Carrying Its Weight
By Peter Gumbel
People in the German border town of Passau probably don't think of themselves as champions of the euro. Yet this August they scored a victory for Europe's single currency. On a warm Friday afternoon, about 500 people drank beer, ate bratwurst and--for almost five hours--blocked a road into neighboring Austria. Their target: the high price of gasoline in Germany, which, thanks to taxes, is about 20% more expensive than in Austria. Every day an estimated 2,000 German motorists fill up at a BP station across the border in Austria--at the expense of the 17 stations in Passau.
What does this have to do with the euro? Passau is a textbook example of what is supposed to happen after a monetary union. Long before the euro became legal tender in 12 European countries on Jan. 1, 2002, economists and policymakers pledged that one of its benefits would be to facilitate price competition across borders, leading to nimbler and more robust national economies. Such "price harmonization" was one of many economic virtues the euro was supposed to usher in: it would eliminate many transaction costs, put an end to bruising currency devaluations, allow savers and lenders to benefit from a bigger capital market and, overall, be a shot in the arm for growth, investment and employment. Now, after nearly three years, we can begin to ask, What are the euro's economic effects so far? The scorecard is mixed.
ECONOMIC GROWTH Since the introduction of a single currency, Euroland has experienced a protracted period of subpar growth. Germany has suffered the most, but France, Italy and the Netherlands have also had virtually no growth. Meanwhile, Ireland, Greece and Spain have boomed--if not overheated. While many factors feed economic growth, some experts argue that the euro has exacerbated Europe's regional economic differences because of its one-size-fits-all monetary policy, with the European Central Bank setting the same interest rates for all. "In the short term, monetary policy is driving economies apart, not bringing them together," says London-based economist Mike Taylor of Merrill Lynch. A recovery is under way, but it's weak. The Organization for Economic Cooperation and Development (O.E.C.D.) predicts that Euroland's economy will grow 2% this year, up from .4% growth in 2003 but well below the 3.4% expected for Britain and the 4%-plus predicted for the U.S. and Japan.
PRICES There's a perception among European consumers that the new currency has driven up prices. The official statistics say otherwise: that the euro has pushed up consumer prices a mere .12% to .29%. But while the prices of many big-ticket consumer durables, such as automobiles and refrigerators, remained stable or fell, the cost soared for many everyday services--hairdressers, cafes, parking meters. "They may not amount to a large part of people's budgets, but they are very visible," says Jim Murray of BEUC, a Brussels-based consumer group.
BUSINESS ACTIVITY For Germany's TWD Group, a midsize textile manufacturer, the euro has been "all positive," says CEO Yorck von Schmeling. Many European business executives agree. Executive vice chairman Benjamin Cohen of the French hotel company Accor says the absence of exchange-rate risk makes investing in places like Italy and Spain easier: "The element of chance has disappeared." Trade activity has also increased: two studies by the Inter-American Development Bank show that countries joining the euro saw a boost of 8% to 16%.
INTERNATIONAL ACCEPTANCE The euro isn't about to take on the dollar as the world's favorite currency. Euro-denominated bonds have grown from about 20% of the global total in 1999 to 30% today, but dollar-denominated bonds have remained at about 45%. The euro has also failed to catch on in foreign-exchange transactions. Globally, it accounts for 20% to 25% of the market, about the same as the national currencies that made up the euro.