The (almost) single market: the euro is now the currency used by 12 of the European Union's current 15 members; its common usage across national borders is an important step towards the creation of one, Europewide economy.

The deutschmark has gone; so have the schilling, the franc, and the peseta. There ate no more lires in Italy, drachmas in Greece, or guilders in the Netherlands. The British pound is still hanging in though, and so are the krone in Denmark and the krona in Sweden.

Most of the well-known currencies of Europe have disappeared. At the beginning of January 2002, a majority of members of the European Union (EU) started to use the euro as a single unit of currency accepted everywhere. Three years earlier, the euro had gone into use as a "virtual currency" in electronic transfers among banks.

The euro is now in use in 12 of the EU's 15 member states; together, these dozen countries form what's called the euro area. (Some refer to it as euroland, but this conjures up images of a theme park). No currency has circulated as widely in Europe since the time of the Roman Empire, which went out of business almost 1,600 years ago.

The modern idea for the euro was put forward in the 1980s and was formally adopted in 1991 by the Maastricht Treaty. But, the notion is not accepted by everyone, even in those nations that use the euro. Sweden and Denmark have both had referendums and rejected dropping their own currencies in favour of the euro. There has been no referendum in the United Kingdom on the euro.

The single currency is supposed to make trade and commerce among EU member states more competitive and efficient. It's easy to see why.

Suppose you assemble washing machines in a factory, in Spain. You might buy the electric motors from a manufacturer in Dusseldorf, Germany. Perhaps, the drive belts come from Antwerp in Belgium. The paint could be mixed in a plant in Turin, Italy. Among other places, you might sell your finished product in Salzburg, Austria, or Oporto, Portugal. So, your Spanish factory will be buying and selling goods involving half a dozen separate currencies that can fluctuate in value relative to one another. You're going to need a small army of accountants just to figure accurate input costs. You'll need another small army to work on pricing.

A single currency is supposed to benefit consumers. Let's suppose you live in Strasbourg, in north-eastern France and your washing machine just shot a cloud of smoke out the back and started sounding like a can of nails. Strasbourg is right on the German border. With a single currency it's easy to compare prices on new washing machines and go for the better deal. In the past, you might find a lower price in Germany but you'd have to convert your French francs into German deutschmarks. The bank would charge you a fee to do that, so it might not be worth the bother.

On a smaller scale there's the example of the continental edition of The Guardian (U.K.) newspaper. On the front page, the newspaper carries a table showing its price in various countries. With a dozen different currencies it was hard to work out who paid what. Converted to euros it turned out that readers in Greece and Portugal were paying 1.67 [euro] a copy, while those in Finland and the Netherlands were paying as much as 2.61 [euro].

Experience suggests that clever consumers will benefit on higher-ticket items. They'll do their homework and find the best price on, say a diamond engagement ring. Then, they'll either take a trip and make the good deal or use the low-price evidence to beat a local supplier down.

The same process works for big manufacturers. Instead of buying goods and services from local suppliers, they'll shop around for the best deal they can get continent-wide. This brings up the spectre of what's called "the race to the bottom." Instead of everybody's income and standard of living rising towards the higher levels the reverse happens. Wages and profit margins ate driven down to the lowest level.

In the past, national governments sometimes played around with the exchange rates of currencies to gain short-term advantages. By devaluing its national currency a country can gain a trade advantage because it lowers the price of its exports, making them more attractive to foreign buyers. What tends to happen though is that the importing country adjusts its currency value, so the advantage is short lived. With everybody using the same currency this tactic is taken off the table. The experts tell us that this makes investors happy. They can now put money into building a plant ha another country without worrying that currency devaluation will ruin their investment.

The list of good things claimed for the euro grows larger. Economists say a single currency across national borders makes it easier to control inflation. This, ha turn, gives investors, workers, and consumers peace of mind.

