Wed, Dec 26, 2001 page17

• Euro has potential to revive economy

  CURRENCY Optimists believe the new monetary unit will allow Europe, instead of the US, to lead the world in economic growth by smoothing out rough spots

  • AP
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  Its potential is awesome: one currency linking the buying power, skilled labor and business know-how of 303 million people in 12 countries -- fully one-sixth of the world's economy.

  Before the Jan. 1 introduction of euro notes and coins, supporters hope the euro has only begun to show what it can do, predicting historic dividends in growth and trade -- and even in peace and security, on the continent where two world wars were fought.

  

  Shoppers stroll down Rue Montorgueil in central Paris passing under the Euro logo in Christmas lights on Monday. The new currency comes into circulation on Jan. 1 in the 12-nation euro zone.

  PHOTO: REUTERS

  Economists say the shared currency already has had clear benefits since it was launched three years ago, not in the form of paper bills and coins but as a peg to which national currencies were fixed.

  Since then, it's been the euro zone's real currency, although for many people the psychologically important moment is the addition of bills and coins next week.

  It has eliminated the problems of exchanging money for businesses trading across borders. But the more expansive hopes -- such as a measurable, long-lasting boost to growth and a political push to loosen stifling labor regulations -- have yet to appear.

  Striving for improved efficiency

  The idea behind the euro is simple: End fluctuations between national currencies, and cross-border trade grows. Competition is increased, pushing countries to further liberalize their economies and become more cost-efficient.

  The euro has eliminated currency risk -- the chance that a sudden shift in the exchange rate will sap business profits or balloon their costs. And they no longer pay the commissions and costs of exchanging money.

  For instance, before the euro, if an Italian bank wanted German bonds, it had to bundle the purchase with a currency swap -- a time-consuming foreign exchange deal guaranteeing they could repatriate gains without losing their shirts.

  New cross-border bond markets have blossomed, providing sources of credit that businesses across the zone can tap into to expand factories and production.

  When the notes and coins arrive, cash-carrying tourists will reap some of those same benefits, speeding from aircraft gate direct to the taxi without paying a 3 percent commission at the foreign-exchange booth.

  And prices will be instantly comparable across borders.

  Loss of independent control

  These pluses are thought to offset the costs of countries' giving up independent monetary policies to the European Central Bank. Members can no longer cut interest rates to spur their economies out of recession, or put a lid on inflation during boom times.

  That loss of control was one reason three EU members -- Britain, Sweden and Denmark -- stayed out of the euro.

  Robert Mundell, the Columbia University economist whose writings provided much of the theory for the euro, says labor and capital should be able to flow across borders to help countries adjust to economic ups and downs, in the absence of a national monetary policy.

  "My own view is that the euro area as it is at present will be successful -- but that it would be an even greater success if it were joined by the remaining three `outs,'" said Mundell, a euro supporter who won the 1999 Nobel Prize in economics for work including his analysis of currency zones. What pushed the region toward monetary union, in many ways, was what some economists have dubbed "eurosclerosis" -- the persistent lag in European growth and productivity, through the 1970s, 1980s and 1990s, behind the US. Although the US population is smaller, at 278 million, it has carved out a bigger share of the world economy, at 26 percent to the euro zone's 16 percent.

  Growth dividends The European Commission has estimated that the euro should add an additional 5.5 percent to growth over the first 10 years.

  While currency hassles have diminished, the deeper effects remain elusive. It's still expensive to lay someone off in Germany, for instance, where workers get fat severance packages and high unemployment benefits. That saps productivity and makes employers reluctant to hire new staff.

  Chancellor Gerhard Schroeder, in fact, says Germany must reduce its unemployment rate of 9.2 percent without resorting to US-style rules that make it easier to fire people.

  The notion that the euro will push governments to overcome political resistance to labor-market reform "is one of the conventional wisdoms repeated by European officials," said Swedish economist Lars Calmfors, who headed the government commission that recommended Sweden stay out of the euro.

  That part remains an experiment, he said.

  "It might be the case. But I could dig up as many arguments in the opposite direction," said Calmfors. "There is no solid theory to support the case, and no empirical evidence."
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