Making The Euro Work

The euro is an audacious experiment of historic proportions. In one bold move, the creation of a single currency makes Europe once again a contender for global economic leadership. If the euro delivers on its promise to remake Europe into a competitive powerhouse, the fulcrum of economic power in the 21st century could eventually shift back to the Atlantic basin, away from the now troubled Pacific Rim.

But first, hard political work to lay the foundation for the euro has to be done. Europe must break down workplace, tax, and regulatory rigidities before the new currency can unite the region. The success of the euro lies in the hands of politicians, not economists, central bankers, or chief executives.

A conspiracy of silence threatens the euro's success. To date, Europe's politicians have portrayed the advent of the euro as a mere accounting device, entirely financial in nature. Once monetary and fiscal policies are centralized and locked in place with a single currency, individual governments will have power over only taxes, labor, and regulation. Unless they use these levers to promote growth, the euro will fail.

So far, most European politicians have shown little courage. In curbing budget deficits for the runup to a single currency, they raised taxes instead of cutting government spending, thereby hurting job creation. They bowed to union pressure and refused to make work hours more flexible. They rebuffed corporate requests for help in lowering their costs.

European corporations are not waiting for the euro. By threatening to shift new investment to Eastern Europe and the U.S., European companies have persuaded local unions to curb wage demands. Corporate profits have been strong for three years, and European stock prices are soaring.

The euro is Europe's last best chance to vie again for global leadership. The currency can be the driving force that makes Continental corporations globally competitive. Or not. Prime Minister Margaret Thatcher withstood more than a decade of strong political opposition to her efforts to make Britain competitive. European politicians have shown no such grit. But they must. Japan once towered over the global economy, only to sink into economic despair because its politicians could not make hard economic decisions. The saddest sight in Western Europe today is the thousands of its best and brightest abandoning their countries for Silicon Valley and London.

There is no doubt that should the euro succeed, it will make Europe a much more formidable--and welcome--competitor to the U.S. By 2003, when marks, francs, lire, and pesetas are totally replaced, the euro could begin to rival the dollar as a major reserve currency. A new euro-denominated capital market could develop. The $6.4 trillion euro economy, second only to that of the U.S., will probably run big trade surpluses and be a net creditor to global financial markets. The result? The U.S., the world's largest debtor, running the world's biggest current-account deficits, could easily find that other nations are less willing to hold dollars or dollar-denominated assets. The free ride the U.S. gets on its chronic trade deficits and its low savings rate could soon end. This would not be a bad thing. A strong euro might puncture America's boastful triumphalism and force the country to deal with some of its serious problems.

Creating a new common currency is an extremely difficult task. It took the U.S. decades to accomplish. Individuals relinquish their familiar stores of value very reluctantly. Europe's political leaders must show their people they can do what is necessary to unleash the great potential of the euro. This is a moment in history all of Europe must seize.

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