THE EURO DOLLAR:
The European Union, the United States,
and the Euro
Address by John B. Richardson
Deputy Head of the European Commission's Delegation
to the United States
Annual Meeting of the
to the Special Librarians Association
June 8, 1998
Indianapolis, IN
Scientific purists tell us that it is, in theory, impossible to say with absolute certainty that the sun will rise tomorrow. This is simply their best prediction, based on past experience. But we have no hesitation about planning our lives on the assumption that it will indeed turn out to be so.
I also cannot say with absolute certainty that the EURO will come into being on 1st January 1999, but you would not be wise to put your money on the contrary.
All the decisions which needed to be taken before the EURO could be born, and all the hard policy decisions which had to be taken to ensure its successful launch are now behind us. Separate quotes for French francs, German marks, and nine other European currencies will have disappeared from the currency exchanges on that momentous Friday morning in a little over six months time.
It will not be necessary for me, before this expert audience, to explain the exact process by which this has been achieved, nor exactly how the transition will occur until July 2002. You can find all the details, and all the legal texts to research them on the European web sites of which you are all aware. You already know that, by that date all the old national notes and coins will have been withdrawn from circulation and American tourists in Europe will be able to use the same EURO notes and coins throughout a vast area with about a comparable population and a comparable national income to that of the United States." Euroland", as it has already been dubbed, will have a GDP of around 6 million million dollars , the US around 7.5 million million. Euroland will have a population of 291 million , compared to 269 million in the US.
I would prefer, in my remarks, to pick out certain aspects of the process which has led to the EURO, as well as of the way it will function, to draw your attention to some aspects of the European Union and its history, which may not be altogether familiar to you.
First, I want to ask what it is that we expect from the EURO in terms of its impact on our economy. The most obvious difference it will make is that, from 1st January onwards, companies which do business in more than one Member State of Euroland, will no longer need to lose money by paying the costs associated with currency exchange and with hedging against exchange rate changes. These transaction costs have been estimated at about one percent of our GDP every year.
It will also become much easier to compare prices from one country to another. This is expected to turn the screw of competition in the Single Market still further, exert a downward pressure on consumer prices, and lead to more and more companies adopting a single strategy towards the whole market, rather than separate ones to national parts of it. This in turn is already spurring rationalisation and a new wave of mergers and takeovers to create companies able to make full use of the new economic opportunities.
By the way, all the American companies established in the EU or exporting to it, will be able to profit from the new situation in exactly the same way.
We will also see a new, consolidated capital market develop, in stocks and in bonds denominated in EUROs. There will almost certainly be a rationalisation of our stock markets, some national exchanges closing or amalgamating. Many analysts believe that this will lead to an increased mobilisation of funds and an increased depth of the capital market in Europe, making it easier for our companies to raise money for future expansion.
There will also be increased competition between our Member States to provide the sort of legislative , social, and fiscal environment, which will lead companies to invest there, rather than elsewhere within the EU. The net result of all these forces will be an environment throughout Europe which is increasingly favorable to investment and to reinvigorated economic growth.
You may think that these are simply the optimistic forecasts of a professional European. If so, just check out the forecasts for economic growth in the EU of a year ago, and compare them with those of today. You will find that the markets already believe in this scenario and are already delivering increased economic growth in anticipation of the arrival of the EURO.
My conclusion is simple. The EURO will deliver a more competitive, more dynamic Europe. This has always been one of the fundamental policy goals of the EU, since the original Treaty of Rome conceived of a Customs Union, through the elimination of the barriers to internal trade, which led to the achievement of the Single Market in 1992. We have always been afraid of being left behind by the train of history, of being not just an old, but a declining civilisation. And I am convinced that we will continue in the future to devise new ways to keep ourselves on our toes.
The second aspect of the EURO, to which I wish to draw your attention, is that the use of a single currency will make it even easier for our citizens to move between Member States, both on a temporary and on a permanent basis. One of the fundamental freedoms enshrined in the original treaty of Rome was the freedom to seek and obtain work throughout the Union. The Treaty of Maastricht extended this to the freedom to settle, for example in retirement, throughout the Union, and to enjoy the same rights of local citizenship as nationals of the Member State concerned.
This is an old dream, which hearkens back to the days in the Middle Ages when a scholar like Erasmus moved freely between one University and another throughout medieval Europe. It is no accident that our main program of student exchanges between Member States is named after Erasmus. And it is no accident that one of the hoped-for effects of the EURO will be to make Europeans increasingly mobile.
