The Euro cometh: bringing unity or fratricide?

On May 2 in Brussels, in one of the boldest experiments of modern political economy, the European Union (EU) gave birth to the European Monetary Union (EMU). On January 1, 1999, the EMU will launch the new pan-European currency, the euro. Eleven countries - Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Austria, Finland, and Ireland - are the founding members of what economists are calling Euroland. Greece is slotted to join by 2001. Britain, Sweden, and Denmark have opted not to join for now. With the launch of the euro the currencies of the Euroland states will be locked into a fixed set of exchange rates. The euro will become the official bookkeeping currency. On the eve of 2002, the euro will begin to circulate as notes and coins, and the national currencies will be retired from circulation. They will cease to exist except as souvenirs. The European Central Bank (ECB) will replace the central banks of the member nations and determine monetary policy for all of Euroland.

With 290 million people, 19.4 percent of the world's economic output, and 18.6 percent of world trade (as compared to the 270 million population of the United States, with its 19.6 percent of world GDP, and 16.6 percent of world trade), aggregated Euroland represents tremendous economic and financial power. No longer will the U.S. dollar be the sole world currency reserve, fine-tuning monetary policy to its own advantage. Euro boosters claim the EU will succeed in balancing the global center of gravity, pulling it away from the U.S. which has become an arrogantly titanic "king of the world." Supporters in France, always attuned to questions of grandeur, like to say that this millennial event is "the greatest thing to happen in Europe since Charlemagne."

European leaders have been talking up European economic integration with considerable persistence since the end of WWII. The Treaty of Rome proclaimed union as an eventual goal. The different incarnations of the pan-European association have never stopped talking about it. Picking up where Konrad Adenauer and Charles DeGaulle had left off, Francois Mitterand, sensing an uncannily familiar pull of the economic tide toward Germany, pushed in the 1980s for a monetary union that would "control" the Germans and their hegemonic Bundesbank. Ever since the "roaring" twenties during which tens of thousands of deutschmarks were needed to buy groceries, fear of inflation has been deeply etched into the German psyche. French politicians, on the other hand, manifest a symmetrically strong need to keep their hand on the economic pump, always ready to prime it with a little more currency flow when political circumstances demand. Consequently, the two countries do not exactly see eye-to-eye on fiscal policy. But France has always known how to push Germany's buttons with regard to residual war guilt and guilt about German economic success. In 1991, Europe's odd couple managed to corral each other and most of the rest of the Europe into the Maastricht treaty, which set the ground rules for the euro.

The last seven years have been lean ones for the plump governments of the EU that committed themselves to monetary union. To qualify for membership, annual budget deficits had to be reigned in to 3 percent of GDP, and the aggregate of public debt brought down to 60 percent of GDP. This was done in the midst of an economic stall in which unemployment has remained near 12 percent across the continent. The political stresses of this belt-tightening have been considerable. In France they led to the ouster of Jacques Chirac's parliamentary majority and abandonment of many of his government's plans to begin dismantling France's vast social insurance system. For their part, the German electorate, having had to swallow the huge costs of unification, is disgruntled. Quite unenthusiastic about the loss of their beloved deutschmark, they have made the once invulnerable Helmut Kohl, up for re-election in the fall, start to run scared. Tensions have run high from Italy to Finland as governments figure out ways to reign in spending while not getting voted out of office. The euro-chasers have all continually promised that monetary union will be precisely the thing that will bring good times to all.

No doubt Europe's forecasters foresaw the macro-economic cycle that is now showing itself. Europe, it seems, is entering into fat years, even before the euro is launched. Economic growth is picking up, inflation remains low, business investments and even that intractable beast, consumer confidence, are looking up. Even unemployment, the bete noire of the past decade, has ticked ever so slightly down. The American boom economy and the Asian slump have actually helped pump capital into the stock markets and provide dynamic trade opportunities in both directions. The future looks rosy.

There are strong economic reasons beyond the traditional wishful thinking to suggest that the euro will succeed. With a unified currency the structural inefficiencies that constrained European business will vanish. An Italian manufacturer of kitchen tiles will now be able to do business with suppliers and buyers from anywhere in Euroland without having to fear being knocked into unprofitability by a sudden shift in exchange rates. Efficient and profitable, powerful pan-European businesses will emerge and grow through these newly delivered economies of scale, and become competitive with American and Asian companies.

But what about the politics of unification? It took something like ten minutes for the EU to approve the EMU in Brussels. It then took twelve hours to deal with Chirac's insistence that the European Central Bank president be French. The other ten EMU'ers had all agreed beforehand on Wim Duisenberg, the sober former Dutch central banker. Chirac's dogged persistence, however, almost derailed the entire proceedings. A compromise was reached when Duisenberg agreed to retire of his own free will after "about four" years when Chirac's candidate, Jean-Claude Trichet, the president of the Bank of France, would take over and remain in place for the full eight-year appointment. The unseemly row clearly embarrassed and annoyed most of the EU representatives. Even though in the end the markets shrugged it off, not a few see this as an ominous sign of what lies in store.

More than Chirac's or even France's nationalist ego is at stake. The reason French politicians like to manipulate the money supply is not simply because they like to play cause-and-effect with interest rates. Increasing the money supply is an efficient way to respond to very intense and very real political pressures. This option will no longer be available for the French or for any other national government in Euroland. As it now stands, Duisenberg and then Trichet, both equally conservative fiscally, will be setting a single and (one assumes) fairly high interest rate for the euro. Ireland or Portugal, whose economies are truly surging right now, and who want to temper inflation, have wildly different needs from those of France or Spain, which are very keen on generating job growth. There is no political process by which these conflicts can be resolved at the Euroland level. Will French sales managers go to Portugal or Denmark for job opportunities? Will Spanish engineers move to Ireland? or Finland? or Austria? Up until now there has been very little of this kind of labor flexibility in Europe. One could be optimistic about such mobility happening, at least with the upper level professional cadres and possibly younger Europeans. However, the bulk of Europeans are unlikely to want to move for jobs or opportunity.

More troublesome will be the political responses as one country perceives its economic hardship to be at the cost of another country's prosperity. National governments will be very constrained in how they respond to any such crises by way of taxes or labor legislation. They will need to remain within the budgetary parameters established by the EMU and avoid further aggravating unemployment. It is one thing for strikes and protests to be against a national government. But the tone and intensity of such activities change considerably when they are directed at another country, especially one which has been a traditional enemy in war. The nagging phenomenon of xenophobic right-wing politics in most of the Euroland nations gives a vivid picture of just how the wrong set of political chain reactions could get going.

The europrophets have been offering monetary union as a way out of the problems that have dogged the Old World's political economy for a decade. If it is true that Europe is in for seven fat years, then they will have seven years to figure out how to deal with the political pressures that intensify during an economic downturn. This is far from a sure thing. A real pan-European budget and extensive political coordination will have to be forged among groups of people who historically have been unable to come to consensus on issues trivial or urgent. At this point, with the Duisenberg fiasco fresh in mind, there is little reason to be highly optimistic. One hopes that as much progress will be made on this front as possible. The notion that Europeans are too civilized to go to war with each other is a lethal mistake that was made by many twice already this century. As recently as 1962 and the end of the Algerian war, French generals were seriously plotting to drop paratroopers on Paris and orchestrate a coup d'etat. Could it happen again?

Jorge Pedraza is professor of French and Comparative Literature at Williams College.