"Historic cooperation is a huge opportunity"-
Published Friday, December 11, 1998, in the San Jose Mercury News
Historic cooperation is a huge opportunity
BY LORI MONTGOMERY
Mercury News Warsaw Bureau
BERLIN -- After a thousand years of strife and war, the nations of Europe will close the bloodiest century in their history by binding themselves more tightly together into a United States of Europe.
On New Year's Day, Germany, France, Italy and eight other countries will merge their economies, abandon their marks, francs and lire and introduce the euro, a new currency that will immediately become the world's second-largest and may one day challenge the supremacy of the dollar.
The creation of ''Euroland'' presents historic opportunities for European business and American investors. It also raises profound questions about the future of Europe. Euroland leaders are calling the launch of the euro the financial event of the 20th century.
'And it probably is,'' said Veda Wilson, a spokeswoman for the U.S.
ambassador to the European Union in Brussels -- the Washington, D.C., of Euroland. ''It is a very big deal.''
But despite a landslide of euro-related news bulletins and
euro-focused special reports, most Americans aren't paying attention.
"You have a question about what? The hero?'' an American Express
operator said at its corporate headquarters in New York City this
week.
So, for the euro-clueless and the euro-indifferent, here are the top
reasons the euro matters to you.
The euro is a historic experiment in war and peace.
Europe has repeatedly sucked much of the rest of the world into its murderous disputes. But World War II shattered the Europeans.
Millions were dead, great cities were reduced to rubble and the awful shame of the Holocaust weighed heavily. In 1945, a fed-up world split the continent in two, separating its eastern and western halves like quarreling kids.
Economic unity
Such a terrible war, it was agreed, should never happen again. So
Europe decided to pursue peace by uniting the economies of its
peoples.
In 1957, the European Economic Community was founded. Four decades later, the euro finally arrived. On Jan. 1, it will instantly
transform 11 separate European nations into a united Euroland.
''This is the first time in modern history that anybody has tried to
make such a big change in the institution of their money,'' said Alan
Deardorff, a professor of international economics and public policy at
the University of Michigan.
''All these countries have long-established currencies that have great
meaning for them, just as the dollar has great meaning for us. And
they're going to give that up . . . to try to force themselves to get
along,'' Deardorff said.
The euro could clobber the dollar.
Euroland will be one of the most powerful economic forces on Earth,
with an economy second in size only to that of the United States and
with slightly more people.
Though Euroland has some tough economic problems -- notably a 10.8 percent unemployment rate -- analysts predict its new currency will present the first serious challenge to the dollar since the dollar
dethroned the English pound as the world's premier currency early
this century.
''The euro will be to the dollar what Airbus is to Boeing,'' said
Norbert Walter, chief economist of Germany's Deutsche Bank. ''It
means this is serious.''
Beyond that, no one is quite sure what to think. Analysts disagree
about how quickly the euro will rise to global stature, to what extent it will displace the dollar in global reserves -- even whether a rival
currency is a good thing for the United States.
The euro opens new frontiers to American investors.
More than half of Americans own shares of stock or in mutual funds.
With U.S. markets showing extreme volatility, many investors are
looking for safe harbors to ride out the storm.
The launch of the euro, analysts say, offers a new and attractive
option. To date, Europe has been a relatively risky place to invest. If you bought shares in a Spanish winery, for example, you were in
trouble if the peseta suddenly went south.
With the euro, American investors will have easier access to more
convenient investment opportunities across a broad territory. And
those investments will be priced in a single currency that is expected
to be much more stable than its predecessors, thanks to the steadying
influence of an independent European Central Bank -- Euroland's
equivalent of the Federal Reserve.
The euro could fail.
Scary early scenarios raised the specter of a euro collapse, worsening
economic crises in Asia, Russia and South America. Virtually no one
now predicts the euro will fall apart completely.
Observers have been a little worried since German voters threw out
the conservative government of Helmut Kohl -- a euro champion --
and installed a leftist, social-democratic coalition led by Gerhard
Schroeder. Schroeder's finance minister, Oskar Lafontaine, quickly
ratcheted up a bitter debate between Euroland's conservative central
bankers -- who are dedicated to maintaining a stable currency -- and
its left-of-center political leaders, who wanted the bankers to lower
interest rates in hopes of spurring job growth.
Joint action on rates
Last week, the central bankers took the unprecedented step of jointly
slashing interest rates, harmonizing the price of money at 3 percent in every Euroland nation except Italy. The move was widely hailed as a
much-needed antidote to slowing economic growth. But it fueled fears
that Euroland's major players -- France and Germany -- are already
pushing the new currency toward instability.
Even the most conservative analysts in Euroland discount that notion,
saying the political threat to the euro has been greatly exaggerated.
So what are the risks?
U.S. officials fear Euroland's leftist leaders will fail to deal with the high cost of labor, creating a weak euro that harms U.S. exports.
Euroland analysts, meanwhile, fear that demand for the new currency
has been underestimated and the euro will come out of the box too
strong, hammering a weak European economy.
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