With European leaders heading to Brussles to finalize agreements on the launching of Europe's single currency on May 2, the Global Reporting Network explored the implications for the U.S. at a Washington press roundtable on April 29: "European Economic and Monetary Union: What will it mean for the United States?" Featured speakers included:
The following is a summary of the presentations and discussion. *************************************************** JOHN RICHARDSON opened his remarks by saying that the "euro," the new European dollar, is "the most exciting story since the creation of the European Union." He then outlined what is expected to happen as the story unfolds. "This weekend in Brussels the decision will be made on which countries will be included in using the euro. We expect 11 countries will be merged. Two years ago many economists were saying it couldn't be done. The economists were wrong. The politicians were right. Those who say it won't work will be proven wrong as well." "Why has it gone so well?" he asked. Inflation tamed: "Most of the European countries were hovering at 1.5 percent over the last four years," he said. Deficits lowered: Likewise, Richardson said, deficits among the countries were much larger in 1993; since then they have come down rapidly. "Even Italy is down from 10 percent to under 3 percent today," he said. "There has been a massive commitment to bring down deficits across Europe." Falling interest rates: Long term interest rates also have dropped significantly. "There has been enormous change in just two years. When you are looking at future, you need to look at what has happened in the recent past." What are the implications of the new currency for the United States? The European Central Bank, which is more independent than the Federal Reserve and very anti-inflationary, will pursue a tough monetary policy. The euro should be strong, and EMU members should enjoy low inflation, Richardson said. This may affect the U.S., but it depends on the U.S. economy. If inflation rises in the U.S., the value of the dollar would decline and the euro would rise. The second impact: reduction in long term interest rates, which is a basis for sound growth. "European growth over the last few months has outstripped earlier growth, and there will be much more growth in countries that bring their economies in line," Richardson said. This is especially true for the countries that have changed the most to meet the EMU requirements, such as Italy, Spain, and even Greece, which isn't in, but is working toward it. "This is important for American companies to consider. It represents marketing possibilities. "It will become easier for companies and consumers to compare prices. That should force prices downward. This increased transparency will lead to competition and to lower prices," he said. Lower transaction costs in Europe. "This will apply to U.S. firms active in Europe. And it will make their European competitors more competitive." Richardson pointed out that today most world trade is denominated in U.S. dollars; some of it is in yen, and still other trade is in deutschemarks. As the euro is phased in, he predicted, many more companies will want their trade denominated in euros. All will want to have reserves in euros, he said. "We don't know what central banks will do. Over a period of time there will be large shifts of other currencies into euros, which possibly will boost the value of the euro and push down the value of the dollar." As for the impact of the euro and its governance on the world financial system, the big question is who will represent the euro at the IMF and other international institutions. "It has important consequences for the United States to have a partnership with Europe in these institutions," he said. Richardson then referred to an article by Martin Feldstein that predicted that the institution of the euro will lead to war. That is totally wrong, he said. "EMU is the most substantive step in European integration in its forty year history, and integration has been the chosen route to peace in Europe" since the project began. "That there will never be war again is a more plausible outcome." RANDALL HENNING stressed that EMU's success is very much in the interest of the United States. "It will strengthen integration and help Eastern Europe as well," he said. "We will benefit economically from the union because of a number of outcomes, including the reduction of transaction costs." But Henning suggested two important caveats: First, to ensure the success of the union, Europe will have to pursue economic reforms to make their economies more flexible, including reforms in their labor markets and fiscal consolidation. This will make European businesses and economies more competitive. Second, the EMU poses challenges for U.S. policymakers in financial and monetary cooperation. The policy challenges include excess dollar reserves in European banks. This will create a $50 to $150-billion redundancy in reserves, and what happens to this is not clear. The second policy issue arises through portfolio rebalancing. There will be the freedom to invest in euro-dominated assets. This could mean a shift of $400- to $800-billion from dollar assets to euro assets. There could be a great volatility between the dollar and euro as this rebalancing happens in coming years, especially as it is not likely to happen in a smooth pattern. There is a possibility of sustained misalignment in exchange rates between the dollar and the euro as a result. "In the course of creating the monetary union, European policymakers cannot afford to be