Euro: The biggest shift in world financial order

By Gwynne Dyer

LONDON (JP): Captain Euro, the blue and white lycra-clad cartoon character whose website -- www.captaineuro.com -- is meant to wean sentimental Europeans away from their outmoded francs, lira and guilders, is a marketing disaster.

His militaristic peaked cap resembles those worn by German student dueling societies, and later by the Brownshirts who paved the way for Nazi rule. As if the deutschemark were about to take over Europe.

On Jan. 1, for the first time since the fall of the Roman empire, Europe from the Mediterranean to the North Sea will have a single currency: The euro.

When the new German finance minister, Oskar Lafontaine, suggested that the next item on the European agenda after a unified currency should be "harmonized" tax policies, Murdoch's flagship tabloid in Britain, The Sun (which has always understood that xenophobia sells as many newspapers as bare breasts) did its Australian/American master proud.

"Listen very carefully, Herr Lafontaine," blared the headline that covered two-thirds of the Sun's front page. "We will say this only once: Foxtrot Oskar." The 'F' and the 'O' were highlighted for those too young to know just which crude English phrase the military slang referred to. It was much uglier than the "Captain Euro" propaganda -- but just as patronizing and stupid.

So have Captain Euro and his buxom blonde sidekick, Europa, inadvertently let the truth out? Is the euro really a Hunnish plot to dominate Europe?

The truth is precisely the opposite: The single currency is a French plot to Gulliverise the German giant in the center of Europe. As Jacques Attali, adviser to France's late President Francois Mitterrand, said after the negotiations that agreed on the single currency: "Maastricht was a long and complex treaty with but one real goal: to get rid of the mark."

The only reason that eleven European countries are getting a single currency next month is that Germany was reunited nine years ago last month.

Even before the fall of the Berlin Wall, the old West Germany was the most powerful economy in the European Union. The new, united Germany towers above the rest -- and this is Germany we are talking about, with all the historical baggage that entails.

The French were not ecstatic about giving up the franc, either, but the euro was sold to them in explicitly geopolitical terms. Former prime minister Edouard Balladur, writing in Le Monde, argued that "the rejection of the Maastricht treaty (would)...simply allow Germany to act as it desires, without taking heed of its neighbors or its partners, without being constrained by common European rules in its role as the military, economic, financial and monetary power at the heart of the continent."

The French public, which is more schooled in geopolitical ways of thinking than any other population in the world, bought that argument without hesitation. Once France and Germany had agreed, Belgium, the Netherlands and Luxembourg naturally climbed on the euro bandwagon too. For Italy, Spain, Portugal, and Finland, it was an opportunity to acquire a harder, more credible currency that could not be missed, and the Austrians and Irish are going along for the ride.

The Greeks failed to qualify because of their budget deficit (though they still hope to join soon). The British, as usual, chose to hang back, leaving a decision on abandoning the pound to later. The Danes and Swedes, with Scandinavian aloofness, decided not to tie themselves even more closely to feckless southerners' like the Germans. But on New Year's Day, eleven of the fifteen European Union countries will adopt the euro as their new currency.

On the day it comes into existence, "Euroland" will have a population of 290 million people and an 18.4 percent share of world trade. Its sole economic rival, the United States, has only 265 million people and a 16.6 percent share.

This is the biggest shift in the world financial order since Richard Nixon floated the U.S. dollar in 1973, it is happening in the midst of the biggest global financial crisis for the past 50 years -- and it is being done primarily for political, not for financial reasons.

This raises a couple of urgent questions. Can the change-over be done without triggering a new bout of panic in the foreign exchange markets? And if the euro really does replace all the other major currencies of the industrialized world except the dollar and the yen, what will that do to Europe's economy and the world's?

It never used to be, of course, but last May all the currencies heading for the euro locked their exchange rates, so the lira, the franc, the peseta, and the schilling are already, in a sense, fixed fractions of a deutschmark. And now the central banks are even changing their interest rates in a lockstep.

