The Year of the Euro
Will a common currency unite Europe? Joshua Kurlantzick examines the successful debut of the euro and its impact on the European economic and political landscape.
By Joshua Kurlantzick

In late 2001, ETA, the Basque separatist terrorist group known for bombing politicians and demanding protection money from companies, suddenly revamped its extortion operation. In a series of threatening letters, ETA informed businesses it regularly strong-armed that after Jan. 1, 2002, the first day of circulation of the common currency adopted by 12 European nations, it would accept bribes only in euros.

That even one of Europe's nastiest separatist groups was willing to embrace the new euro demonstrates how quickly the common currency has been adopted. Indeed, European leaders now laugh at last year's prophesies of euro disaster. Building on the success of the currency, many politicians have begun discussing closer European integration and dreaming about a continent that could challenge the United States for world leadership.

Though the rollout of the euro has been a logistical success, bringing some benefits to businesses and consumers and boosting European economic confidence, there are few signs that European Union (E.U.) leaders trust each other enough to create continent-wide military and diplomatic unity.

What's more, though Europeans share some common values, they remain intensely proud of their cultures. Many still fear some of the euro's possible negative effects and are unwilling to envisage the kind of constitutional ties that transformed the American states from a loose federation into a united country.

In the long run, Europe may manage to equal America's economic output. But even as its economic power grows, the E.U. will remain unable to punch its weight on military or diplomatic affairs.

Before "E-Day," Jan. 1, the media frequently predicted that the common currency would lead to massive confusion. One Dutch government study reported that the euro launch could create "a bottleneck that boggles the imagination" at retail centers.

In fact, little chaos ensued. There were a few armed robberies, but overall the amount of theft was low, and banks transferred the equivalent of $600 billion in new bills and coins in an orderly fashion during the early days of the changeover. Some consumers faced long lines at retail outlets in January and February, but companies and governments innovated ways to acclimate Europeans to the new currency. In Portugal, the government hired priests to lecture parishioners about recognizing counterfeit euros. In France, the supermarket chain Carrefour doubled its support staff and even put some workers on roller blades so they could more easily navigate wide aisles and answer euro-related questions. A European Commission poll in the spring revealed that four out of five euro-zone residents believed the changeover had gone smoothly.

In less than a year, the euro has led to more changes in Europe than any event since the fall of the Berlin Wall. According to Christian Weller, a Europe specialist at the Economic Policy Institute, a Washington, D.C., think tank, the euro has improved price transparency within the E.U. No longer forced to convert the price of a baguette or a beer into different currencies, consumers now can see that the same item often costs vastly different amounts across the continent. Accordingly, prices are converging, a change that benefits savvy shoppers.

More important, European businesses now save big on shipping, currency hedging, and marketing, because they no longer have to hold marks, francs, and lira, convert shipping costs into several currencies, or vary advertising and pricing among countries. Reaping these savings, European companies are increasing their operations to battle American and Japanese competitors. Notably, many European steel producers have merged, creating several behemoths headquartered in Luxembourg.

Moving quickly to capitalize on the euro's success, several E.U. leaders have begun a public campaign to make Europe a more unified bloc. E.U. representatives have discussed the idea of a single European economic spokesperson. More important, the E.U. has set up a constitutional convention that will for the first time write a pan-European constitution enunciating continental economic and political values.

Meanwhile, leading European politicians have begun to distance the continent from its alliance with the United States. In April, E.U. Commissioner for External Relations Chris Patten told an audience in China that the world's regions cannot be defined solely by their ties to America and promised that the relationship between Brussels and Beijing increasingly would determine the shape of global affairs.

At the same time, European companies and trade negotiators have tried to leverage European cohesiveness to win concessions from America, Japan, and other powers. In March, after President George W. Bush enacted tariffs of up to 30 percent on foreign steel, the E.U.'s savvy trade representative, Pascal Lamy, refused to submit to U.S. demands, even as Europe and America together pursued a global war. Lamy seems to feel that, because the U.S. economy was weak in 2001 and 2002 and because European leaders stand together more on trade issues, Europe can take a tough line with the United States, says Robert Blecker, a trade specialist at American University in Washington, D.C.

Lamy has demonstrated this tougher stance by warning that the E.U. would enact a range of retaliatory tariffs, many of them aimed at products manufactured in states crucial to Republicans' political chances: Harley-Davidson motorcycles, which are made in Wisconsin, a political swing state; bras, a staple of the textile industry in the Carolinas, where Democrats have made inroads into Republican dominance; and orange juice, a major product of Florida, governed by the president's brother. Trade experts say Lamy hopes to prompt U.S. companies potentially affected by retaliatory tariffs, as well as American steel importers, to pressure Bush to reverse his steel decision. The stratagem may work: Several American companies have criticized Bush for pandering to U.S. steel, and Harley-Davidson apparently is considering calling out motorcycle enthusiasts - what the company calls its "hog armies" - to protest the tariffs.

Lamy's stance may foreshadow the next two decades, when Europe could seriously challenge America for global economic superiority. As Fred Bergsten of the Institute for International Economics in Washington, D.C., notes, the euro already has replaced the dollar as many nations' reserve currency and become widely used for international bond flotations. It has even made it to Mecca: Many money changers along the pilgrimage route accept the euro.

If Britain, Sweden, and Denmark, the E.U. members who have not adopted the common currency, agree to use it, the total population of the euro-zone would rise to about 380 million people, and Europe might dominate financial markets and trade negotiations the way America does today. The E.U.'s economy has become increasingly diverse, driven by a range of manufacturing and service industries. European companies' economies of scale and experience serving numerous markets that all use one currency also should make them more competitive. In addition, the inflation pact that euro-zone countries signed before the euro's launch has led to a culture of budget discipline and low inflation across the continent, a situation that should benefit business.

