Here comes the Euro: new challenger to the dollar.

The arrival of a common European currency is a watershed in the relationship of the United States to the new Europe. It is the most important event for European integration since the Treaties of Rome in 1957. It promises to be the most important event for the United States since communism collapsed.

Since 1989 the United States has been, in economic and military terms, the most powerful state in the world. Washington has imagined no serious challenge to American power until the distant future. Then China, or perhaps a recovered Russia, might test the United States. Europe is disregarded as politically divided, its economy overregulated and undynamic, historically "finished."

The euro defies that assumption. The single currency cannot help but pose a financial and economic challenge to Washington, and that eventually will take on a political weight which neither side now wishes to contemplate. Washington, and most Europeans, have seen European monetary union as a step taken in the context of Atlantic cooperation, which has benefited both sides for five decades.

This misses the point. For the first time in postwar history, vital and "sovereign" interests of the United States and Western Europe will become engaged in what game-theorists describe as "zero-sum" competition. It is "zerosum" because the gain of one will be the loss of the other. Both sides are accustomed to the "game" which has prevailed since the Marshall Plan and Europe's reconstruction, in which coalition and economic cooperation profited both sides. The arrival of European monetary union changes the game.

The world economic agenda will no longer automatically be set by the United States, through the Federal Reserve's power to set the key global interest rate. The European Central Bank will set its own interest rate for an economy that is nearly as large as America's, and is a more important trading power. Europe's single currency will automatically become a competitor to the dollar as an international reserve currency - an internationally recognized store of secure value - and as a denominator of international trade.

The European economies enjoy a trade surplus, while the United States has a $200-billion annual trade deficit and owes a trillion dollars abroad. The euro zone's attractions as a place to secure one's funds is obvious. The economist Lester Thurow wrote a year ago in the New York Review of Books that people will initially go into the euro to hedge their investments, "but if enough people hedge their bets and the dollar starts to fall, a run on the dollar could easily begin."

So long as oil, minerals, other commodities, and high-value manufactures such as commercial aircraft, are priced in dollars, the United States benefits from perfectly stable prices. The European Airbus, for example, like the European commercial space launcher, Atlane, is built with materials and components paid for in European currencies, but the product is sold in dollars. Boeing's material and labor costs are all in dollars. The company does not have the costly problem of "covering" currency movements it cannot control.

American corporations and banks functioning in Europe will enjoy the same benefits as European industry and banking, pricing their products in euros and being paid in euros. However, domestic-based American export industry will lose the dominant-currency advantage it has enjoyed for fifty years. The same will occur if the oil and other commodities producers begin to denominate their goods in euros.

The Japanese government, and some economists elsewhere, have proposed that Europe, the United States, and Japan set exchange-rate "target zones" so as to reestablish the stable international currency relationships which existed under the Bretton Woods system - ended when the United States "floated" the dollar in 1971. Washington refuses, following the neoliberal economic orthodoxy of the last two decades, which says that only the market can decide currency values. Therefore the dollar, the new euro, and the yen now will all float against one another. (The Canadian ambassador to the OECD, Kimon Valaskakis, has recently drawn attention to the mathematical proposition in systems theory "which claims that when three systems co-exist in the same environment the result is chaos.")

The United States has known only currency stability. The dollar's value was fixed to gold until 1971, and it remained the dominant world currency even under the floating exchange rates system that followed. The dominant political position of the United States today is integrally linked to the dominant position of the dollar, as well as to the country's economic and industrial preeminence - which the Europeans are also challenging.

The euro's threat is to that dominance. European monetary union is not designed to make a political challenge to the United States. It is motivated strictly by the Europeans' interest in further integration of their own economies. It nonetheless is a major step toward reestablishing a world of balance, where there is more than one center of economic power, and - inevitably - of political influence. Washington, and the Europeans, must come to terms with this, which may not be easy.