The Degeneration of EMU

HERE TODAY, GONE TOMORROW

From conception through gestation and birth, and now in its early infancy, the euro has consistently proved the skeptics wrong. Some Cassandras thought that Brussels-bashing nationalists would reject the single currency in referendums. Others doubted that Italy and other fiscally troubled applicants would fulfill the Maastricht Treaty's strict limits on budget deficits and national debt. Still others predicted that the fierce 1998 dispute over the presidency of the European Central Bank might abort the entire enterprise.

Yet economic and monetary union (EMU) has proceeded more or less according to plan. The French referendum's "petit oui" in 1992 may have required a little gentle massaging; the Maastricht fiscal criteria may have been honored partly in the breach; and of course the currency has, over the past year, depreciated markedly against the dollar. But the fixed exchange rates within the eurozone have held firm, despite warnings about speculative attacks during the transition. And with its depreciation spurring economic growth, the euro is likely to recover somewhat against the dollar this year.

Nevertheless, the skeptics may have the last laugh. For whether a euro equals a dollar tomorrow or the next day does not really matter. What matters is whether the entire monetary union will hold together in the years ahead. The euro's medium-term future will prove much shakier when Europe is hit by the fiscal crises looming for the majority of the eurozone's member countries.

THE NEW MATH

The notion that such fiscal problems exist is not new. Nor is the proposition that they could jeopardize monetary cohesion. But fresh evidence, drawn from a recent, comprehensive calculation of "generational accounts," shows the full extent of the fiscal crisis facing the eurozone.

Generational accounting provides answers to the following three questions: How large a fiscal burden does current policy impose on future generations? Is current fiscal policy sustainable without major additional sacrifices on the part of current or future generations? What policies are required to achieve generational balance -- i.e., to ensure that future generations will pay to the government the same share of their lifetime incomes in net taxes (taxes paid minus transfer payments received) as do today's generations?