The euro isn’tsmall change

By Harry Keaney

Americans, including Irish Americans, could be forgiven for feeling confused at times about happenings in Europe.

Only in 1973 did Ireland join the European Economic Community, which had been created in 1957 under the Treaty of Rome. In latter years, the European Economic Community, or EEC, became known as simply the European Community, or EC.

Then, in March 1979, the European Monetary System began. And on Nov. 1, 1993, the Maastricht Treaty set out the steps toward full European economic and monetary union, or EMU.

Now comes another new European term, "Euroland," the Disney-sounding name given collectively to 11 of the 15 European Union countries that will begin operating under a single currency in January.

This development, only about seven weeks away, has been described by some economists as the most significant in Europe since World War II. It will have an impact not only on every person living in Europe but also for anyone visiting or having any business dealings with the continent.

Ireland is among the most enthusiastic countries about the concept of European monetary union. The others to join on in January will be Germany, France, Spain, Italy, Finland, the Netherlands, Portugal, Austria, Luxembourg and Belgium.

Britain, concerned, in part, over a loss of economic sovereignty, will not be among the first batch of countries to join. Some Tory party members are among the most vociferous opponents of Britain’s entry into European monetary union, although the current ruling Labor Party, under Prime Minister Tony Blair, generally seems more amenable to the idea.

This raises another question: Could Ireland, the English-speaking gateway to Europe, with its myriad of investment attractions, including its lenient corporate tax structure and its International Financial Services Center in Dublin, somehow benefit from Britain and "the City," as London’s famous financial district is known, being outside of Euroland? Possibly, but in time, it is expected, Britain will become a part of European monetary union — when politics, as much as economics, allows it to — probably some time after 2002.

What happens?

So what, exactly, will happen in January? In short, the euro will become legal currency, and the implementation of a single European monetary policy will start. Individual countries within Euroland will no longer have sole control over such issues as interest rates, economic policy and fiscal strategy.

By this stage, the conversion rate for the exchange of the currencies of individual countries into euros will be known. Dr. Sirkka Hamalainen, a member of the executive board of the new European Central Bank, based in Frankfurt, Germany, told the Echo at a recent conference on the euro in Fordham University that these rates would be announced in December.

The new European interest rate, which will apply throughout all countries of Euroland, will be announced in January.

Although an array of cashless, paper and electronic business transactions throughout Europe, and between Europe and the rest of the world, will take place in euros after Jan. 1, national notes and coins will simultaneously remain as legal tender.

But on Jan. 1, 2002, new euro notes and coins will be introduced, resulting in a massive changeover of everyday retail activity to the new currency. It’s at this point that visitors to Ireland will find themselves actually handling the new currency; no longer will they be exchanging dollars into punts, but rather into euros.

For a period in early 2002, shops in Ireland will price their goods in both euros and punts.

The dual legal tender period will last from Jan. 1, 2002 to June 30, 2002. Then, the legal tender status of national currencies will be withdrawn, thus completing the changeover to the euro.

Benefits and costs

So what will be the result of all this? There are, of course, two sides to the euro coin. Irish interest rates are expected to drop, which is bad news for those Irish Americans with money in simple demand deposit accounts in Ireland. As to what will be the exchange rate between euros and punts, no one really knows until the conversion rate is announced next month..

Corporations doing business throughout Europe will have the convenience of dealing with just a single currency. And, of course, within Europe, there will be the disappearance of fees for exchanging one European currency for another, as well as the disappearance of unfair pricing advantages resulting from currency distortions.

Price comparisons will become just a simple matter of looking at the figures. Euro credit cards will, in time, make their appearance. And virtual European shopping centers are expected to open on the internet.

From 2002, Americans visiting Ireland who wish to venture farther into the European mainland won’t have to worry about obtaining a new currency for every country they visit..

However, European businesses will have to become more like their U.S. counterparts, trimming inefficiencies and becoming more flexible in order to simply survive. Europe’s fragmented banking system, in particular, will have to consolidate, which means small banks in European member nations will probably be gobbled up by larger competitors. Today, there are about 10,000 credit institutions in Europe.

