Creating a Coin for the Realm : Europe Leans Toward a Single Currency

He heads Europe’s largest consumer electronics company, but Dutch industrialist Cornelis J. van der Klugt offers a lament that even a tourist to the Continent would understand.

The chairman of the giant Philips electronics group calculates that he could leave the Netherlands with 1,000 Dutch guilders in his pocket, tour the other 11 European Community nations and spend a full 750 guilders on nothing but the cost of changing money.

“It’s an argument to convince the ordinary citizens of the need for one European currency,” he told a gathering of businessmen here.

For most visitors, dealing with 12 different currencies in a geographical area the size of the western United States is an inconvenience. For Europeans, the problem is more fundamental.

The cost to European Community industry alone is estimated at around $10 billion annually. Efforts to quantify the drag on the EC economy as a whole go as high as five times that amount.

It is a drag that the community wants to shed by achieving a goal most observers placed in political wonderland just a few years ago: monetary union.

That the idea is now the focus of community summit conferences reflects the pace of European unity.

“We’ve standardized product size with the metric system; we’re harmonizing technical standards; now it’s time to simplify business transactions,” declared French businessman Bertrand de Maigret, spokesman for the 18-month-old Assn. for Monetary Union, a Paris-based organization of 170 blue chip European industrial concerns, including Philips.

The idea of a Europe without the French franc, the British pound or the Greek drachma--a currency with origins in the pre-Christian Athenian city-state--may seem radical, but the public also seems broadly in favor.

A poll conducted last fall of about 12,000 people in European Community nations found that nearly 60% supported the creation of a single communitywide currency.

Working Out Details

Such sentiments have helped push the once distant vision of EC monetary union into the realm of serious discussion.

The 12 European Community heads of government first pledged themselves to the idea four years ago. Now the debate on detail has begun.

Last month, a high-level committee headed by EC Commission President Jacques Delors and including the heads of all 12 countries’ central banks agreed on a three-step process for taking the community into a single-currency system. It would include creation of a federated EC central banking system, fully independent of governmental influence.

As an early first step, the committee urged Britain, Spain, Greece and Portugal to join the European Monetary System, the decade-old system of exchange rate discipline that has successfully managed to keep aligned the currencies of the EC’s other eight nations--West Germany, France, Denmark, the Netherlands, Belgium, Ireland, Luxembourg and Italy.

After a period of economic integration and binding agreement on such issues as budget deficit limits, the committee said, a European System of Central Banks, not unlike the present U.S. Federal Reserve System would be created, with the present central banks of the 12 nations becoming regional branches.

Finally, with increased cooperation on budgetary and economic policy, exchange rates would be locked and a single currency issued for the community.

The committee report specifies no timetable and is not binding on member states. Officially, it is merely a policy option, albeit one drafted and endorsed unanimously by all central bank heads.

Major Milestone

The plan would also require a new treaty among the 12 countries and, while the bankers agreed on the way to proceed, not all of the governments appeared ready to proceed.

Yet, to have 12 central bankers unanimously agree on such fundamentals as how a European central banking system should be organized is acknowledged an important milestone.

Accepting the idea of an independent central bank, for example, runs against centuries of tradition in countries such as France and Britain, where these institutions have long operated as arms of government.

“It is a remarkable development and cannot be ignored by governments or by parliaments,” Karl Otto Poehl, president of the West German Bundesbank, said in an interview. As the voice of the community’s economic powerhouse, Poehl was a key participant in shaping the report’s conclusions.

The report will be among the major items of business confronting EC leaders when they gather in Madrid next month for their semiannual summit. Spanish Prime Minister Felipe Gonzalez has declared that he hopes to commit the leaders to a timetable.

France, which will be host to the December summit in Paris, has also indicated that it places a high priority on monetary union.

The implications of a single-currency European Community would extend far beyond the region:

For example:

Reduced operating costs inherent in such a development would make European-based industries more competitive on international markets.

A common European currency, representing the world’s largest trading bloc whose annual trading volume exceeds that of the United States and is more than twice that of Japan, could quickly become a primary competitor to the dollar on global markets.

A currency union would also enhance European influence in important international gatherings such as in meetings of the Group of Seven nations. Four members of the group (West Germany, Britain, France and Italy) are also community members, giving the Europeans a numerical majority in the Group of Seven’s annual summits on economic policy.

Either the four would increasingly back common positions, or, as some predict, the Group of Seven might eventually become a Group of Three, with single representatives from Europe, Japan and North America.

But despite the potential advantages, resistance to monetary union is strong.

Some Nations Worried

Danes, for example, worry about the prospect of being permanently locked into a deutsche mark-dominated monetary union and a European monetary policy too strongly influenced by German interests.

Spain is also apprehensive about its ability to maintain the present high value of the peseta within the disciplined limits required by the European Monetary System.

But the most vocal opposition is British. In a nation that for centuries equated its survival with its ability to keep continental powers weak and divided, the idea of European unity has never come easily.

Talk of giving up the pound sterling--one of the world’s leading trading currencies and, as such, a rare reminder of Britain’s previous greatness--has been especially tough for Prime Minister Margaret Thatcher’s government to swallow.

