IT WILL happen over a holiday weekend, and in a way which leaves ordinary citizens more or less unaffected, as new notes and coins will not replace old national currencies for a further three years. But the nature of its launch on January 4th should not let anyone underestimate the importance of the creation of the euro, the new single currency for 11 European Union members, nor miss its genuinely historic nature. It is the biggest risk the EU has ever taken, but also an adventure that could transform the economic and political landscape of the continent. It is the first time that countries of anything like this number, size or global economic weight have gathered together to share a currency, and thus to pool their monetary sovereignty. It is arguably the most momentous currency innovation since the establishment of the United States dollar in 1792.

The superlatives could go on. But is the euro to be welcomed? Yes, it is, and all should hope that it will be a success. The European Union is an imperfect creature, with some of its actions based on fine principles of political economy and some on poor ones. The intentions behind the euro fall clearly into the first category. The EU was founded in 1957 on the desire to avoid war, and many of its best achievements have also been based on another sort of disarmament: policy disarmament. For external trade, for state aids, for the single-market rules and others, countries have handed over powers that seemed (though generally weren’t) individually desirable but were in practice mutually harmful. A similar transfer is happening now with monetary policy. The 11 euro members’ rights to inflate, to finance budget deficits by printing money, to boost exports temporarily by currency devaluation are being handed over to the new European Central Bank (ECB) in the most powerful way possible, by treaty.

As with the other forms of policy disarmament, the transfer of powers to a supra-national body does not guarantee they will be used well. In trade, national protectionism has too often merely been replaced by pan-European protectionism. But the Treaty of Maastricht, which in 1991 paved the way for the ECB and the euro, gives cause for hope. The ECB has a strict and simple task: price stability. It is forbidden by treaty from bailing out a profligate government. Its independence from political interference is well entrenched.

That said, the risks associated with the euro also begin with the treaty. To paraphrase Keynes’s criticisms of the Treaty of Versailles after the first world war, treaties often solve one problem but cause the next. In the case of Maastricht, one risk is that the ECB’s task will be carried out too strictly and inflexibly. But the most worrying legacy lies in the treaty’s strictures about national budget deficits and in the cementing of those concerns in the later Stability and Growth Pact. As our article argues, this deprives governments of the one power which, under a monetary union, they most need: the ability to use national fiscal policy to counteract recessions which affect one member state more than the others. They have not lost this ability altogether, but it will be severely constrained.

The danger that this raises is that in the event of a sharp recession in one or more countries, there will then be a political reaction against the EU itself. The Union as a whole, and other euro members, will be blamed for the victim’s inability to moderate its recession. Given that public support for the euro has been thin, to say the least, in most of the member countries (and is unlikely to grow much during the absurdly long, three-year period before people actually get hold of euro notes and coin), this is one helluva hostage to fortune.

Such an outcome, if it happens, could cause a political bust-up; or it could lead to more power being transferred to the EU in the worst possible circumstances, namely when the Union is deeply unpopular. But there is also a happier way to think about things. Perhaps this nasty outcome will not occur, either because no such “asymmetric” recession takes place or because governments, meanwhile, have dismantled the stability pact. In that event, the euro will have proved a success: its members will have achieved low inflation, and the currency will have ridden out the ups and downs of the economic cycle without itself becoming politically unpopular. That is the outcome for which everyone should be hoping during the next decade.

What then? The answer, most probably, is that a successful euro would give a big impulse to political union between the constituent countries, something close to the founding fathers’—and Winston Churchill’s—original dream. The policy disarmament of monetary union would have been shown to have worked, would by then be justifiably popular, and would have encouraged governments to seek new ways to transfer their powers to common institutions. Such a union is not inevitable. And on a decade or two’s timetable it would be unlikely to be as full a union as today’s United States of America. To those who hate federalism, the very thought of political unity will anyway be anathema. But this would be the right way to arrive at a closer union: after a positive experience, and with popular support.

Even this Elysian vision must, however, take account of other likely changes. By then the EU will be bigger, with 20-30 members rather than the current 15. That fact, let alone the current division between the 11 euro countries and the four, led by Britain, that have not joined, is likely to mean that the Union should become a multi-system entity, with some countries signing up to everything and others opting for a different blend. It may well prove perfectly rational, in the long term, for some EU countries to stay out of even a successful euro. But that, too, is a happy thought: a Europe that is broad as well as deep, that takes account of national differences and is not thought of as a federalising bully. If the euro succeeds in creating such a Europe, its launch on January 4th 1999 will be looked back on as really quite a moment.

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