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The euro: One currency -- but still 11 different nations

By Charles Hodson
CNNfn Anchor and Correspondent

In this story:

• Challenging U.S. economic dominance
• All aboard, but who's driving?

May 1, 1998
Web posted at: 11:10 a.m. EDT (1110 GMT)

LONDON (CNN) -- It has been in many ways a dream, this new euro that is soon to become the currency of 11 European nations. And, in the nature of dreams, the outlines are clear enough, but the details are a bit murky.

For generations, Europe's leaders have longed for the day when their people could move from country to country with a single currency in their pockets, freed of the cost and trouble of changing money as they cross borders.

That day is now a set date: January 1, 2002. Then, barring any last-minute loss of heart or change of plan, 11 of the 15 members of the European Union will introduce the euro as their common system of banknotes and coins.

And well before then, monetary union will take practical effect. Just seven months from now, on January 1, 1999, those 11 nations will "lock" or fix their common exchange rates. The currency will be phased in on a consumer level in the three-year interim.

The euro is to become the legal tender in Germany, France, Italy, Spain, the Netherlands, Austria, Belgium, Finland, Ireland, Portugal and Luxembourg.

This weekend, the European Union is formally designating the nations participating in the euro at a summit in Brussels.

The four other EU members -- Britain, Sweden, Denmark and Greece -- will stick with their own currencies for the time being.

Challenging U.S. economic dominance

Creating monetary union has taken Europe quite some time, but its impact on the rest of the world will be sudden and probably dramatic.

Literally overnight, what's been dubbed "Euroland" will become a currency bloc of a size formidable enough to challenge the dominance of the United States.

Euroland will account for about a fifth of world trade -- more than the United States. Its 300 million people will produce a quarter of the global gross domestic product, about the same as the United States and its population of 270 million.

Perhaps most importantly, the participating members of the European Union will enjoy something that has enriched the United States for two centuries: a single vast domestic market and a single currency.

Business will benefit first. While initially companies will still have to pay fees to exchange money, as well as keep their accounts in both euros and their existing currencies, they will be relieved of the costly uncertainties that stem from exchange rate fluctuations.

At the same time, fixed exchange rates and a gradual shift to the euro will make price and cost differences across borders clearer, making for keener competition that will benefit businesses and consumers alike.

All aboard, but who's driving?

With such clear benefits, many advocates wonder why it's taken Europe so long to give monetary union a try.

The reasons go back to the elusive details of the original dream. Euroland fits into a small space on the world map, but it has had -- and will continue to have -- 11 different economies, run by 11 different governments.

To bring them all into line to make the euro feasible, their governments have spent the mid-1990s struggling to cut budget deficits, pay back debt and reduce inflation to agreed levels, known as "convergence criteria."

But many economists say these criteria have been interpreted too liberally because politicians, many of whom have staked their reputations on monetary union, want to squeeze in as many nations as possible. And already there are fears that old habits of financial laxity in some countries will return to make the euro weak and unstable.

And since the single currency stretches from Tipperary to Trieste and from Cadiz to Kiel, the 11 different economies that are linked by the euro likely will still react to outside shocks in 11 different ways.

A number of economists and politicians already forecast one major problem -- the rigidity of Europe's labor markets. They say excessive regulation and excessive benefits for existing workers already keep unemployment high in continental Europe, and the euro will make matters worse by restricting policy options.

Policy decisions such as the pivotal matter of setting interest rate policy will be entrusted to a new European Central Bank that will enjoy a degree of independence similar to that of the U.S. Federal Reserve.

Doubts are shared by at least some of the people affected. Opinion polls in Germany, whose government support of the euro has been instrumental in its implementation, show nearly two-thirds of the people surveyed want to keep the deutche mark.

And in Britain, so-called "Euroskepticism" has been strong enough to keep the country on the sidelines of monetary union in a wait-and-see stance.

As the euro proceeds, some economists say nations such as Britain will ultimately be forced to join as a matter of practicality.

Whatever the outcome, visitors to Europe nostalgic for heavy pockets full of different coins can still pack all those guidebooks. After all, it's one single currency -- but still 11 different nations.

Related sites:

Note: Pages will open in a new browser window

• European Union
• ECU-ACTIVITIES
• European Monetary Institute
• EMI's links to European central banks

External sites are not endorsed by CNN Interactive.

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