| Euro facing major test { September 24 2003 } Original Source Link: (May no longer be active) http://www.washingtonpost.com/wp-dyn/articles/A55420-2003Sep23.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A55420-2003Sep23.html
Euro Facing a Major Test Zone Nations Show Willingness to Break Ranks
By Keith B. Richburg Washington Post Foreign Service Wednesday, September 24, 2003; Page E01
PARIS -- Europe's common currency, the euro -- introduced 41/2 years ago as a global competitor to the dollar and the most visible symbol of the continent's postwar unity -- is facing its most serious crisis since its inception.
France and Germany, which have the biggest economies of the 12 countries that use the euro, are breaking the strict budget rules governing the currency by running huge public-spending deficits. Growth continues to sputter in the euro zone, while the United States is showing initial signs of recovery. Unemployment has risen to 12.5 million. And the near-record-high value of the currency is hurting competitiveness by dampening exports.
Last week voters in Sweden overwhelmingly rejected adopting the euro in favor of keeping their national currency, the krona. Sweden's entry would have expanded the euro zone's economy just 3.6 percent, but the rejection, based in part on voters' concerns about problems they see in the euro zone, could strengthen resistance in the other two holdouts in the 15-country European Union, Britain and Denmark.
"The outcome of the Swedish referendum was no surprise," said Dominque Barbet, senior economist for the French bank BNP Paribas. "The euro zone is definitely not looking attractive right now." He added, "We knew from the beginning that the euro zone was not a perfect monetary zone."
The euro's current troubles are highlighting the enormous difficulties of melding a dozen disparate economies into a single monetary union. It shows that despite statements of integration and European unity, many countries are willing to break ranks when they feel their national interests are being subordinated to a common goal.
"I don't see any threat" to the euro zone as a whole, said Lars Calmfors, a Stockholm University economist. "But what is happening now is serious, and it's a bad situation in some countries."
The most serious problem, economists said, is the continued defiance by France and Germany of the euro zone's "growth and stability pact," which requires countries using the euro to run budget deficits of no more than 3 percent of their gross domestic products. In theory, countries can be fined huge amounts if they exceed the limits.
French officials caused a crisis earlier this month when they said they expect a 4 percent deficit this year. President Jacques Chirac and his prime minister, Jean-Pierre Raffarin, also have said they intend to push for large tax cuts, further challenging their partners in the euro zone.
Germany is predicted to run a deficit of about 3.8 percent this year. Italy and Portugal could also violate the deficit rule.
France and Germany have drawn strong criticism from members of the European Commission, the EU's executive board, and from officials in smaller countries that have made huge sacrifices by cutting spending to stay within the stability pact's rules.
"We gave up the sovereignty of our currency for a very good treaty," said the Dutch finance minister, Gerrit Zalm, at a meeting of European finance ministers this month in the Italian resort of Stresa. "If this treaty is not applied, we would be in big trouble."
Chirac and his German counterpart, Chancellor Gerhard Schroeder, last week defended their plans to cut taxes as a way to stimulate growth. Meeting in Berlin, they also unveiled a series of joint infrastructure projects, including high-speed train links and broadband communications networks, that they said would boost Europe's sluggish growth.
But critics blame the policies of both governments for the euro zone's predicament. Specifically, they say French and German leaders failed to use the boom years of the late 1990s to cut public spending and build budget surpluses, so their economies are less able to withstand the current downturn in the business cycle.
"The mistake made in Germany and France is that in this boom of the late 1990s and 2000, they did not restrain spending," said Calmfors. "They did not create a surplus." Given the downturn, he said, it's awkward for them "to tighten their budgets in this situation. But if they don't live up to the rules, the rules will lose all credibility."
The French and German attitudes were among the reasons frequently cited by Swedes for rejecting the euro by an unexpectedly large margin.
Structural problems adding to the budget troubles include the massive pension liability in France, and Germany's high-priced labor system. The governments in both countries have begun major programs aimed at overhauling their respective systems, in each case against entrenched opposition.
Chirac and Schroeder have in the meantime been asking for more flexibility under the stability pact's rules. They have found an ally at the International Monetary Fund, which has often argued for fiscal prudence around the world. Last week in Dubai, United Arab Emirates, the fund's managing director, Horst Koehler, told reporters that the pact's 3 percent deficit ceiling "should not be seen as an absolute limit."
Another concern of late has been the comparatively high value of the currency, with one euro now trading at about $1.15. This has meant double pressure: Euro-zone exports have become costlier both in the United States and in Asian countries whose currencies are pegged to the U.S. dollar.
While economists and policymakers in Europe acknowledge the difficulties facing the euro, many say the problems are mainly the growing pains of a new currency, not a threat to its viability. By many measures, optimists say, the euro has proven the most dire predictions of its critics to be wrong.
"What the euro was supposed to do is introduce a single currency to supplement the single European market by lowering barriers to trade," said Katinka Barysch, an economist at the London-based Center for European Reform, who considers herself one of the optimists. "Is the euro doing what it was supposed to do? I would say yes."
For example, she said, trade among the euro-zone countries increased by 30 percent in the 1999-2000 period. She also said that many of the euro zone countries, notably Finland and Ireland, are performing well economically.
"Because of the problems in the euro zone's two biggest economies -- France and Germany -- the euro doesn't look attractive from the outside," she added. "It's a tough time. Obviously there are teething problems."
© 2003 The Washington Post Company
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