The employment market is likely to function considerably better when employees can compare job offers and costs of living in different Member States in the same currency. The employment pages of the Sunday editions of European newspapers will begin to look very different and mobilising, particularly of younger people, is likely to increase.
The third aspect of the EURO, which I would like to point out to you, is the design of its coins, because this is highly symbolic. Perhaps the first thing which will strike an American is that there will be no one EURO note, five EUROs will be the smallest denomination. Instead there will be coins worth one and two EUROs. Also. although the EURO will be divided into cents, their will be no quarters, we will have a twenty cent coin. Is this symbolic of a desire to be different from the US? No, of course not, it simply reflects previous habits in Europe and the design of our purses!
The symbolism, which is meant, is the fact that the coins will have a uniform, European design on one side and a national design from the issuing Member State on the other. This will be a very public affirmation of one of the fundamental principles of the European Union. We are trying to bring about a strong, prosperous, and integrated Europe without taking away those precious elements of human identity of our citizens, which find their expression in being British rather than French, Portuguese rather than Spanish.
Americans have no difficulty with the idea of multiple identities. An Irish-American, who lives in Manhattan, will see himself as being different from a Polish-American from Queens. Both will see themselves as New Yorkers and will make jokes about people for whom the sophisticated urban culture of their city is known only through episodes of "Seinfeld". And despite a strong identification with their city, they will be very proud of being Americans. My own country, Great Britain, is another good example. Technically, the state is the United Kingdom of Great Britain and Northern Ireland. Within it , it is normal to refer to the distinct "nations" of England, Wales, Scotland and Ireland, which all traditionally are represented internationally by different teams in the various sports. There would be an uprising if anyone tried to impose a pan-British identity on sports fans. And yet the United Kingdom functions very effectively as a state in the modern world, at the same time as its citizens cling to these complex elements of personal identity.
The Treaty of Maastricht describes the overall goal of European integration as follows:
".to continue the process of creating an ever closer union among the peoples of Europe, in which decisions are taken as closely as possible to the citizen in accordance with the principle of subsidiarity,"
In working towards this goal, the Treaty also specifies that:
"The Community shall contribute to the flowering of the cultures of the Member States, while respecting their national and regional diversity.."
These quasi-constitutional provisions speak for themselves. Those who dislike the progress we are making in Europe often try to propagate the myth that Brussels bureaucrats have a hidden agenda to create a new super-state and eliminate our centuries old national identities and the Member States through which they are expressed. Nothing could be further from the truth. The Treaty of Maastricht makes it clear and the design of the EURO coins is a vivid demonstration of this central fact about the European Union.
I would like to turn now to the interesting question of the accountability of the European Central Bank (ECB) , which will have the responsibility for EURO monetary policy. It will be taking important decisions, which will affect the way our economy functions, will deeply impact on the welfare of our citizens, and indeed will have significant implications for Americans and others around the world. In doing so I would like to compare the situation of the ECB with that of the Federal Reserve.
The task of the ECB is, in principle, simple. It is to conduct monetary policy in such a way as to maintain the value of the currency. The aim is to prevent inflation. This draws upon the consensus arrived at by economic policy-makers around the world over recent decades, that a stable currency is the only solid basis for sustained, economic growth. And since governments have been found to be too prone to forget this and to pursue short-term policies which feed inflation, most democracies have moved to a system, which guarantees the independence of the central bank, just like that of the judiciary. In this country, the Fed has this sort of status, and so does the ECB.
Monetary policy is not, however, conducted in a vacuum. It interacts with other areas of economic policy-fiscal policy, competition policy, consumer policy, etc. And these are, of course, developed by the other democratic institutions. In the US, the President may propose legislation, but both the House and the Senate must approve it. Checks and balances are built into the system. The same is true in the EU. In all the areas of policy affecting the Single Market, the Commission proposes legislation but both the Council of Ministers and , since the Treaty of Amsterdam, the European Parliament, must agree.
Our system may not be the same as yours in detail, but the same fundamental, democratic ideas underlie it. It is not surprising therefore that we have come to a similar conclusion as to the best way to ensure the accountability of the central bank, viz. by making its president explain the bank's policies before an elected assembly. Just as Chairman Greenspan appears at regular intervals before the House and Senate banking committees, so President Wim Duisenberg will appear before the members of the Banking Committee of the European Parliament at least four times a year.
We have another safeguard built into our system. Just as the criteria in the field of economic management, which our Member States had to fulfill in order for their currencies to qualify for the EURO, were anchored in the Treaty of Maastricht, so also the type of economic policy, which they will need to pursue to make it effective, is codified in the so-called Stability and Growth Pact, adopted by the Council of Ministers. In other words it has the force of law.