“Monetary union will mean, in effect, the end of the nation-state, the end of independent national currencies,” thundered British Chancellor of the Exchequer Nigel Lawson shortly after the Delors Committee published its report. “The end of the nation-state was not the reason why we joined the European Community.”

Despite this outburst, Lawson agreed during an informal meeting of EC finance ministers in mid-May to accept the committee’s report as a basis for progress toward economic and monetary union.

But for Britain, even modest steps toward the reality of such a union are fraught with trauma.

For 10 years, Thatcher has resisted full membership in the European Monetary System, variously arguing that Britain’s North Sea wealth exposed the pound to global oil price changes, that domestic economic conditions were adverse or simply that “the time is not yet ripe.”

In repeating her stance recently, she seemed to reflect as much an inherent suspicion of the whole idea as any reaction to present economic conditions. The plan for a European System of Central Banks is expected to stir broader-based resistance within member states once national policy-makers realize that they will effectively be ceding control over monetary policy.

Might Widen Gap

Commented Poehl: “You can easily imagine the problems of agreeing on an economic and monetary union that, for example, precludes the access of governments to central bank credits, places strict limits on budget deficits and puts decisions concerning liquidity and interest rates into the hands of a supra-national institution that is independent of both individual governments and EC institutions.”

There is also concern that a currency union might deepen the disparities between the affluent countries and EC’s poorer, peripheral states such as Greece, Portugal and Ireland, as investment capital flows to richer regions.

Prof. Alan Budd, former head of the London Business School and now group economic adviser at Barclays Bank, noted that Italy’s currency union in the 1860s decimated the country’s poorer southern regions because they were economically unable to compete with the richer north. However, he added, there was little such trouble after German unification a decade later because its regions were roughly at the same stage of development. “The question you have to ask,” Budd said, “is where Europe is today?”

Senior EC officials in Brussels argue against the premise that monetary union makes the weak weaker.

“It is absolutely wrong to say that if you create an economic and monetary union then the poorer regions must suffer,” claimed Joly Dixon, a senior member of Delors’ staff at the EC Commission. “Economists don’t know what makes a country develop, but to suggest that Greece could make its economy grow faster by constantly devaluing against the German mark seems to be just plain wrong.”

Pushing for Union

He also stressed the role of European Community development funds, which by 1993 will earmark roughly $15 billion annually for such items as improving roads, telecommunications and increasing manpower training in declining regions.

Despite the many apprehensions, powerful forces are already pushing in the direction of eventual union.

Respected economists argue that the gradual interlocking of trade patterns and national economies of EC member states has already made complete independence in monetary policy more an illusion than a reality for most of the 12.

Trade among EC member states, for example, has risen from 35% of their total trade in 1958 to close to 60% today, and moves to create a single European market by 1992 are expected to strengthen this trend.

The removal of all restrictions on the free flow of capital between member states--scheduled for July of next year--is likely to further limit national policy options.

“We’re moving in the direction of monetary union and have already gone a long way,” Poehl said. “The integrated movement of goods, services and capital generates its own pressure for common policies.”

Currency unions are nothing new in Europe.

In addition to those that accompanied the German and Italian unions in the second half of the 19th Century, France, Italy, Belgium and Switzerland joined in a loose monetary union during the 1860s, as did Norway, Denmark and Sweden.

Historians note that in one sense, any monetary convergence would merely return Europe to these pre-World War I realities, when most currencies were fixed firmly to gold and, through the precious metal, to each other with equally fixed exchange rates.

The late British economist John Maynard Keynes once reminisced how earlier in this century international travel required little more than dispatching a servant to the bank “for such supply of precious metals as might seem convenient.”

Events Swamped Idea

Since World War II, the idea of monetary union has been floated periodically but never addressed in detail.

It was first proposed 20 years ago at a time of relative monetary stability, but the collapse of the Bretton Woods global arrangement of fixed exchange rates in the early 1970s and the economic waves from the 1973 oil crisis swamped the idea.

Through the turbulent 1970s, as many as 11 European countries linked their currencies in a common system whose nickname, “the snake,” summed up its failure to build stability.

The European Monetary System, formed in 1979, pegged the currencies of eight EC countries to a stable European Currency Unit, itself a weighted composite of the system’s currencies.

The ECU functions as a central reference point as well as a de facto currency in its own right for limited commercial transactions. (Several governments, for example, have floated ECU bond issues.)

The strains that many predicted would quickly pull the European Monetary System apart have instead imposed unprecedented monetary discipline on its members and made an attractive, deutsche mark-influenced currency area, characterized by slow growth but German-style low inflation.

In an important, more subtle, benefit that is impossible to quantify, central bankers of the European Monetary System countries have developed a familiarity, trust and cooperation that is considered essential for any monetary union.

“Politicians can argue what institutions are needed to deal with what is happening in Europe, but the realities are hard to ignore,” Poehl said. “The gut question is to what extent governments are willing to cede sovereignty in this area.”

But for many politicians, too, the question is no longer “if” but “when.”

On a recent British television progam exploring the issue of monetary union, Belgian Prime Minister Wilfried Martens said confidently: “I think that at the end of the ‘90s, we will have a European central bank and a common currency.”