European Affairs

Fortunately, the euro is so far having, on balance, a beneficial impact on European economies and transatlantic relations, according to the authors of a new study. In Tran-satlantic Perspectives on the Euro, two prominent economists, Randall Henning of the Institute for Inter-national Economics in Washington, and Pier Carlo Padoan of the University of Rome, provide a detailed, balanced, and relatively accessible analysis of these issues.

The book examines the costs and benefits of Economic and Monetary Union and whether it will lead to greater cooperation or rivalry between Europe and America. Both authors generally support the EMU project. But they also argue that in order for the euro to continue to be beneficial for Europe and its relations with the United States, Euroland members need to reduce structural rigidities in their economic and social systems and deepen and expand their capital markets.

Henning looks at the political, economic, and institutional issues EMU raises for transatlantic relations, while Padoan focuses on the euro and international monetary cooperation. Each author uses insights from both political and economic theory, but Padoan's chapter is more explicitly theoretical and contains numerous charts and equations.

According to Henning, if the euro's international role were to increase gradually, this would not pose insurmountable problems for the American economy. A precipitous increase, however, would create problems for the United States by raising interest rates and making it harder to finance deficits. But this would still not pose a major challenge to the dollar.

Indeed, both authors agree that in the short- to medium-term the dollar's preeminence is assured, though they do not necessarily think that is a good thing. Henning notes that American policy-makers would lose the luxury of being able to make the type of errors made over expansionary monetary policies in the 1970s and expansionary fiscal policies in the 1980s if the dollar's role declined.

Henning says EMU is in the American geopolitical interest because it is closely bound up with the admission of the Central and Eastern European countries into the EU. Enlargement will improve the stability of this region, which is an important American security interest. In its absence, the United States would have to make substantial increases in the defense resources it devotes to Europe.

This author's recommendations center on how American economic and political interests and transatlantic policymaking would benefit from internal EU reforms that are a prerequisite to the EU's eastward enlargement. In an EU with 27 or more members, consensus decision-making would spell paralysis.

He urges the EU to extend the use of qualified majority voting, one of the main issues on the agenda of the current intergovernmental conference to revise the Maastricht and Amsterdam Treaties on European Union.

Greater use of majority voting would make EU decision-making more efficient and flexible, and if coupled with greater transparency, would enable Americans to more easily determine European negotiating preferences. Negotiation theory shows that when each side has a greater awareness of the other's preferences, the prospects for reaching agreement increase markedly.

Euroland is still in the process of working out "the institutional arrangements for making external monetary policy and presenting that policy to the international community." Henning suggests that Ecofin, the EU's economic and finance ministers, should formally agree to confer clear authority on a single representative for a broad range of external monetary matters and give the representative a mandate to negotiate international agreements.

Padoan's contribution uses ideas from the theories of multiple currency equilibria and optimum currency areas to assess the likely global role of the euro and its impact on U.S.-EU monetary relations. He notes that the benefits of EMU "will increase with the number of members, the size of the EU's gross domestic product (GDP), degree of internal market integration, and monetary and financial convergence." He also says the euro's international role will depend on the extent to which it is used by non-Euroland countries, in particular those of Central and Eastern Europe, the Mediterranean, and, to a lesser extent, Latin America.

For Padoan the main macroeconomic policy issue EMU participants need to address is creating the conditions for closing the investment gap. In other words, market investors need greater confidence in the outlook for economic growth, trade, and wealth creation in Euroland. Finally, while the United States is likely to continue to dominate international finance markets, the high costs of transatlantic rivalry will encourage monetary cooperation between Europe and America.


This article was published in European Affairs: Volume number I, Issue number III in the Summer of 2000.