Europe's currency test

When almost a dozen developed economies come together in a currency union, the rest of the globe might be expected to sit up and take notice. But the birth of the European Monetary Union euro currency has been so protracted that the news that 11 nations are likely to meet the criteria for membership at the beginning of 1999 has aroused little attention outside Europe itself.

This may be because the eyes of the world have been on the Asian crisis and because the U.S. dollar has been so dominant that it obscures other currencies. Britain's refusal to join the single currency has also cast a shadow over the project. Furthermore, the scramble to meet the membership criteria has also thrown up some examples of creative national accounting to which orthodox bankers have from time to time raised an eyebrow.

Still, a monetary union including the world's third and fourth economies -- Germany and France -- plus such countries as Italy, Holland and Spain should have repercussions well beyond Western Europe, with implications for both the United States and Asia from the start of the next century.

If the yen continues to be as weak as it has been recently and Japan stays within its conservative domestic economic path, the countries of the new euro currency may reasonably hope to become the counterweight and alternative to the U.S. dollar in international dealings. Some proponents of the euro seem ready to lean towards a "soft" currency which would float gently downwards to achieve a currency devaluation that would boost European exports.

This may look tempting given the high levels of unemployment in France and Germany. Both countries have suffered political uncertainties as a result.

But this would negate the achievements in terms of deficit cutting which has been undertaken to bring the euro into being. Europeans sometimes worry about U.S. hegemony. One response is to develop a joint currency which can match the dollar. But whether they can work with the unity of purpose required to do that is the great political and economic test which the founding members of the euro are about to face.

-- South China Morning Post