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Europe: Monetary Union Means Greater Efficiency

  • Breffni O'Rourke

Prague, 21 January 1998 (RFE/RL) -- As the European Union moves inexorably towards introducing a single currency, argument continues among economists as to whether the move will succeed, or will instead derail economic growth in Europe.

The "euro" due for introduction into 11 of the EU member states on January 1 next year, and detailed preparations for the launch are already underway. Central and East European countries, which will be indirectly but powerfully affected, are also beginning to make adjustments.

Monetary union is widely seen as the most momentous single step taken by the EU since that organization's genesis in the post-world-war-two era. Skeptics see the move as a dangerous leap into the dark, because it seeks to treat as one unit 11 big economies which still differ substantially, despite following common convergence criteria in recent years. They note that historically seen, political union has always preceded monetary union, whereas the EU is doing things the other way around.

The optimists, on the other hand, look forward to the greater efficiency offered by a huge single-currency market, which they predict will provide a powerful boost to growth among participants, and also for the neighboring transition economies which are closely bound to the EU through trade ties. They point out that the financial markets, the decisive factor in the EMU equation, appear to have accepted the arrival of the euro without any sign of nerves. And they note that European exchange rates have remained stable throughout the Asian crisis, at a time when speculators have devastated a series of Asian currencies.

Assuming that the positive scenario works out, senior EU officials dealing with monetary affairs told RFE/RL that they see a number of benefits for Central and East Europe from the single currency. The most basic is that the huge single-currency market simplifies their exports to the EU by cutting red tape presently caused by 11 separate exchange rates. Another is that the business risk factor in dealing with the fluctuation of separate currencies is correspondingly reduced 11-fold. Still another is that the new euro finance market, being deep and highly liquid, will be characterized by the availability of new financial instruments, including the facilities for borrowing at lower interest rates than at present.

Further -- and once again assuming an optimum outcome for the euro -- the eastern currencies will have the opportunity to "borrow" the stability provided by the euro area. One EU official noted that the currencies of many of the transition countries are linked to the D-mark, or a basket of hard currencies, usually including the D-mark and French franc. When these separate European currencies disappear, direct exposure to the euro will replace them.

The official said that a Hungarian delegation held talks in Brussels last week. He said they raised the possibility that Hungary might increase the prospective share of the euro in its currency peg, which at the moment is basket composed of 70 percent D-mark and 30 percent US dollar. The official said that sort of move would be characteristic for countries moving towards the EU as future members of the organization.

On the consumer level, the public in West Europe are seeing the first practical evidence of the new currency. For instance banks in France have notified customers that from May 1, their bank accounts will be given both in Euros and in francs. Many small steps are being taken to educate consumers, and that analysts say that's necessary, as public attitudes towards the new currency are often cool.