions. And because they get mixed up in national identity and national image, you know, they become that much more difficult.
PAUL SOLMAN: In other words, nationalistic prejudices and pride are still alive and well in Europe. And that could cause continued anxiety about currency union as the day of the Euro approaches.