Monetary Momentum

The euro is only a stage in Europe's integration, which began forty years ago with the six original members of the Common Market, which was designed to keep the Federal Republic of Germany within the Western orbit and to stand up to the Soviet Union. It prospered during the "golden age of capitalism," and marked time thereafter. Over the years it gathered nine new members, including Britain, losing in cohesion what it gained in numbers. Integration got a new impetus in the late eighties through massive deregulation, which was part of the search for a single market. The Maastricht Treaty, signed at the beginning of 1992, was to crown this edifice with a monetary union. The single currency was also aimed, once again, at keeping Germany tied to the West, this time after the fall of the Berlin wall and reunification.

Admission to the E.M.U. finally proved less difficult than had been assumed. Not that the would-be members did not pay a hell of a price. The so-called Maastricht criteria-on price or currency stability and public deficit-were used as a pretext for a tough deflationary policy throughout the region, as part of the already mentioned attack on social benefits. Ultimate acceptance was, in the end, easier than expected because by 1997 the continental economies had emerged from depression, and the one test that could have barred many countries, notably Italy and Belgiumthe limitation of accumulated public debt to 60 percent of G.D.P.-was interpreted very loosely. Thus, nobody was rejected: The eleven are in, and Greece has been promised membership at the start of the new millennium, while Britain, Sweden and Denmark have chosen to stay out for now.

If the people have paid the price in living standards and the European idea has suffered because it is now associated in the popular mind with the public-spending squeeze, the new monetary authorities emerged from this slimming cure in a very comfortable position. Incidentally, Europe's Central Bank, with its headquarters in Frankfurt, will be less constrained in its monetary activity than is Germany's Bundesbank or the U.S. Federal Reserve. Wim Duisenberg, his French deputy and four other members will constitute the executive board; these six, along with the eleven heads of national banks, will form a governing council, and neither board will have a real political counterpart. True, the French have managed to set up a Euro-1, where ministers of finance will meet regularly to discuss matters of common interest. But the Germans, whose voice has been decisive throughout the preparations, made it quite plain that this was not even the embryo of a European government.

Unhindered, the Frankfurt bankers will have plentiful funds at their disposal. The eleven were heavy foreign traders, but the bulk of their trade, carried in euros, will now be "domestic."Trade with outsiders will account for about 10 percent of the domestic product, roughly the same share as in the United States or Japan. With their foreign trade thus curtailed, the countries of Western Europe will no longer need a good proportion of their currency reserves, now held mostly in dollars. Should they throw them suddenly on the market while other countries shift partly to the euro, the dollar could be in trouble.

Yet the real problem is the long-term impact. Nobody can say whether the Frankfurt bankers will favor a strong euro (recommended by the Germans) or a weak one that is good for exports (advocated by the French); probably the former. Some facts, on the other hand, are certain. The eleven can be compared with the United States in terms of output or value of foreign trade; actually, they show a big surplus, contrasting with America's even bigger deficit. But the role both play in the world's finances is very different. The dollar accounts for about half the world's foreign transactions and nearly 63 percent of world currency reserves. Its privileged position can be summed up simply: The United States is the only country that can extricate itself from a foreign payments crisis by printing its own money. If the euro were to match the dollar as a means of exchange and as a favored reserve currency, that privilege would be more than threatened. The question is whether the advent of the euro heralds the end of the half-century of undisputed U.S. domination, first of the Western, then of the whole world.

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