Euro-tunnel vision.

For years the elites who gather each year at Davos have been talking about the inevitability of a European common currency. With the January 1, 1999, deadline comes the hard part - can they make it work?

Amidst the snow-capped serenity of this alpine ski resort in eastern Switzerland, 1,000 CEOs, presidents, and other business leaders gather with 200 senior economic and finance ministers and assorted scientists and journalists from around the world each year to meet, talk, and relentlessly network. Since its inception in 1971, the annual meeting of the World Economic Forum held in Davos has become the global economy's Cotillion Ball - a chance for the economic elites to take on the weighty issues facing the world during a week-long series of informal discussions and private dinners and meetings where the real action takes place.

The 1998 annual meeting coasted on its reputation for providing high drama. In 1990, Klaus Schwab, the WEF's founder and president, orchestrated the meeting of Chancellor Helmut Kohl with East German leader Hans Modrow, opening the door to German unification. In 1992, Nelson Mandela appeared on the same platform with F.W. de Klerk and Chief Buthelezi of the Inkatha Zulu organization and renounced the African National Congress's nationalization program. Two years later, all eyes were riveted on PLO leader Yassir Arafat and Israel's Foreign Minister Shimon Peres as they clasped hands in evident display of reconciliation. Although no oratorical spellbinder. Chinese Vice Premier Zhu Rongji captured participants' imagination three years ago when he assured his hosts that China was committed to economic reform anti integration with the world. This year's oxygen was supplied by Hillary Clinton, who delivered a well-crafted if partisan apologia for her husband's programs. The first lady gave credit to President Clinton for NASA, but not for Fast-Track's failure, and blamed the Republican-controlled Congress for misrepresenting the administration's healthcare scheme. Viewed through U.S. business leaders' eyes it was familiar stuff. The Europeans had mixed reactions. Many admired her resoluteness but couldn't imagine the unelected Frau Kohl, Madame Jospin, or even Britain's Cherie Blair, who shares with Hillary Clinton a similar legal professional career, making stump speeches. "Are we to view her as a policymaking person?" asked a French banker, shrugging his shoulders. "Is that why she's here?"

If she did not make new friends, at least Mrs. Clinton made no new enemies. The same could not be said of Larry Summers, U.S. Deputy Treasury Secretary, who irritated a few non-U.S. executives present with such grandiose gems as "not in 500 years has a nation been this dominant in business, technology, and culture." Even the normally pro-American Davos crowd found the chest-pounding a tad too triumphalist for taste. "By comparison, House Speaker and erstwhile flamethrower Newt Gingrich, who appeared on the same panel, came across as an internationally astute, culturally sensitive diplomat," observed Stephan-Gotz Richter, president of TransAtlantic Futures. "Gingrich," he said, "found himself in the somewhat improbable role of making the U.S. likable again."

This wasn't the only Davos disconnect. A year ago, the forum consensus was that Asia was the hot growth area and would likely continue to be so. Europe would muddle along, groping toward monetary union without much economic boost to jostle it further. This year, the financial crisis in Asia dominated the discussions, and some even claimed to have seen it coming. North America and Europe were seen as bright spots with Commerzbank chairman Martin Kohlhaussen, assuring all that "the worst is over." With less than a year to go before the introduction of the euro, the mood for monetary union was decidedly upbeat, almost Europhoric. Chancellor Kohl dismissed all speculation about membership of the EMU, now slated for 11 of the 15 EU countries. (Those not joining are Sweden, Denmark, and the U.K., with Greece ineligible to join due to failure to meet the Maastricht criteria.) "The euro will be a currency of lasting stability," he said. "This will be assured by the independence of the European Central Bank (ECB)."

These may prove brave but hollow words, due to the fact that there is an embarrassing struggle for the very soul of the ECB, which is due to be up and running as early as May of this year. Wire Duisenberg, the president of the ECB's forerunner, the European Monetary Institute, looked to be a shoe-in as the ECB's first president. A Dutch Alan Greenspan, Duisenberg is Germany's favored candidate and was seen even by other EU members as the one figure who could ensure the fledgling currency's credibility. On November 5 last year, France broke with the prevailing consensus by putting forward a rival candidate, Jean-Claude Trichet, governor of the Bank of France. Both sides have rejected a compromise that would have split the ECB president's eight-year term. At Davos, Duisenberg bitterly rejected the compromise as a breach of the Maastricht Treaty. But this is the least of it. The tiff underscores the way in which the ECB is far from being the lofty apolitical organization modeled on the Bundesbank the politicians claim it to be.