parochial," Henning said. They cannot just focus inward on fully implementing EMU. "They need to take into account international concerns, such as the current Asian currency and economic crisis." From the U.S. perspective, he said, "All of this can be managed, but it must be addressed proactively." Henning then mentioned two institutional issues. The first question is how the external exchange rate policy is made in regards to the euro. "Who does Secretary of the Treasury Rubin talk to create a stabilization program for the dollar?" he asked. "There are no clear answers from Europe yet. How do we address crises?" Second: How do international institutions, such as the G7, respond to monetary union? Henning believes that for exchange rates and monetary policy the G7 should be reduced to a G3, which would include the United States, Japan and the EMU. "At the IMF, national European governments will want to retain separate memberships, but they should be consolidated into single European quota," he added. "That will free up quota shares for other countries, and the IMF. It will be hard for Europe to speak in a single voice at the IMF." QUESTION AND ANSWER SESSION WITH RICHARDSON AND HENNING Q: John Richardson used the word "experiment." Is this an experiment? "You said it will succeed because it must. What factors concern you most?" A: "Legally there is no experiment," Richardson responded. "The euro will become a fact on January 1, 1999. There is no scenario for re-creation of separate currencies. It cannot happen without secession of member states. In my view it as implausible as the United States having a war between the states. The question is, What will the effects of a single currency be? Will it lead to important and negative consequences for some residents of certain countries? Problems can arise and will have to be dealt with. It can happen to any country and can happen anywhere." Q: What about Great Britain? What if it doesn't join? Could it benefit? A: Richardson: British citizens will benefit in the same way U.S. citizens will. But their benefits will be less than if they were involved. Great Britain will have less influence on euro policy, but will gain its own economic sovereignty. Great Britain's position is to join when it makes sense, when the time is right, when its economy is in sync with the rest of the union. Q: NATO enlargement and other things are going on in Europe. Will the union be slowed down by countries that are not yet eligible to join? A: Henning: Countries may not be ready to join in monetary union at the same time they are ready to join other institutional bodies. If the monetary project did not begin in January 1999, then European integration would be set back. The EU 15 will not agree to the inclusion of Central and Eastern European countries soon, but monetary union will help make that happen. Q: What about the movement of U.S. dollar assets to euro assets? A: Henning: You need to look at the rate of liberalization of European markets. If it is dragged out over 10 to 15 years it will happen very slowly. I expect this to happen erratically. Q: The central banks hold reserves that will disappear on January 1. What happens to the deutschemarks held by French banks. Do they disappear? A: Henning: Yes. They disappear as foreign exchange currency. Richardson: That means world reserves will become smaller. Henning: Yes. Some banks are now converting their own currency into dollars to keep as foreign exchange reserves. Richardson: Rather than give that money back to their government. Henning: That is partly why the dollar is strong. Q: Who will [U.S. Treasury Secretary Robert] Rubin call on January 1? A: Richardson: There must be a single voice on behalf of Euroland at the IMF and the G7. It's an open question whether member states will give that responsibility to the commission. But it has to happen by the end of the year or there will be problems. The commission should have spoken louder on this. Who should Rubin call? The president of the central bank. How quickly Euroland can come up with a policy solution is the bigger question. The long-term problems, such as IMF quotas, the president of the union council will have difficulty answering. We have a problem on the crisis side, but the long-term policy side is worse. The strongest role for the European union is trade policy. There are existing scenarios where individual states can have their own opinion along with the union. Q: [A series of questions asked at the same time] Will the U.S. dollar lose its position as the dominant exchange currency? What about the volatility in exchange rates? What about countries holding to the limit of national deficits at 3 percent of GDP, especially in a crisis? Will the notes have any national markings? A: Henning: The United States would be concerned if the euro replaced the dollar, but that won't happen. At most it would be equal--each representing 40 percent of international assets. The United States will still be able to manage account deficits. Under normal circumstances it won't be a problem. As for the volatility of the exchange rate between the dollar and the euro, we could see volatility at any point. We have seen some already with the strength of the dollar. We also may have volatility in European cross rates. A: Richardson, responding to the question about the design of notes and coins: Coins will have one national side and one euro side, but there has been no decision on the notes as yet. The basic look for notes has been accepted. Richardson on the 3 percent deficit question: If there is a crisis a country can deviate. A deficit should