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January 21, 1999

Significance of EU's new currency discussed

The value of the European Union's new common currency, the euro, has hovered at about $1.16 U.S. since its debut in world financial markets Jan. 4.

But the euro's full significance can't be measured in monetary terms alone, participants in a Jan. 13 Pitt roundtable discussion pointed out.

"After all, a currency is not just money. It is a repository of a regime's history, its credibility and its position in the world. And so, the euro is not just a currency. It is also a powerful symbol," said Alberta Sbragia, director of the University's Center for West European Studies.

Sbragia also directs Pitt's European Union (EU) Center, formed last summer as one of 10 such academic centers in the United States. The EU Center sponsored the roundtable discussion, called "The Euro and the EU: Opportunities and Implications for Transatlantic Relations." Despite that title, speakers' remarks focused on the euro's meanings for Europe rather than transatlantic issues such as the possibility that a powerful EU currency might someday rival (or even replace) the dollar as the world's dominant currency — perhaps increasing borrowing costs for the U.S. government, and undermining American political influence and financial power.

The Clinton administration's official policy on the euro has been to welcome it as contributing to European stability and building a more prosperous trading partner. Roundtable participants likewise downplayed a potential euro-versus-dollar rivalry.

Jonathan Davidson, a representative of the EU delegation in Washington, D.C., said it remains to be seen whether the euro will evolve into an alternative global currency to the U.S. dollar. (A majority of dollars in circulation are held outside the United States, according to some estimates.) An obvious reason it's too early to make such a prediction is that euro bills and coins won't enter circulation until Jan. 1, 2002.

Companies in the 11 nations comprising "Euroland" may continue doing business in their national currencies until then, although securities exchanges began buying and trading in euros this month.

The new European Central Bank controls monetary policy and interest rates for Euroland nations. National currencies of those 11 countries are pegged to the euro.

"Just like the nickel is a subdivision of the dollar," Davidson explained, "the German deutsche mark, the French franc, the Dutch guilder [now] are subdivisions of the euro." According to Davidson, "the ultimate performance of the euro depends on the performance of the European economies, and as we well know there are many problems" for those economies, including sluggish economic growth, double-digit unemployment in most EU nations, and a flood of low-cost imports from Asia and Latin America.

Trade is not a zero-sum game, and an expanding EU economy should not threaten the United States, Davidson argued. But he also stated (with perhaps pardonable pride for an EU delegation representative): "We live in a bipolar economic world now," with the U.S. and European Union as principal economic powers.

"What we have in the 'euro-11,'" Davidson said, "is something very similar in size and economic performance to the United States, comprising 20 percent of world GDP [gross domestic product], involved in 20 percent of world trade, and with approximately the same number of people as in the United States" — 290 million people compared with the U.S. population of 270 million.

q Western European leaders began seriously discussing a single market with a common currency three decades ago, said Paolo Cecchini, former special adviser to the European Commission and author of the "Cecchini Report," a seminal work on the single market project.

But a succession of events — global recession during the 1970s, Cold War tensions, internal political squabbles within Western European nations as well as traditional rivalries between those countries — stalled progress on economic union until the late 1980s.

In 1993, the 15 EU nations ratified the treaty that ultimately will unite their economies, assuming all 15 join Euroland.

Cecchini refuted the "horrible myth," as he called it, that a single currency was a prize extracted from the Germans (whose deutsche mark has long been Europe's strongest currency) by the French (with their weaker franc) in exchange for French support of German reunification.

"The dates don't warrant it," Cecchini said. "The political decision to go with a single currency was taken in June 1989. The Berlin Wall fell, unexpectedly, in November 1989." q As recently as three months ago, many people were still predicting that the euro was years away. Sbragia recalled, "Every time I went to Britain, I would read stories that it [the euro] would never happen." Enid Miller, vice president of Mellon Bank's Euro Task Force, suggested that some of the skepticism grew out of the tight timetable for introducing the euro. It was only last May that 11 EU governments committed to joining the monetary union: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

Four other EU nations (Britain, Denmark, Greece and Sweden) opted out, at least for the next few years.