Trichet's candidacy is no mere fit of French pique. Before the 1992 referendum on the Maastricht Treaty, President Mitterrand assured his fellow citizens that, contrary to the express language of the treaty, European monetary policy would not be determined by faceless central bankers, but would be guided by political oversight governed by concern with unemployment and inflation. At an EU summit in 1996, France added an employment chapter to the treaty emphasizing that employment was a parallel goal to price stability. The French government earlier inserted amendments at a Council of Ministers meeting that established a "stability council" as an advisory counterweight to the ECB. Hence the question over who heads the ECB is more than a preference of personalities. It may have a crucial bearing on how the organization responds when the euro faces its first crisis. For example, if the economies of the 11 initial members start to slow, to what will the ECB respond: slow growth, widening deficits in one country vs. another, or wage acceleration in one country vs. constancy in another? It was this issue of sustainability that prompted 155 German economists to publish their letter to German and British newspapers calling for a delay of the euro until such fundamental questions could be worked out.

Nonetheless, both the financial markets and the business leaders at Davos believe that EMU will go ahead on schedule on January 1, 1999, largely because of the overwhelming political will behind it demonstrated by Europe's leaders, chiefly Helmut Kohl, whose very future political career is at stake. Furthermore, neither the news media nor the financial markets have accepted the possibility that something might derail this process at the last moment. Most politicians and central bankers argue that any delay now would result in total abandonment of EMU. What they fail to appreciate is that the lack of faith in the sustainability of EMU at this time presents a fundamental flaw. Horst Siebert, president of the Kiel Institute of World Economics and member of the German Council of Economic Advisors, told business leaders at Davos that there are few precedents of a common currency among nation states that remain sovereign. "In monetary union," he argued, "the monetary suit is no longer custom-tailored for each nation, but the standard size must fit all." In other words, if one country is in a boom and another is in a recession, they both must cope with the same policy.

This skepticism has seeped into general EU public consciousness. For the first time in the community's 40-year history, a majority' of its citizens are questioning its very existence. This sentiment comes on the eve of the EU's most profound move to integration - the launch of the euro. According to a report by Demos, a left-of-center British think tank with ties to Downing St., a majority of Europe's citizens are opposed to the planned single currency and do not feel a part of the community. The findings are based on a European Commission survey that polled 2,000 citizens of each member nation. Only 41 percent of Europeans think their country has benefited from EU membership. Almost as many - 36 percent - feel their country has lost out. While a majority oppose the euro, three-fourths expect it to be introduced anyway. The survey also revealed that most Europeans have an overwhelming feeling that they know little about the EU and how it works. The Demos report depicts the EU and its institutions as elitist and out of touch.

If monetary union goes ahead as planned, it will likely be the result of political pressure from above. Hence much depends upon central bank credibility and the euro's attractiveness to investors. Adherents say the ECB will be as tough or tougher than the EU central banks it supersedes. They also assert that the euro bloc will be less dependent on external trade than any of the EU national economies. External trade will account for 10 to 15 percent of GDP compared to 30 to 40 percent for the larger EU national economies. This makes the EU comparable to the U.S. Some Davos-goers are convinced the new common currency will displace the dollar as the world's sole reserve currency. Given its size and liquidity, the new euro zone, said Yoh Kurosawa, chairman of the Industrial Bank of Japan, would present an attractive alternative to the dollar. "I hope you can digest our huge investment," he said. France's minister of economy, finance, and industry, Dominique Strauss-Kahn, went further in contrasting Europe's currency stability with that of Asia's. "Now, nobody can contemplate instability," he said. He added that Europe is no longer as burdened by welfarist policies. "This view of Europe as the bad boy is very old-fashioned."

Yet the downward forces that may act on the euro may easily predominate. Whether or not the ECB is as disciplined as the Bundesbank, there are other factors that may weaken the euro, such as demand weaknesses and high debt levels among national governments that need to be addressed. Having a single currency in a zone of different economic cycles that are imperfectly synchronized will limit the EU's capacity to coordinate their economies. External imbalances, divergent degrees of competitiveness, and increased capital flows suggest a euro that will be more volatile than the former national currencies. The social impact on the euro and on EU integration, for example, has yet to be played out. France's recent move to a 35-hour work week, argued Nestle chairman Helmut Maucher, raised questions about labor market reforms and their impact on competitiveness. "Having the currency is not enough," said Roll-Ernst Breuer, chairman of Deutsche Bank, who expressed concern about the lack of preparation for the euro among mid-sized companies. "Our own research shows that within this group, 75 percent are not yet well prepared. They see it simply as a bookkeeping effort."

Yet much the same could be said of U.S. companies, the majority of which seem unsure as to how to gauge European monetary union on their business. "If EMU works for Europe," says Summers, "it will work for the U.S." A single currency will reduce transaction costs and likely drive down prices in the short term as distribution inefficiencies are exposed. But as the date for its launch draws closer, the issue of sustainability and stability becomes larger. Europe's political leaders believe any delay will result in a complete unraveling of any hope of monetary integration. Skeptics who ask for a two-year delay to sort out fundamental questions are being drowned out or told that their questions will be resolved at a later date. A source of intense pride to the elites and anxiety to the average European, the euro appears to have a rendezvous with destiny. A successful launch may well be in the U.S.'s long-term interest. A fumble may create financial uncertainty which may aggravate instability elsewhere.