"European Monetary Union started today around 2 p.m.," announced Tomasso Padoa-Schioppa, a member of the new European Central Bank, referring to the concerted cut to a 3 percent interest rate carried out on Dec. 3 by ten of the eleven euro- zone countries. "The importance of this move cannot be overstated." And in a sense, he was right.

In their last-ever independent decision on interest rates, the central banks of Germany, France and all the other countries showed that they are committed to a single European currency with a single interest rate regardless of regional differences that might argue for a higher or lower rate. (Italy cut only to 3.5 percent, but will come into line on Jan. 1.) Nobody now doubts their commitment, and no sane speculator is going to take a run at the euro in the first months of its existence.

What remains is the huge job of changing eleven currencies for one, which will ruin the New Year's long weekend for up to one hundred thousand people in the financial sector all around the world.

Then at 12.30 p.m. on Dec. 31, eleven finance ministers meeting in Brussels will announce that their countries have adopted the euro at the exchange rate calculated by the European Commission's economists, and the race will be on.

Over US$2,000,000,000,000 ($2 trillion) of European bonds and other debt, in 1,400 different types of instrument, will have to be recalculated in euros. Share prices will have to change over, derivatives markets will have to be rebased, foreign exchange desks will be closed down -- and everybody must be ready for business again on Monday morning, Jan. 4. It will be done, of course, but in the City of London alone over 30,000 people will be working in shifts around the clock all weekend.

And still it will not all be over, for while the banks and financial markets will be working in euros, ordinary Europeans will continue to do their shopping with escudos, guilders, markkas and the like for a further three years.

These will have become phantom currencies, in the sense that they only officially exist as fixed fractions of the euro, but actual euro notes and coins (55 billion coins) will only go into circulation on Jan. 1, 2002.

Six months later, the last of the old money will be withdrawn -- and by then we should have a much better idea of what this upheaval means for Europe and the world.

At the moment, cars cost around 40 percent more in Portugal than they do in Italy, and clothing is about 40 percent more in Germany than in Ireland. Nobody notices, because almost nobody carries the escudo-lira or the mark-punt exchange rate around in their heads. But all the protected markets are going to be hit hard as wholesalers and customers take advantage of the euro, and the result will be a major restructuring of European industry.

This should improve Europe's global competitiveness, but how much depends also on the spending and taxation policies of the euro-zone, and that is a contentious area. We have probably seen the first signs of where monetary union is taking Europe politically in German Finance Minister Oskar Lafontaine's recent talk of "harmonizing" some tax rates in the euro-zone, and his even more radical remarks about the need to end the unanimity rule in EU decision-making.

It is a simple equation: one currency equals one interest rate equals one government. You can have a loose federal government, with lots of room for individual variations, but you cannot have a single currency and eleven different sovereign governments. This was, after all, the logic at the heart of the Kohl- Mitterrand strategy: that monetary union will FORCE political unification.

The political status quo is not really credible: Europe is adopting a currency that may become as important as the U.S. dollar, but it has none of the institutions that normally back such a currency except a central bank: no president, no Congress (the European Parliament has very limited powers), and no federal budget worthy of the name. In the long run, the euro will not survive unless the member countries move rapidly towards a true federation.

So things may move faster than people expect on this front once the euro is up and running. Consider, for example, the defiant joint declaration by German Chacellor Gerhard Schroeder and French President Jacques Chirac early this month, after all the uproar in Britain about Lafontaine's comments: "We will campaign for stronger coordination in economic policy. particularly in the framework of the 11 euro-countries, for rapid progress in harmonization of taxes, and for the formation of a real European social model."

What is a "European social model"? In Lafontaine's formula, it is "harmonized" fiscal, investment and wages policies across the European Union, and Europe-wide macro-economic policies to stimulate growth and create jobs. That requires a much bigger EU budget, and an end to the unanimity rule that lets a single member veto any decision. And if the recalcitrant British, for example, use their existing veto to block such changes, then we'll just make them inside the euro-zone where the British aren't present.