Floyd Norris in today's New York Times says that little in the way of "reforms" is being implemented, however.
"When the euro was being planned, advocates expected the currency to be strong. No longer would an Italy, say, be able to just let its currency weaken. To stay competitive, it and the other governments would have to adopt structural reforms. Rigid labor markets and high-cost government pension plans would inevitably wither away.
Just the opposite seems to be happening. Taxes are being cut, but other reforms are coming slowly, if at all. . . . " New York Times/Business September 15, 2000
The Euro Experiment: A Bold Idea That Isn't Working By FLOYD NORRIS
THE euro is a grand experiment, a paper currency without a government. And that lack is one reason the euro has sunk far below any reasonable level.
Early this week, Romano Prodi, the president of the European Commission and, as such, the closest thing Europe has to a president, called for intervention in the foreign exchange markets to support the euro. The markets yawned. Traders know that Mr. Prodi has little power.
Nor does anyone else. Europe has a central bank, but the euro has 11 national governments. None of them can set policy for the area as a whole, and each of them can disclaim responsibility for what happens to the currency.
When the euro was being planned, advocates expected the currency to be strong. No longer would an Italy, say, be able to just let its currency weaken. To stay competitive, it and the other governments would have to adopt structural reforms. Rigid labor markets and high-cost government pension plans would inevitably wither away.
Just the opposite seems to be happening. Taxes are being cut, but other reforms are coming slowly, if at all. The currency markets can no longer cast a vote on any one government's policies, so the easy way out is not directly punished, and the hard way is not going to be directly rewarded. It should come as no surprise that governments under pressure tend to choose the easy way, as France did to buy off protesters who wanted lower fuel taxes.
One way to fight a falling currency is to intervene in the currency markets. That can be a good tactic when, as now, currency values are clearly out of line. But for intervention to work, it should be large, internationally supported, backed by a government making credible policy changes and seen as likely to continue if necessary. Yesterday's European Central Bank announcement that it was buying $2.2 billion worth of euros fails on all counts. [Page C3.]
Raising interest rates is another method to support a currency, and one that poor Wim Duisenberg, the president of the European Central Bank, has tried. Unfortunately, it is equity capital flows that now dominate the global investment scene, not bonds. Europe needs to find a way to persuade investors to buy stocks and businesses. Higher interest rates would slow the economy without helping the euro.
Mr. Duisenberg never expected anything like the current situation, in which the United States can run an unprecedented current account deficit — now at 4.3 percent of gross domestic product, or more than $1 billion a day — while the dollar rises. "In the long run, such a deficit is unsustainable," he told a European parliamentary hearing. But for now, he added, "the Americans have no difficulty in having that deficit financed, basically by us, Europe."
That current account deficit is being exacerbated by high oil prices, which may yet slow the entire Western world and make American investments look less attractive. Eventually, Mr. Duisenberg will be proved right. The dollar is overvalued, and will decline. Someday.
But the euro may not have that much time to wait. Already the euro disarray is damaging hopes that Denmark will vote to join the currency union. Such a vote would damage the euro even further, and strengthen British opposition. In that environment, a European recession might stir nostalgia for good old marks and francs. But Europe's rules bar any country from abandoning the euro.
A strong government for the euro region could fight those trends. But this currency has 11 governments, which for some purposes is the same as having none. [end]