America's dangerously large trade deficit also bodes well for European economic prospects. "There has never been a time in history when a country ran as large a trade deficit as the United States without the deficit ultimately doing serious damage," says Robert E. Scott of the Economic Policy Institute. "Over the next 10 years, we will probably see the trade deficit force the United States to devalue the dollar." Economist Robert Mundell agrees: "There will be a time when the pileup of international indebtedness makes reliance on the dollar as the world's only main currency untenable."

Given these factors, some economists predict that Europe will be the world's most powerful economic bloc by 2020. Perhaps - but many obstacles still stand in the way. The vastly different economic histories and cultural traditions within Europe will make it difficult for the continent to match America's growth rates, even if the dollar implodes. Just as many Europeans love the euro but oppose closer political integration, so too most E.U. citizens are proud of Europe's economy but shudder at giving up national labor laws, unions, or high corporate tax rates.

Given Europeans' unwillingness to surrender their national laws, as well as the potentially massive costs of absorbing more nations into the E.U., some European economists believe that Europe's numerous regulations, web of corporate taxes, and fixed labor costs will prevent it from challenging America as a locus for foreign investment and engine of global growth. Regarding Germany, the continent's largest economy, a report by the Heritage Foundation, a Washington think tank, says that it "is beset by structural problems ... [because] its labor costs are still among the world's highest." German unemployment probably will top 4 million, more than 10 percent of the workforce, by early 2003; by comparison, U.S. unemployment during the recent recession never reached 6 percent. Meanwhile, French unemployment is rising, abetted by a popular 35-hour workweek, tough labor laws, and powerful unions; France's bank workers' union even threatened to go on strike on the day the euro was introduced.

What's more, the common currency has highlighted some of the complexities of intracontinental ties - complexities that could push public sentiment against immigration, which is vital to continued growth. The introduction of the euro, along with the phasing out of border guards, will make it easier for immigrants to stay within the E.U. The popularity of anti-immigrant political parties in the Netherlands, Austria, Germany, France, and Italy demonstrates that, to many E.U. voters, increasing migration to Europe is not an acceptable price to pay for integration; many of these voters, and the politicians they favor, increasingly oppose further continental unity. Philip H. Gordon, a senior fellow at Washington's Brookings Institution, notes: "Some of the best-known ‘French' companies ... are now majority-owned by foreigners," yet French "leaders compete in their promises to control" globalization. Compared to the United States, where many of the technologies that have made the American economy more efficient were developed by immigrants, Europe's antipathy toward migration will make it difficult for the continent, whose population is aging rapidly, to keep up with the pace of global technological innovation.

Though Europe is becoming increasingly economically powerful, it is actually becoming less of a geopolitical rival to America. It is falling behind America in terms of defense spending, weapons technology, and troop training. What's more, except for Britain, no E.U. nation possesses a high-quality force of troops that could respond quickly to a global emergency, even though European leaders have called for the creation of a 60,000-strong E.U. rapid-response force separate from NATO.

Accordingly, argues Martin Walker, a fellow at the World Policy Institute in New York, it was hardly surprising that after Sept. 11, "one remarkable feature of international response was how little a role the E.U. played as a military or even diplomatic institution." Given Europe's military weakness, Bush hardly listened to European strategies for combating the Taliban, preferring to rely on the American armed forces and, to a lesser extent, on British troops.

Continued infighting among E.U. members also prevents Europe from becoming a military and diplomatic rival to America. Though European politicians are discussing integration on the continent and European trade negotiators have been able to unite European industry, Old World governments still harbor intense suspicion of each other. As Latvian President Vaira Vike-Freiberga has said, "We have had to fight too hard for our nation-state to want to dispense with it now."

Because no one country is dominant in Europe, each nation still struggles to put its stamp on policy. After the Sept. 11 attacks, German, French, and British leaders convened privately at Tony Blair's residence to discuss the war on terror. But because European nations still don't trust anyone else to speak for them, several other leaders crashed the dinner, creating an intensely awkward meal that contributed little to the war effort and made them the subject of snide chatter in Washington.

The E.U. institutions don't help mitigate this web of suspicion. Because the E.U. lacks a structure similar to the U.S. Senate, in which each state gets two votes, smaller European countries fear being overwhelmed by Germany, Britain, and France. And the E.U. presidency rotates among countries every six months (roughly equivalent to North Dakota running the United States for six months, then passing the baton to Oregon, and so on), so the E.U. often is unable to maintain a consistent foreign policy. Expansion is only going to make these institutions more bulky and less able to handle infighting.

Though average Europeans celebrate the euro, they frequently tell pollsters they oppose greater integration. As several economists have noted, the E.U. always has been a top-down affair: Elites propose economic and political integration and then try to convince the voting public to support these changes.

But survey after survey demonstrates that elites may soon run into a wall. Though Europeans now use the same currency, share some intangible continental qualities, and often voice similar opposition to American global hegemony, large majorities of them oppose devolving greater power to the European Parliament, drawing up a federal European constitution, or creating an E.U. military force. Given popular opinion, as well as Europe's lack of a unified defense establishment or strong-willed E.U. diplomats, the Old World likely will remain confined to a secondary role in global affairs. Or as one Belgian political columnist succinctly put it, for the foreseeable future, "the [United States] makes the [diplomatic] dinner, and Europe is left to wash the dishes."