be 3 percent in a non-crisis situation. Richardson on volatility: There will be none after January 1, 1999. If we have portfolio diversification into euros and account balances are positive that would drive up the euro exchange rate. That's with all other things being equal, but other things may not be equal. On the whole, the United States has been calm about changes in the dollar's exchange rate. It may become a non-topic. PART TWO JEFFREY FRANKEL, U.S. Council of Economic Advisors Like Woodrow Wilson, I have 14 points to make. EMU is an inspiring adventure/achievement/experiment, a big step in European integration. Integration is in turn desirable economically as well as politically -- born out of a desire to banish permanently the possibility of another European war. American economists have in the past had some doubts about the practicality of EMU -- about whether European countries constitute an "optimum currency area" in the manner of the States of the U.S. (As an economist, I still think there are a lot of interesting research questions there. [However,] research suggests that, as European countries become increasingly integrated over time, they will become increasingly suited to a common currency. For European policy-makers, the priority should be the oft-stated one of structural reform to reduce market rigidities. Otherwise, regions hit by future "asymmetric" shocks, and now lacking the possibility of an independent monetary response, will no have no way to adjust. But by it is now well past time to put away doubts about whether EMU will successfully take place. The 11 have made impressive and unexpected progress toward meeting the Maastricht criteria. It is clear that EMU is going ahead as scheduled. Americans offer congratulations and wish it every success. The economic implications for Americans are far less than for Europeans. But that is nonetheless the topic that I have been asked to speak about. The main economic effect on the U.S. is that, to whatever extent EMU contributes to European prosperity, it will also contribute to American prosperity, through trade and other channels. This is true in particular if European growth is led by domestic demand. U.S. firms should benefit from savings in transactions costs, perhaps even more than European firms because they are already used to operating in large markets. Another effect could come if the euro turns out to be a rival for the dollar as an international currency. I now think this more likely than I did three years ago. It is quite possible that the dollar will in the coming decades resume the gradual downward trend in its international use that prevailed in the 1970s and 1980s which at that time came at the expense of the mark and yen. I still think that the dollar will most likely remain the world's leading international currency 20 years from now, absent serious U.S. macroeconomic policy errors. The dollar has more of the characteristics that make for international currency status than the euro is likely to (size, confidence, developed financial markets, and history). While reserve currency status carries some advantages for a country, they are quite modest (e.g., some $16 billion/year in seignorage for the dollar). We care enough about the role of the dollar to include its international standing on the list of reasons for pursuing monetary stability / low inflation. But we are relaxed about the dollar's ability to compete. As to any possible implications for the exchange rate of the dollar, positive or negative, I am not going to speculate. Many Europeans -- from taxi drivers to economists to journalists to politicians -- are convinced that Americans fear EMU as a rival currency bloc and do not want it to succeed. I assure you that this is not the case. In fact, I have had trouble finding any Americans arguing this line, though I am sure there must be some. There is a bit more justice to the European fear that is the dual of that above: that many Americans do not know or care about EMU. This has probably been true of much of the general public until recently [though certainly not of the Clinton Administration]. Even now, many businesses are not prepared. But this is changing rapidly, as the time draws near. As we approach the millennium, people will be looking for some truly historic event to mark the occasion. The union of Europe around a single currency fits the bill admirably. JOHN DOWNE, head of EMU global initiatives for IBM "I'm not an economist, I come to this from the point of view of practicality," he said. From our point of view, it is important to look at the terms. "We use EMU and the euro interchangeably, but they are two terms. The euro is a new currency, and there are technological problems of putting it into circulation. There are new notes and coins, and a new currency symbol." "As for the EMU, here we get into subjects alluded to before, such as price transparency. It's a catalyst for a single market in Europe, and it raises questions about competition and efficiency. We have already seen some sectors--banking, for example -- launch new competitive initiatives. The trend is to using the Internet and other electronic trading. When prices are all in euros, there will be a greater propensity to use electronic media for transactions." "For IBM it is a big deal. And it is for our customers. Our response is to gear up our operations to provide for our customers in implementing their EMU projects. IBM has been working on it for 20 months. For companies in Europe it is something you must prepare for. We have made announcements about our products and have put into place