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January 4, 1999

The Euro: For U.S., Gains and Losses

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    WASHINGTON -- For the last several years, the Clinton administration has articulated a simple policy toward the single European currency: Anything that helps build a more prosperous trading partner on the other side of the Atlantic is good for the United States.

    "We have everything to gain," Deputy Treasury Secretary Lawrence H. Summers said, "and little to lose from the success of this momentous project."

    But that policy masks some complex and unresolved issues for the United States.

    If the new currency, the euro, is successful over the long run, it could pose a threat to the dominance of the dollar as the world's primary reserve currency, perhaps increasing borrowing costs for the United States. If it is unsuccessful, the struggle to make the euro work could endanger the remarkable progress made by Europe in melding its diverse economies into a single market and subduing historical animosities under the cover of financial engineering.

    In the meantime, U.S. officials are prodding European governments to make sure their focus on getting the euro off to a good start does not diminish their resolve to deal with Western Europe's chronic economic problems, most notably its persistently high unemployment rate.

    And, U.S. officials say, Europe should not allow the very real challenges of monetary union -- which formally began last Thursday with 11 countries in the European Union locking their currencies to the new euro -- to turn its attention inward at a time when much of the world is still struggling to recover from the shocks of the financial crisis that began last year in Asia.

    "Some have argued that a Europe with a single number in the global directory might ultimately pose a threat to the United States," Summers said in a speech last month. "But in a global economy, the United States has infinitely less to fear from an open and integrated Europe that continues to take its share in global responsibilities, than a Europe that turns inward and seeks insulation."

    To the extent that there has been any debate in Washington policymaking circles, it has had less to do with the euro itself than with Europe's economic challenges and its view of its place in the world.

    On one side are those who are optimistic that the euro will prove to be the spur that Europe needs to unshackle its economies from excessive regulation and stimulate more growth and jobs through private investment. On the other side are those who think Europe is doomed to years of economic underperformance, tinged by protectionism, as the left-wing governments now in power in France and Germany stall on long-delayed changes.

    "This is a double or nothing bet for Europe," said one senior U.S. official. If the euro works, the official said, Europe will emerge stronger and more prosperous; if it fails, the continent will emerge more divided, poorer and less confident.

    Beyond the questions of political and economic stability, the benefits to the United States of a successful euro could be considerable. By replacing the French franc, the German mark and nine other national currencies with a single European currency, the program should make it easier and less expensive for U.S. companies to sell their products and services. Multinational U.S. companies are already among the largest in Europe, and many mid-sized and smaller U.S. exporters are increasingly looking to Europe for growth. But Britain, the most popular location for U.S. business interests, has chosen not to adopt the euro for now.

    "I think we are going to see significant advantages go to those companies who had already viewed Europe as a single market, which a lot of our bigger companies already have done," said David L. Aaron, the undersecretary of commerce for international trade.

    Moreover, he said, eliminating fluctuating exchange rates should create competitive pressures in Europe that will narrow price variations among countries, favoring cost-conscious U.S. companies.

    "Prices are going to fall," Aaron said. "That will increase demand and put more money in consumers' hands. That's going to have a positive effect on the European economy, and that will be good for the United States."

    While U.S. officials say the potential economic threats to the United States from a successful euro are too often overstated, they are nonetheless real.

    A euro representing the might of nations whose economies together already rival that of the United States in size could eventually draw away some of the influence and financial power that the United States has long enjoyed by virtue of having the world's dominant currency.

    David Hale, an economist at Zurich Kemper Investments in Chicago, compares the introduction of the euro to the formation more than eight decades ago of the Federal Reserve system in the United States. Before it had a central bank, the United States had no uniform monetary policy and although it had a nearly equivalent share of world trade to Britain, the country accounted for a minuscule share of global finance.

    The dollar now accounts for nearly 60 percent of global foreign currency reserves, almost four times as much as the European currencies combined. And although it is difficult to predict how fast that situation will change, a successful euro would certainly reduce the dollar's hegemony in international finance over the long run. That could make it more expensive for Americans to borrow in an increasingly global capital market.

    "Until now the fragmentation of Europe and the national nature of the central banks has inhibited the international use of the currencies," Hale said. "But at some point there will be a moment when international capital demand and additional competition for global savings hurts the ability of the United States to fund its external deficits because there will be competition to the dollar."

    There is also some question about whether the United States will continue to benefit from the desire of people in other countries to hold dollars instead of their local currencies -- a practice that amounts to a huge interest-free loan to the United States.

    By some estimates, a majority of dollars in circulation are outside the United States, held by everyone from Russians desperate to avoid the effects of a ruble depreciation to drug smugglers and arms merchants who need a currency they can move around the world with ease.

    And the Europeans seem to have taken that potential role into account in devising their new currency, which will start circulating as coins and bills within the next three years. The largest European bill will be a 500-euro denomination, worth about $550, while the largest U.S. bill remains $100.

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