A momentous decision

Eleven of the 15 members of the European Union are preparing to discard their marks, lire, francs and other national currencies by 2002 in favor of a new currency, the euro. Their goal is to boost economic growth and political ties. But the euro could backfire, trapping unlucky regions in recession and triggering political resentment when no authority comes to the rescue.

By adopting the euro, every country in the European Union except Britain, Sweden, Denmark and Greece would create the kind of common currency that Americans take for granted with the dollar. The euro is likely to boost economic activity by cutting the cost of buying and selling. Rather than juggling 11 different yardsticks, consumers can instantly compare the price of goods in Finland, Italy and other countries in between. The euro also eliminates the risk for investors that exchange rates will fluctuate and sabotage long-term contracts.

But a single currency also poses risks, because it robs countries of control over their own economies. If the French economy takes a nosedive, the government can pump in francs, devalue the franc or cut taxes and raise spending. But under the euro, France would have no francs to inject into the economy or devalue, and would operate under rules that severely limit deficit spending.

If the euro boosts the European economy, it will also boost America's. However, to the extent that it replaces the dollar as the currency of international trade, it will trim some real financial benefits that come from America's current role as the world's banker. But the threat is small. The best guess puts the loss at a few billion dollars a year, nothing to fret about in an US$8 trillion economy.

A more amorphous threat is political. If managed properly, the euro could assume an international presence comparable to the dollar's.

There would be pressure on the Europeans to create a political body able to manage the euro for international purposes, like the bailout of South Korea, Indonesia and Thailand led by the United States.

Some in the United States welcome the political evolution of the European Union as a way to lighten the United States' economic and political burdens. Others fear Europe's potential political clout.

The impact of this momentous decision goes way beyond economics in unpredictable directions.

-- The New York Times