consulting services for our customers. For example, in early 1999 securities and bonds in national denominations will be recalibrated into euros. This is a nontrivial exercise--a mammoth logistical task. It all will culminate in "le weekend" in January 1999. "Notes and coins will require new store applications, such as printing out receipts in both old denominations and in euros. IBM is working on these systems with its customers." QUESTION AND ANSWER SESSION WITH FRANKEL AND DOWNE Q: Where will the euro symbol be on the keyboard? A: Downe: We do know where it will go. It will be on the "e" key in France and Germany. In the UK, it will be somewhere else similar to accessing the pound symbol by pressing the "alt" key and the "4" key. We will be coming out with new keyboards soon. Q: Milton Friedman has said that the United States is much more flexible in moving money from the national level to the regional level, and has much more labor mobility than Europe, and this is why a single currency can work. Can it work in Europe? A: Frankel: How integrated is Europe? The idea is that we need these cushions. What about asymmetric shocks within the union? It does constitute grounds of skepticism that American economists have had. It is true that European countries are not geared toward labor mobility, but they don't necessarily have to be as integrated as the U.S. economy to be able to have monetary integration. Also, the union will foster trade and labor mobility over time. Q: How will the euro impact tourism? A: Downe: It will be easier to travel around Europe without exchanging money in every country. British travel agents did a study and said it would increase tourism. A: John Richardson: Between 1990 and 2002 it is not clear that tourists will be able to travel without the cost of exchanging money. Even though the different notes in each country will be set denominations of the euro, there will still be actual costs for exchanging them so there is some justification for charges. That will be up to national governments. But after 2002 those costs will be gone. Q: IBM sells computers, so it is facing the new euro and the 2000 number problem at the same time. A: Downe: Those are two different issues. The computer problem is distracting when thinking about EMU. Year 2000 is a technical problem which is important and everyone has to deal with it. But EMU is first a business and planning issue. Countries and companies need to get their IT systems and all their operations geared up for change. They should not just look at this as a technical question. Q: With the advent of the euro, will there be a return to the reduced use of the dollar as in the 1980s? What are the implications? A: Frankel: The dollar will be dominant for at least the next 20 years. It has size, confidence, free financial markets, and past history. The dollar will stay the leading currency. This does have advantages for us. For example, when people hold dollars around the world, that is like making a loan without paying interest. That's worth $16 billion to us a year. Also, it makes things easier for U.S. importers and exporters that the dollar is dominant. It's an advantage for U.S. banks and financial institutions. It is the one of the trappings of a great geopolitical power. But there are disadvantages, too, such as the possibility that the demand for dollars will increase its value. Q: What are major stumbling blocks for EMU? What about the barriers of language and culture? A: Frankel: The barriers are one of the reasons why labor mobility will remain lower in Europe than in the United States. Q: to Frankel: You were skeptical. What changed your mind? A: Frankel: We recently did a retrospective on the last year. When was the turn in expectations? Measures show changes in June 1997 with the agreement on stability pact and in October 1997 with the increase in German interest rates, which aligned rates. Also when the fiscal requirements were met by the end of 1997. We thought the Germans were going to have problems. But the Germans made it work. All of these things helped turn it around. We didn't doubt it would go ahead, but not with all 11 countries. Q: to Downe: What are the pluses of the UK's position staying out? A: Downe: With all due respect, it's an irrelevant question. British companies can't ignore what is going on across the channel. The City of London is almost outside the UK; it cannot operate without Europe. Companies that are suppliers to major continental companies will have to operate in euros in order to compete. Some British companies are making visible steps to gear up operations to cope with a new world. The biggest issue is with smaller British companies; do they need to do anything? I think it would be dangerous if they didn't. Q: There has been less movement to political union since Maastricht. In the past, monetary unions that took place without political union fell apart. Will this lead to more political union. A: John Richardson: The question is not whether you have political union or you don't. We certainly have a degree that is less than the United States. However, we are a long way toward full political union. But we probably don't want to go as far as the United States with a central state. There are degrees of union. -end- Elliott Negin, Rapporteur Click here for Convergence: Economics, Politics, and the Euro: A handbook for journalists covering Europe's common currency Return to Global Beat Home Page Nuclear Watch | East Asian Security | Economic & Monetary Union | NATO Expansion | Nuclear Weapons and Proliferation | U.S. Defense Policy | Publications | Events | |
