Wed, 29 Mar 2000

Euro is facing a crisis of confidence

By Michael Stuermer

LISBON (DPA): It is a self-evident truth that good-naturedness ends where money comes into play. Up to now Germans have been seeing the euro as an abstract object. Now that the last Deutschemark bank-notes are being printed, the new single currency is sinking rapidly in the public esteem.

Two-thirds of the Germans would like to see European monetary union (EMU) revoked. One in 10 would prefer the U.S. dollar. The mood is even worse among the elderly and in eastern Germany. A crisis of confidence is brewing. This is the worst that can happen to a currency, especially one that is untested.

The reasons for the plunge in the euro exchange rate lie not only in the strength of the American economy. Rather, they are rooted in the weakness of the European structure.

Also, many European governments, especially that of Germany, have approached the restructuring of the labor markets (which hardly deserve the name), the social welfare systems and taxation either too timidly or not at all. The euro has to break the back of the discretionary state and the comprehensive insurance mentality or it itself will fail.

That however, would be a worst case scenario that would endanger Europe's industrial democracies. The factors to which the markets respond with rate declines drive fear into the hearts of ordinary citizens. The euro was always a risk, contrary to all official bans on doubt.

Industry keeps congratulating itself on chances to export to the dollar markets as well as on its attempts to bind constantly advancing devaluation by European competitors. But this is not a strategic way of thinking. The loss of confidence counts more than all of the small advantages together.

The German mark reflected the country's history, was a piece of national identity. The euro bank-notes resemble computer animations and are considered by experts to be susceptible to counterfeiting. This double shock is still to come.

Economist Joseph Schumpeter cautioned insistently after the monetary and financial crises of the 1930s that the monetary system of a nation reflects "everything that this nation wants, does, suffers and is". "Considerable influence on a nation's economy and its fate as a whole" emanates from the monetary system, Schumpeter said.

The euro is coming at a time of sobering-up and budget discipline. The moderation that was necessary a long time ago is now being attributed to the euro. From this, a leadership responsibility of a magnitude not seen since the economic miracle is developing for policymakers.

The European Central Bank (ECB) is not in an envious position. It has to prescribe homogeneous interest rates for a heterogeneous economic-and political area.

The most European characteristic of Europe is the diversity of the Europeans themselves. Integrating them into a single currency was a courageous risk. The acid test for policy is to regain the confidence lost.