The former President of the European Central Bank, Dr. Wim Duisenberg, points out that the euro zone single market is not perfect--yet. "Even if people in [the Netherlands]," he said ha a recent speech, "see that it is cheaper to buy a car ha Germany, they ate not allowed to do so without paying taxes to the Dutch authorities." Dr. Duisenberg said there are plenty of other regulations, controls on the mobility of labour, different approaches to taxation, and distribution problems that get in the way of a completely equal euro area market. He believes the introduction of the euro will speed up the elimination of obstacles to cross-border activities.

Of course, not everybody is happy with the euro. The Danes voted not to adopt it in 2000. Sweden went through a hard-fought referendum in 2003, with the voters giving the euro the thumbs down. The Brits haven't made their minds up one way or the other yet.

The government of Prime Minister Tony Blair favours joining the euro area, but the great British public does not share the enthusiasm of its leaders. There's a certain amount of stubborn nationalism involved in the opposition. Many people see giving up the pound as demolishing an important national symbol of what was once the world's superpower. But, there's more to the dislike of the euro than misplaced national pride.

The biggest complaint is that joining the euro zone robs individual countries of the flexibility in economic policy to deal with local problems. For example, the European Central Bank (ECB) sets interest rates that affect the cost of borrowing money to buy a house, a car, or yes, a washing machine, whether you live in Athens, Greece, or Dublin, Ireland.

Go back to the introduction of the euro in 1999. The Irish economy was buzzing furiously and had been for several years. Its government had used relatively high interest rates to try to cool business activity and stifle inflation. At the same time, the German economy was in a rough patch and needed low interest rates to stimulate growth. The European Central Bank set a one-size-fits-all interest tate of 4.5% in January 1999. So, Ireland had to slash its interest rates when it really needed to raise them while Germany had to struggle with a rate that was higher than it wanted.

It is this lack of control over local policies that turned Swedes off the euro. In September 2003, the people were asked to approve a government plan to join the euro zone. The voters decisively said "Nej" (Swedish for No). In total, 56 percent of Swedes voted against the euro, while a strong majority favoured staying in the European Union. All of Sweden's major political parties favoured the euro. So did the country's biggest companies. The people living in Stockholm's wealthiest district voted 75 percent in support of joining the euro zone. It was the ordinary folk who objected.

When asked why they voted against the euro, people cited loss of sovereignty as the number one reason. Swedes believed that moving to a single currency would be another large step along the road to political integration. They did not want to hand political and economic power to Brussels; they wanted to keep it in Stockholm, their capital. Of lesser importance, but still well up the list of objections, was the fear that Sweden's generous welfare state would be threatened.

SUGGESTED ACTIVITIES:

1. French Prime Minister, Jean-Pierre Rafarrin, has commented that his country's economic growth was not going to suffer in order to satisfy "accounting equations of some office or other in some count{y." This has infuriated many in the European Union, such as the Austrians and the Dutch, who have struggled painfully to meet the terms of the Stability and Growth Pact. Brussels forecasts that the French deficit will reach four percent of GDP in 2003. It could be higher in 2004 because France is pressing ahead with a tax cut and a major program to build new aircraft carriers, nuclear submarines, and fighterjets. Prime Minister Raffarin is hoping to stave off fines by using a murky let-out clause exempting states from the deficit limit in "exceptional circumstances."

But, the Dutch finance minister, Gerrit Zalm, has threatened to go to the European Court unless France is punished. "We gave up the sovereignty of our own currency because we had a very good treaty. If this treaty is not applied, then we are in serious trouble, " he said. Open a clipping file on French and German failure to meet the terms of the Stability and Growth Pact to follow the progress of this story.

2. Britain remains outside the euro zone. Currently, the U.K. has an unemployment rate of three percent, the euro zone's is nine percent. The United Kingdom's economy has been growing in the 2.5 to three percent range for several years, while the euro zone's growth has been one percent. The British government of Tony Blair wants to join the euro zone but has postponed indefinitely a referendum on the issue. How would you vote if you were in Britain today?

