Euro offers prospect for both prosperity and trouble

Continental Europeans have failed to reform their burdensome welfare states and sclerotic labour market, and have allowed America to dominate almost the entire "new economy." But observers note that the tendency to maintain the status quo went out the window this week when a dozen countries tossed out the symbol of economic sovereignty – their currencies. During the past week, 14.3 billion euro notes and 50.6 billion euro coins have come into circulation.

The risks and rewards are both high.

Europe invites trouble by combining a rigid single currency with an inflexible labour market – compared to the U.S., where the single currency works because people think nothing of moving across the country to look for a job.

The euro could turn the continent's least competitive regions into permanent wards of the European state, bereft of real jobs – and could provoke continental protectionists.

On the other hand, the simpler marketplace could unleash pent-up entrepreneurialism as small firms have easier access to capital, technology, talent and markets.

By one estimate, intra-European trade could soon double in volume.

On the other hand, observers point out, the more transparent marketplace will bring the continent's rigid, restrictive labour laws into high relief. Nor will drug companies be able to continue selling flu medicines for 60 percent more in some countries than others. And bureaucrats will have a harder time off-loading social costs of the welfare state onto businesses and consumers without anyone noticing.

Source: John Micklethwait and Adrian Woolridge, Europe Gets Bold, Wall Street Journal, January 2, 2002.

For text (WSJ subscribers)
http://interactive.wsj.com/articles/SB1009928464196637960.htm
For more on International Currency Issues http://www.ncpa.org/iss/int/

FMF Policy Bulletin\9 January 2002