US in two minds over Euro

Date: 11/07/1996

By Tim Jones

THE Americans are waking up to the single currency - or so European politicians would have us believe.

Wall Street and its political wing, Washington, say the Euro crusaders, finally 'get it'.

A group of countries really will be banding together with Germany in January 1999 and handing over control of monetary policy to an independent European Central Bank. Within four years, the deutschemark will be consigned to the history books together with the ecu, the gold sovereign and the ducat.

The long-sceptical US establishment has at last woken up to the implications of this event. At a dinner held in Lyon two weeks ago for the G7 finance ministers, Economics Commissioner Yves-Thibault de Silguy talked about a “surprise guest”.

Where so often these gatherings have been dominated by discussions of Russia's debt or the falling or rising dollar, suddenly monetary union held sway. US Treasury Secretary Robert Rubin, it seemed, could hardly be torn away from the subject.

There are still 18 months to go before the list of economies earmarked to form the monetary union is drafted. Next summer's G7 summit in Denver, Colorado, should be the EMU summit.

In public, the Americans are expressing their hopes for - rather than their fears over - the coming Euro.

“All of this is a very positive development with respect to Europe and what is good for Europe is good for all of us,” Rubin remarked after the Lyon summit.

But the State Department let its guard down. “We are supportive of their efforts to create EMU but,” admitted Joan Spero, under-secretary at the US foreign ministry, “at the same time, we do not want EMU to be developed at the expense of a massive slowdown in the European economy.”

The Americans fear that, by focusing so single-mindedly on the Maastricht Treaty's criteria for budget deficit reduction, European governments are in danger of fuelling a huge downturn in demand across the world. Once EMU is up and running, these rules will be enforced and fines levied if they are missed.

American exporters may have to get used to a level of consumer and business demand in Europe unprecedented in post-war history.

This was the American view on show at April's conference of G7 finance and employment ministers in Lille. In private discussions, Joseph Stiglitz, chairman of Clinton's Council of Economic Advisers, and US Deputy Treasury Secretary Lawrence Summers sounded warning notes.

They agreed with the prevailing orthodoxy that a large proportion of the unemployment plaguing the Union was 'structural'. Even with a significant upturn in demand for goods and services, a core of joblessness would remain because of the costs of employing people, rigid laws against flexible working or opening hours, and the continued monopoly control of certain huge utilities markets.

But they disputed the idea that nothing could be done by monetary policy-makers to create jobs.

Summers warned that if short-term interest rates were kept too high for too long, 'cyclical' unemployment could harden into 'structural' unemployment.

A job lost because of depressed demand may never be replaced as industries relocate to countries where it is cheaper to borrow.

US officials derided the attempts of French President Jacques Chirac to write a 'social clause' into the EU's treaty to protect the European social model. Paris could do more by getting interest rates down to realistic levels than with a hundred treaty amendments, they quipped.

The Americans came to the Lille meeting armed with a study showing that the US economy was generating high-quality jobs in numbers unimaginable to their European counterparts. The analysis drawn up by Stiglitz showed that between 1993 and 1996, 8.5 million jobs had been created, with most of these in sectors paying above-average wages. Industry has continued to re-equip and inflation has been kept under control.

Last week, the US Labor Department announced that 239,000 new jobs had been created in June alone - and this coming after a rise of 365,000 in May. The unemployment rate fell to its lowest level since 1990 at 5.3&percent; of the workforce. A happy President Bill Clinton said: “It is good news when America can have high job growth, strong investment and low inflation.”

The US is a giant single market, but it also has a federal tax system and a common language. If a recession begins in Texas while the economy in California is booming, redundant workers can pack their bags, cross state lines and head for the Golden State. At the same time, the federal tax system will ensure that falling public revenues in Texas will be offset by increased federal spending, and vice-versa for California.

The same cannot be said for Europe's monetary union model.

Yet many European officials and ministers hate nothing more than to be lectured to by the Americans about how to conduct economic policy and create jobs. For many of them, the whole idea of the single currency is to give the Union the kind of international political clout it needs to reduce the power of the almighty dollar.

Earlier this month, de Silguy had a dream: the EU sitting at the table with the US and Japan and drawing up an international pact to stabilise currencies, banking systems and increasingly sophisticated markets.

“The introduction of the Euro will offer the Union an opportunity for dialogue with its two principal partners on an equal footing,” he told a meeting. “This dialogue should concern the overall coherence of policies followed in each of the three monetary zones and the active surveillance of financial institutions and markets.”

De Silguy has even gone so far as to advocate the use of blue ink in the printing of Euro banknotes. That way, he believes, the Euro could become known as the 'blueback' - boasting a nickname to compare with the dollar's 'greenback'.

Nevertheless, while the Americans' attitude continues to infuriate Europeans, the fact that they have an attitude at all provokes satisfaction in Brussels. Many EU officials suspect Washington has finally cottoned on to the fact that the dollar could be under threat.

The dollar benefited throughout the Cold War from the global dominance of the States and the sheer size of its market. People living in countries with unstable economies still use the dollar as a surrogate currency, while international portfolio investors must sink a large proportion of their funds into dollar deposits, US shares and federal government debt.

This could be under threat. A new reserve currency will emerge from the deutschemark bloc with a huge single money market. While bond markets will remain separate, the currency loss risks attached to investing in some of them will be gone.

“International portfolio holders, such as the Taiwanese, with large amounts are already getting concerned about being overweight in dollars and are wanting to spread it around,” says a New York-based investment banker.

US investors, on the other hand, are still sceptical about the real prospects for monetary union in Europe.

They were told five years ago that EMU was coming in 1997 and nothing could stop it. The Spanish, British, Portuguese and Italian markets were surrogate marks, they were told, and they invested heavily in 'Europe funds'.

“They lost money on that,” says David Hale at Goldman Sachs in New York. “Americans have been traumatised by the last few years and I think they will approach this again very cautiously.”