Websites

A Euro Homepage--http:// www.econ.yale.edu/ ~corsetti/euro/

Euro Information (U.K.)--http://www.euro.gov.uk/ home.asp?f=1

European Central Bank--http://www.ecb.int/index. html

No Euro--http://www.noeuro.com/

THE THREE PERCENT RULE

The Stability and Growth Pact is at the core of most objections to Europe's attempt at creating a single market. This is an agreement among members of the euro area to balance individual national budgets. Those who don't like the Pact, and that seems to be most politicians, call it an economic straitjacket. The rules are very clear. If a government runs a deficit of more than three percent of Gross Domestic Product (GDP) it faces having to pay a fine as high as 0.5% of GDP. There is an escape clause in the case of a severe recession, but The Economist says it is of little "practical use."

The idea behind the pact is to stop national governments from undoing the work of the European Central Bank in controlling inflation. The fear of the bean counters is that if one or two governments run up huge deficits, the massive borrowing they will need to do to cover the gap between income and spending will push up costs for everyone else.

At the time of writing, Germany and France are presenting the bosses in Brussels (the EU's headquarters) with some awkward choices. Both economies are sputtering and their governments have repeatedly broken the three-percent-rule.

If the economy is in a downturn, the last thing governments should be doing is increasing taxes, or cutting spending, but that is what the Stability Pact forces them to do.

The European Commission can fine Germany as much as ten billion euros, which would not be helpful to an economy that's stuck in the glue. It can pretend not to have noticed Germany's failure to balance its budget, but that would make a mockery of the roles. It can pressure Germany to tighten its spending and risk prolonging a recession in Europe's biggest economy. It can re-write the Stability Pact and thereby make enemies of the country's that have abided by its rules. Brussels does not seem to have a good option available.

Meanwhile, a poll done for The Daily Mail (U.K.) in the fall of 2003 found that 70 percent of Germans would vote to keep the deutschmark if a referendum were held on the issue. What irony. The Stability and Growth Pact was mostly a German initiative in the first place.

STABILITY

Under the Maastricht Treaty, the European Central Bank (ECB) controls the monetary policy of the European Union. Monetary policy is a complex tool that is used to stimulate or cool down an economy. It has three main components: money supply, the availability of credit, and interest rates.

Money is made up of currency (paper banknotes and coins) and bank deposits. If there is too much money in circulation the effect will be to cause prices to rise--inflation. If there is too little money in the system, the economy may contract causing unemployment. Controlling interest rates is another ECB function that affects how cool or hot the economy becomes. The number-crunchers in the ECB aim for stability. Perfection, in their world, is an unvarying inflation rate of two percent a year.

To achieve its goals it is essential that the central bank be completely independent of political interference. The ECB has that independence.

EURONUMBERS

* On 1 January 2002, the euro went into circulation.

* There were 50.6 billion euro coins and 14.3 billion euro bills.

* The total weight of euro coins (239,000 tonnes) is equal to the weight of 24 Eiffel Towers.

* Germany's allocation of euro bills (4.3 billion) if stacked on top of each other would be ten times higher than Mount Everest.

* Distributing all the euro cash in a single day would have required the use of 478,000 vans.

SHARED CURRENCIES

Common currencies have been used before by different countries. For several decades, most industrialized countries were part of what was called the "gold standard." During the 19th and early 20th centuries, trade imbalances were settled in gold bullion. The system dissolved after the stock market crash of 1929.

Britain and Ireland shared the same currency for a while. The Lat-n Monetary Union existed from 1865 to 1914. This involved Dance, Belgium, Italy, Switzerland, Greece, and Bulgaria. The West African nations that are members of ECOWAS (Economic Community of West African States) are supposed to enter a monetary union on 1 January 2004.

FACT FILE

At the start of 1999, the exchange rates of national currencies into euros was fixed irrevocably for countries in the euro zone.

FACT FILE

The euro is the second most widely used currency in the world after the U.S. dollar, albeit with just one-fifth of the dollar's share.

FACT FILE

In the fall of 2003, one Canadian dollar bought 64 euro cents.