THE EURO - A STABLE CURRENCY?
On I January 1999, 11 EU Member States begun their great adventure: monetary union. At first there will be no significant changes for consumers since national currencies will remain until 2002. Investors must, on the other hand, expect a number of innovations, some of them radical. The adaptation of stock market prices and asset valuations to the Euro will be the least of their problems, though this will cause rather more headaches for those responsible for data processing and data banks. What is important for investors is whether or not the Euro will be stable.
As yet there is no definitive answer to this burning question. Although the German point of view prevailed for the most part in the Maastricht Treaty, this does not mean that the Euro will be as stable as the DEM. What will be decisive for the Euro's stability is how the Monetary Union's institutional framework - intended to foster confidence - will work out and operate in practice. With the definitive fixing of exchange rates individual member countries will no longer be able to cushion the effect of differences in productivity or assymmetrical shocks by means of monetary policy, since the European Central Bank has to fix its monetary policy for the whole of the Euro zone. Member States' room for fiscal manoeuvre has also been restricted to a considerable extent by the stability pact, which limits the budget deficit in principle to 3% of gross domestic product. This figure may be exceeded only in cases of extreme economic setbacks. With the loss of this national autonomy regarding economic policy, the labour markets will have to counteract external shocks by flexibility in real wages and workforce mobility.
Many investors are sceptical as to the extent to which the workforce will be able to achieve this, because one thing is clear and that is that the Monetary Union's institutional structure will be of productivity trends. In the Maastricht Treaty the traditional trade-off in economic policy between efficiency and equality plainly shifted in favour of efficiency.
This brings us back to the practical interpretation of the Maastricht Treaty.
With the political shift to the left in the EU greater efforts are being made to push equality rather than efficiency. The discussions about a common employment programme and efforts in the direction of tax harmonization certainly point in this direction. In a world of globalization this means that in the long term the European economies will not react to pressure for efficient allocation of resources but will simply postpone. Price trends on the foreign exchange markets show, however, that, so far, investors'confidence in the solid institutional structure of the Monetary Union has not been shaken in a sustained manner by the shift in economic policy priorities. Consequently, with the help of the slow rate of growth in Germany, the Euro should get off to a good start.