|
|
|
|
European Affairs
Letter to the Editor
Political Will Is Still Needed to Make the Euro a Success
In the last issue of European Affairs, two articles addressed various implications of the introduction of euro bills and coins in the 12 member countries of the European single currency zone.
Alasdair Murray addressed "euro-creep" and how the leaders of the "out" countries are hoping for an easy transition to the euro inside the zone, in part to build domestic support for their own future membership. Arne Jon Isachsen's article took an economic and business perspective. Both articles bring out the importance of politics in the creation of the euro and its future.
Little was said, however, about the political will that is going to be required, beyond the issuance of bills and coins, to make the euro a success. While I, too, share Isachsen's optimism that the euro could be a challenge to the mighty dollar in the future, I am not optimistic that we will see a particularly mighty euro before the next decade.
There are three important attributes of a currency - a unit of account, a medium of exchange and a store of value. Murray and Isachsen provide evidence of the euro's success in the first two categories.
The issuance of bills and coins certainly provides a boost to the euro's role as a trading currency. Trade and financial instruments denominated in the euro are already showing strong growth. It is this attribute that lies beneath the "euro-creep" described by Murray.
Unfortunately, the issuance of euro bills and coins is not sufficient to ensure the currency's success as a store of value. It is hard for me to understand why the voters in the three "out" countries, particularly in Britain, would want to embrace membership in the single currency zone until this third attribute is assured.
Investor confidence is the key ingredient lacking for the euro's success. Despite all the ills that have befallen dollar assets of late - recession, Enronitis, a huge current account deficit, etc. - the euro has not been able to shine as an alternative store of value.
In fact, the pound, the Swiss franc and the Norwegian krona have been bigger beneficiaries. Strengthened investor confidence in the euro will require institutional credibility, structural reform and time.
Murray pointed out that lack of confidence in euro zone institutions was a British concern. It is also a concern of the global financial markets. It is not clear that the European Central Bank is appropriately structured or empowered to manage the euro zone's economic and financial affairs. Enforcement of the budgetary rules of the EU Growth and Stability Pact is looming as a test of fiscal discipline and institutional credibility.
As pointed out by Alan Greenspan, the IMF and many EU leaders, structural reforms aimed at lifting productivity and growth are a must in order to attract new domestic and foreign investment. Opening up domestic markets to foreign ownership through mergers and acquisitions is also needed.
It is not evident, however, that euro zone member countries have the political will to implement these needed changes. Such reforms will certainly not happen in 2002, given the long list of national elections and relatively high unemployment rates.
Time is not on the euro's side. Even before the existing institutions are able to build international credibility, there are plans to complicate the structure. The terms of EU membership for many central European countries are due to be finalized by the end of 2002. More countries are likely to join the single currency zone by the middle of this decade.
It is not clear, however, that there is either the time or the political will to follow through with these ambitious plans, build institutional credibility and implement the needed economic reforms before the end of the decade.
The distant outlook for the euro is positive, but there is little on the horizon to suggest a major improvement in investor confidence. Lacking this, the euro's positive attributes in terms of a unit of account and a medium of exchange will not be sufficient to challenge the might of the dollar.
Eric A. Nickerson
Senior Currency Strategist
Bank of America