Regarding financial traders who doubted the euro would fly by Jan. 4, 1999, Miller said: "Foreign exchange traders make bets. That's what they do for a living. And that means they're always trying to figure out whether there is the weird bet or the oddball bet that is worth trying to sell to their institutions so that they can, in fact, have a coup and make a lot of money.

"By fall, certainly by Thanksgiving, no one was doubting anymore," Miller said.

None of the speakers expressed doubt that the EU nations that have yet to tie their currencies to the euro eventually will do so. (In euro-jargon, the four holdouts are known as the "pre-ins" rather than the "outs," according to Davidson.) Each of the four "pre-ins" had its own reasons for not joining. Greece actually wanted to join, but failed to meet criteria for the euro. Of the four, Britain has by far the strongest economy and has been most opposed to monetary union.

But not all Britons are europhobic. Roundtable moderator Burkart Holzner, director of Pitt's University Center for International Studies, recalled attending a meeting hosted by a Pittsburgh law firm for some lawyers from the UK. "The Americans asked about the likelihood that Britain might join Euroland," Holzner said. "The British lawyers said, very coolly: 'What are you talking about? Of course we will.'" Clearly, Holzner said, the British legal and financial communities "are very differently oriented" toward pegging the UK's currency to the euro than are the British press and "Euro-skeptic" politicians.

Because its short-term interest rates are higher than those of most other EU nations, Britain may benefit by remaining out of Euroland for a few more years, some economists say.

But they also question how long London can remain Europe's financial center if UK voters reject Euroland membership in a referendum expected to be held after Britain's next national election.

Mellon Bank's Miller said: "One potential solution for people in Britain and companies and financial institutions in Britain is that they use the euro as their currency in doing business, whether or not sterling continues as a separate currency." q Before anyone knew whether the euro would proceed on schedule (or, if it did, how many nations would join Euroland), financial institutions like Mellon Bank had to begin planning for the conversion. That included conforming to the European Central Bank's new money-clearing system.

As the culmination of a year-long project, Miller said, some 500 Mellon staff members at 10 sites worked around the clock during "conversion weekend" (leading up to Jan. 4, 1999) plus the following week, converting and redenominating bank and customers' euro-connected holdings.

"In fact, it was a Mellon payment, out of our Citibank Frankfurt account, that became the first euro transaction," she said. "This was executed through the German Central Bank at 5:30 a.m. central European time on Jan. 4." Davidson likened the changeover to launching a spacecraft. "You have to think through, before you lift off, all of the conceivable things that could go wrong. You plan for them, you have dry runs. All of that had to be done within the financial markets" in preparation for launching the euro.

The Alice in Wonderland quality of the euro's birth is well-known: A big splash over a new currency that won't exist in cash form for another three years.

Davidson defended the delay, although he allowed that three years might have been excessive.

"The thought of doing this in one big bang with the general public as well [as financial markets], on top of the logistical problems of producing the money and the coins, educating the public and familiarizing them [with the euro], doing all the other technical things that have to be done — it would have been impossible," he said.

q Europe hasn't had a common currency since the fall of the Roman Empire. Since then, European currencies — like most other national symbols in Europe — have been divisive, Sbragia said.

Following World War II, Western European countries continued to struggle among themselves for dominance, she said; only instead of weapons, currencies were the measure of a nation's strength.

"The deutsche mark came to represent Germany's superior economic strength….Generally speaking, the southern [i.e. Greek, Italian, Portuguese, Spanish] currencies were at the bottom of the hierarchy, with the French franc constantly trying to maintain its status as a first-tier currency," Sbragia said. She called the euro "the great equalizer" in Western Europe. "By the year 2002, the implicit hierarchy shaped by strong versus weak national currencies will be practically eliminated, at least at the mass level. A Portuguese tourist will be the euro-equal of a German. Further, the euro will be a symbol unattached to a national territory." Although the euro should reduce the north-south split between haves and have-nots within the EU, it may aggravate the west-east division between Euroland and the weaker economies of Eastern Europe, she said.

Sbragia predicted that economic and monetary union will have a "federalizing influence" over EU foreign policy. "Over time, Europe will increasingly speak with one voice," she said.

— Bruce Steele

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