And in our system, just as in yours, we have a legal authority, whose job is to ensure that the law is respected, and whose final ruling prevails. In other words, our Court of Justice has the same function, and the same strong powers, as your Supreme Court.
I would like to turn now to the likely impact of the coming of the EURO on the global economic system. Its first, most obvious effect will be to make that part of the world called Euroland a simpler and easier place in which to do business. The transaction costs of anyone who does business in Europe will fall. Secondly, to the extent that the EURO leads to increased growth in Europe, this will provide an additional stimulus to world growth and increased export opportunities for all our trading partners.
Next, we should be aware that Euroland will be a very large entity in world trade. In 1997 its combined exports and imports with the rest of the world amounted to roughly 1.6 million million dollars , slightly , but only slightly, larger than US trade. European traders will begin to insist on denominating their trade in EUROs, their partners will find it convenient to do so, and many of our closest trading partners will start calculating in EUROs and using it as the unit of account in their business contracts. Gradually , much of world trade will come to be denominated in EUROs, just as much of it now uses dollars. Inevitably, market operators will wish to maintain financial balances in the money they use for trade. The Euro will become a reserve currency, alongside the dollar. No one knows how rapid this process will be nor the magnitudes involved, but the experts are agreed that it will happen and that it will be a significant phenomenon.
In these circumstances, decisions taken in Frankfurt by the ECB will have the potential to affect world financial markets. If international intervention is needed to prop up a currency or to correct exaggerated swings in currency rates, the role played by the EURO will be as important as that played by the dollar. Who, then will speak for the EURO in the councils of the world? Here we come to one of the few questions where decisions have yet to be taken. It seems clear that if Chairman Greenspan or Secretary Rubin want to know how the ECB will be intervening on the markets tomorrow he will ring up President Duisenberg. What is less clear, and has yet to be decided, is who will speak on behalf of Euroland within the IMF or in discussions of the G-7 finance ministers. This piece of unfinished business will be part of the EU's agenda for the second half of this year.
It seems to me that this question illustrates rather well one of the basic ideas which has always driven the European construction forward. A legal framework is created, which leads inexorably to economic integration. This integration creates a situation in which a political vacuum is perceived, and this vacuum is then filled. There is a constant interplay between the reality of economic integration and the design of political structures. This is the original idea of Jean Monnet, and it can still be seen at work in the EU of today.
Finally, I would like to address the question of how we will deal with the difficulties to which this momentous exercise will certainly give rise. Many economists ask how Euroland will cope with the situation which will arise if economic developments in different parts of the EU diverge so much that differing monetary policies, rather than a single one, would be appropriate. This arises, of course, in the United States, where it is perfectly possible for Texas to be experiencing a boom while Massachusetts stagnates. The answer here is that federal income tax takes from Texas will increase, those from Massachusetts will not. Social security payments to Massachusetts will, at least temporarily, increase, those to Texas will decline. Thus a transfer of resources from the booming part of the economy to the stagnating part will occur. And, most importantly, workers will move south in search of jobs.
It is pointed out that worker mobility is much less in Europe, not least because of fears of parents, not to find appropriate schools for their children. In addition, our labor markets are not as flexible as they should be; hiring and firing workers is hedged around with rules and conditions in most of our Member States, which make companies take such decisions more slowly than they might in the US.
On the other hand, our Member States do retain a large degree of fiscal autonomy, and their own tax and social security systems will continue to provide automatic stabilisers in the face of a short-term economic downturn. For more persistent problems we already have a policy instrument in place, which has proved its worth since the inception of the EU. This is the system of fiscal transfers through the structural and regional funds, whose goal is to ensure that regions within the Single Market do not fall further and further behind the general level of prosperity.
It has proved its value in Member States such as Ireland and Portugal, whose economic performance has been remarkable in recent years, thanks in large part to the continued transfer of resources from the central budget.
These policy instruments may turn out to be insufficient to deal with all the problems, which may arise. But the conclusion need not be that EMU is doomed to failure. New policies will be devised, as they always have been up till now in the face of new challenges. If the developments of the last few years have taught us anything, it is surely that the political will to make European integration in general and Economic and Monetary Union in particular succeed is much stronger than the doomsayers ever imagined. It is the strength of that will, coupled with an enormous amount of painstaking effort by my colleagues in Brussels, which has brought us to the point of launching the EURO. And it is these same qualities, which will ensure its success.
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