U.S. media coverage

To date, much of the mainstream press coverage in the U.S. in the run-up to European Monetary Union has bordered on the negative. This has been mainly because many observers thought it would never happen. Also, some see the euro as a threat to the dollar, which is currently the world’s most important trading and reserve currency.

Commentators have also pointed to the recent emergence of left-of-center leadership in some European countries. Traditionally, left-leaning parties have been wary of the unfettered free market-oriented approach necessary for the success of the euro. Indeed, the Wall Street Journal, in a commentary on Oct. 27, stated that at a recent summit of European Union leaders in Austria, only two of the summiteers, Prime Minister Jose Maria Aznar of Spain and Taoiseach Bertie Ahern of Ireland, lead governments that can be labeled "conservative" with any legitimacy. (The Journal obviously had only monetary policy in mind. The Journal also recently lavished praise on Ireland for its recognition and successful exploitation of the benefits of supply-side economics, particularly in adopting extremely attractive corporate tax rates.)

At Fordham University’s Graduate School of Business’ recent conference on the euro, Dr. Dominick Salvatore, professor of economics at Fordham, noted that American economists have said and written little about the euro. He said this was partly because they did not know much about it. "And when you don’t know much, silence is golden," he said.

Salvatore said he felt that asking whether the euro would be successful was a "silly question."

"If you want it to be successful and are willing to pay the costs, then Europe will have the euro," he said. He added that there would be significant adjustments and costs in the short and medium terms. "But in the long term it will have significant benefits for Europe," he said, adding that benefits include no exchange costs, no volatility among currencies, and more rapid economic and financial integration. The euro would also impose discipline on member countries, he said.

However, Salvatore also pointed out that member nations will lose their monetary and exchange rate independence. There is also the question of what to do with regional areas within Europe that suffer from economic downturns, or, in euro parlance, "asymmetric shocks." Salvatore pointed out that labor mobility is low in Europe, and "not much will be possible in the way of fiscal distribution."

"Labor mobility will change but it will take a few years," he said.

An endemic problem throughout Europe is its unemployment, although Ireland, the so-called Celtic Tiger, is, at present at least, a glaring exception. Salvatore insisted that European labor markets have "to loosen up," a euphemism for firms being allowed to hire and fire and keep labor costs down.

Salvatore also said Europe can no longer afford its excellent social welfare system.

In her presentation to the Fordham conference, Dr. Hamalainen of the new European Central Bank said that the convergent process toward European monetary union showed "the degree of consensus that exists in Europe."

She also said that European unemployment had nothing to do with the euro. Unemployment, she said, had to be solved by structural measures.

Hamalainen repeatedly pointed out that the main focus of the new European Central Bank would be on maintaining price stability, on "keeping our own house in order."

Good for the U.S.

William McDonough, president of the Federal Reserve Bank of New York, whose ancestors came from Galway and Mayo, believes European Monetary Union will be good for the United States. McDonough is a member of the Fed’s Open Market Committee, the body which sets U.S. interest-rate policy.

He said the euro would be the second major reserve currency in the world. McDonough also pointed out that an advantage for the dollar is the deep U.S. bond market.

Dealing with the issue of asymmetric shocks within Europe, McDonough said that in one sense Euroland, a name he described as "perfectly awful," was not like the U.S. Giving an example, he said that an oil shock, meaning that oil prices suddenly jump, adversely affects New England but helps the Gulf Coast. An oil shock would affect all of Europe about the same, he said.

He added that the cause of unemployment in Europe was the same as the cause of the skewed wealth distribution in the U.S. He also said that union leaders have to be cooperative and managers have to be flexible.

McDonough also pointed out that the existence of the euro as a strong reserve currency would provide an important discipline for the U.S., "should the U.S. need it in time."

"The U.S. has much at stake in Europe’s and the EMU’s future," McDonough wrote recently in a Wall Street Journal commentary on the euro.

"That is why the U.S. should wish the EMU success," he said.