To:go4it who wrote (109)
From: John Barendrecht Wednesday, Jun 18, 1997 6:40 PM
Respond to of 79909
Europe's economy crucial to Euro's fate
LONDON - As politicians scramble to ensure that European economic and monetary union begins on schedule Jan. 1, 1999, there is plenty of handwringing on all sides of the complex issue.
More than anything, plans for a single European currency known as the Euro are part of a political initiative whose roots lie in the debris of the Second World War.
The goal of the monetary union is an extension of the European Union's aim - to ensure lasting peace by integrating markets and economies as the first steps toward what some see as eventual political union.
"This is all about monetary matrimony," says Paul Horne, chief international economist at Smith Barney Inc. in Paris.
The 15-country European Union has come a long way, establishing a single market for the free movement of money, goods and people.
But while political will - especially that of German Chancellor Helmut Kohl, who has made the Euro a personal crusade - has helped drive the process along, the project's economic goals seem to be receding.
Despite a deal this week that smoothed over disagreements about whether Europe should adopt economic policies that favor unemployment reduction or promote price stability, France and Germany - the monetary union's two biggest participants - are headed in opposite directions.
The French support higher wages and jobs programs. That is at odds with Germany's insistence on fiscal prudence.
"In a world in which you have very highly integrated economies, countries can't sustain these differing directions," says Bruce Kasman, chief European economist for J.P. Morgan and Co. in London.
Nations that want to adopt the Euro have until the end of this year to meet targets of low inflation, narrow budget deficits and falling public debt - which for some countries require politically unpopular tax hikes and spending cuts.
France reopened the debate Tuesday by saying the targets should be interpreted more loosely for countries that are close but not quite there, Associated Press reported.
Some economists like David Hale of Zurich Kemper Investments Inc. in Chicago warn that the monetary union could "start and then collapse two years afterward."
By locking countries into a single currency, the monetary union deprives them of the ability to devalue their currencies - a major shock absorber when addressing slow growth, low productivity or an economic crisis.
A weakening currency can make a country's products more competitive, boost corporate profits and create jobs.
Yet, if the release mechanism of exchange-rate movements is taken away, these shocks have to be absorbed through some other medium.
"It's called unemployment," says James Lister-Cheese, an economist at Independent Strategy, a London investment-consulting firm.
This wouldn't be the case if Europe had other ways of mitigating the impact of economic shocks, such as a mobile labor force, uniform tax and regulatory structures and a better system for fiscal transfers between rich and poor nations.
In Europe, labor mobility is constrained by language and cultural barriers, Kasman says.
By contrast, 17 per cent of Americans move every year, 40 per cent of them across state borders, Hale notes. In Canada, fiscal transfers from Ottawa account for nearly two-thirds of Newfoundland's income.
In addition, any economic slowdown would deepen if the new European Central Bank maintained a tight monetary policy.
"One of the greatest threats to the monetary union's survival is that it threatens to condemn large areas - probably entire countries - to devastating unemployment," says Robin Aspinall, an economist at National Australia Bank in London.
Lister-Cheese says disenchanted voters could easily elect politicians who promise to abandon the union.
But pulling out would be messy. The Maastricht Treaty that enshrines the union's framework doesn't provide for divorce.
And any country that pulls out would face the daunting task of re-establishing its own currency and monetary credibility.
"The markets aren't going to give it the benefit of the doubt," said Ravi Bulchandi, an economist at Morgan Stanley and Co. in London.
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Wonder if you pulled out of the Euro whether you would need gold backed currency to re-establish credibility?
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