Europe's New Money Union

Six countries bring forth an odd creature called ecu

It was a shaky birth, but a birth nevertheless. In Brussels last week, six of the nine members of the European Community agreed to tie together their currencies--and, to some extent, their economies--in one big monetary union.

Beginning Jan. 2, the governments of West Germany, France, the Benelux nations and Denmark will start taking steps to ensure that their currencies move up or down, more or less, in unison. In addition, the members created a new form of money, the European Currency Unit, or ecu. For now, at least, the ecu will not be paper money used by the man in the strasse to pay his bills, but simply a bookkeeping device for Europe's central banks to settle debts with each other.

The idea of a currency union has been around since the European Community started in 1957. What advanced it now was the recent decline of the U.S. dollar, which has unsettled Europe's money and hurt E.C. economies. Every time the dollar dropped against the strong German mark, it also dropped--less so--against most of Europe's other, not-so-strong currencies. This caused annoying changes in the exchange rates between countries. Export trade was slowed because businessmen had to calculate and recalculate prices, and multinational companies postponed transborder E.C. investments because they could not forecast investment returns easily in their own currency.

The prime mover behind the latest plan for monetary union was West German Chancellor Helmut Schmidt, who was especially unhappy at the threats to his country's exports and the general economic instability caused by the slumping dollar. Schmidt enlisted the help of French President Valery Giscard d'Estaing to convince other E.C. leaders that it was time to act. He argued that "a zone of monetary stability" was necessary to revive lagging economic growth, slow inflation and make Europe immune from the dollar's malaise.

At Franco-German insistence, the E.C. countries agreed in principle last July to try to link their currencies tightly. It was decided last week that each currency would be assigned a set value against all the others and would be allowed to fluctuate only 2 1/4% above or below this point. In theory this should create a "zone of monetary stability."

Under the system, if any member country's currency rises or falls out of this narrow band, its government will be obliged to adjust the price and pull it back in. A country can do this by buying or selling its own currency on international markets. If it needs money to do this kind of buying, it can borrow from a new fund. To set up the fund, each member country will contribute about 20% of its gold and dollar reserves, or a total of up to $32 billion. The fund will be denominated not in marks, francs or dollars but in the new European Currency Units--ecus.

This scheme sounds as grand as it is complex, but it falls short of being a true European monetary system. Not all the E.C. countries will participate. Britain, Italy and Ireland backed out, at least for now, because they feared they might have to spend too much and accept overly harsh austerity policies to support their currencies, which are weaker than the mark. As their price for participation, they wanted more loans and grants from richer E.C. countries. In fact, Italy and Ireland may still decide to join before the new system starts next month. Britain will stay out at least until after next year's election, but it supports the program in principle and promises to try to hold the pound within the desired band.

The U.S. officially endorses the monetary union as an important step toward the integration of Europe. In the short run the plan should help the dollar. Reason: European governments will usually not sell dollars in attempts to lift their own currencies and that will relieve downward pressure on the greenback. Instead, these countries will sell other European currencies.

In the longer term, however, members of a united Europe might increase trade more with themselves than with the U.S., and a strong, viable ecu ultimately might rival the dollar as a real reserve currency. If that ever happens, Arab and other foreign governments might be tempted to sell dollars in order to invest in that odd new creature that has six parents--the ecu.

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