What is the euro really worth? It's time to start asking. Europe's new single currency has lost 28% of its value against the dollar since its launch nearly two years ago. The euro's decline is making gas prices even more expensive for German and French consumers while seriously eroding profits for U.S., Japanese, and other multinationals doing business in Europe. Hard political decisions are necessary to stop the drop and turn the euro into something it is not yet: a true international reserve currency that maintains value over time.
There is no question that the euro's achievements to date are impressive. A single currency has created a unified capital market in Europe, promoting investment. A massive wave of corporate restructuring is under way, thanks to the euro. Europe has one of its highest growth rates in decades, and its unemployment rate is finally beginning to go down.
But the markets want more. To stem the euro's decline, here is what must be done. The problems are basically political. European governments must seriously begin to coordinate their major economic, tax, and labor policies. In response to strikes protesting the surge in oil prices, France caved and cut taxes on energy to lower prices. Germany refused. There was no European oil policy, just as there is no European policy on labor, spending, immigration, or technology. A unified currency must be backed by unified policy.
Europe also needs a real central bank. At the moment, the European Central Bank is a misnomer. The ECB holds the equivalent of $43 billion in non-euro reserves while its 11 member central banks hold on to $331 billion. Will the real European central bank please stand up? The euro will probably never be a strong currency if reserves that could be used to back it are distributed among various central banks throughout the Continent. Reserves must be centralized in the ECB just as they are in the Federal Reserve.
If the euro is to become a strong currency, European political leaders must not only coordinate their policies, they must get them right. Capital is flowing out of Europe into the U.S. because a gap has opened up in relative growth rates. The U.S. is changing into an information economy that permits higher noninflationary growth. European companies want access to that growth and the technology propelling it. This structural change goes beyond the business cycle.
European leaders must move faster to get Europe into the New Economy. They must change the tax laws to encourage entrepreneurs and to stop its young from fleeing overseas. They must encourage investment in information technology, now running at half the annual U.S. rate. Clearly, the success of mobile telephony and advances in the mobile Net show that Europe can do it. But politicians must do more, quickly, to help the euro.
The euro is a grand experiment. But it remains half-finished, a demi-currency waiting for political decisions to complete it. It took the U.S. decades to switch from regional currencies to the dollar. Europe doesn't have this kind of time.