Euro Fantasies: Common Currency as Panacea
Article Summary and Author Biography
The battle for the common currency may be remembered as one of the more useless in Europe's history. The euro is hailed as a solution to high unemployment, low growth, and the high costs of welfare states. But the deep budget cuts required before integration are already causing pain and may trigger severe recessions. If the European Monetary Union goes forward, a common currency will eliminate the adjustments now made by nominal exchange rates, and the central bank will control money with an iron fist. Labor markets will do the adjusting, a mechanism bound to fail, given those markets' inflexibility in Europe.
Rudi Dornbusch is Ford Professor of Economics and International Management at the Massachusetts Institute of Technology.
For nearly 50 years, Europe has been on a course of ever-widening and -deepening integration. For just as long, Germany has been building a reputation as the global champion of hard money to which the deutsche mark stands as its monument. The proposed monetary union to create a common currency in Europe joins these two strands: Europe gets German monetary integrity, and Germany blends into Europe.
The Maastricht Treaty, concluded in December 1991, is the pre nuptial agreement for this marriage. However, on the way to union doubts loom larger than joy. Still in question are the benefits to be derived, the suitability of the partners, and relations with outside parties. These questions are particularly acrimonious because the tight timetable (see p. 112) for converting to a common currency destroys illusions, as does Europe's poor economic performance. Europe has 18 million unemployed, and no one knows what to do with them. German Chancellor Helmut Kohl, German industry, and German banks all agree that the common currency, provided under the European Monetary Union (EMU) is a must. Promoters of "social union" are equally eager; they see integration as a way to ameliorate an economic system that they regard as having too much competition and too little social justice.
Those who question the drive toward a common European currency include monetary hawks, that is, most of Germany's population and its central Bundesbank; excluded bystanders, such as Central European countries; and benevolent spectators in the United States. The prospective partners in EMU who financially live from hand to mouth -- France, Italy, Spain -- are cheering monetary union. They still believe it is a miracle cure for rotten public finance and generations of debased currency, but they are also wincing as they are weighed in for the race to the Maastricht goal. Meanwhile, Britain is searching its soul. The Labour party wisely is favorably inclined toward the monetary union -- a safe and pragmatic strategy with which to tear the Conservatives apart.
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