The Euro's Ripples

Euro notes and coins started replacing national currencies in Germany, France, and 10 other euro zone countries on Jan. 1. And despite widespread predictions of long supermarket lines, confused customers, and computer chaos, the changeover--the biggest logistical operation ever undertaken in peacetime--came off with few hitches. The Continent's consumers readily accepted the new money and by the end of Jan. 2 were already using it for the bulk of their cash transactions. Romano Prodi, president of the European Commission, hailed the euro's arrival as "a great day for Europe." The new currency will "stimulate the economy and boost growth," he said.

Sharing a single currency will certainly help knit together the 12 euro zone economies into a unified whole. But plenty more remains to be done before the Continental market, with its 302 million citizens, becomes as efficient and productive as the U.S. In particular, say business folk, what European governments need to do is harmonize their different national regulations and standards, coordinate their economic policies more effectively, and push through far-reaching structural reforms--especially on the labor front. European business people and financiers are hopeful that the new currency's arrival will encourage economic policymakers to do just that.

Now that it's easy to compare the spectrum of prices, taxes, and social security contributions across national borders, businesses will be tempted to make new investments in countries where costs are lowest and regulation is lightest. That means governments will come under increased pressure to cut taxes and trim red tape. Unfortunately, general elections are scheduled in France and Germany later this year, and the last thing the left-of-center governments in Paris and Berlin want to do at the moment is force through unpopular structural reforms, such as labor market liberalization. But there is a growing feeling among politicians of all persuasions that far-reaching change cannot be avoided now. If that is the case, Europe's new single currency has already had a very positive effect.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE