September 18, 1997
A Continent's Leaders Lay Hopes for Real Currency on the Euro
Stringent Rules on Euro Currency Cause Growing Turmoil (June 15) Concerning the Euro, Sense of Mounting Crisis in Germany (June 3) France's Election and German Dispute Unsettle Currency Traders (June 3) European Left Takes Heart From France (May 27) All Eyes on New British Leader at European Union Meeting (May 24)
By ROGER COHENMOSBURG, Germany -- Franz Schmid is old enough to have suffered his share of European upheaval, and now, as the century wanes, he is convinced that the continent is on the brink of another disaster, one that will wipe out all he has slowly built from the ruins of Hitler's war.
A retired hairdresser with a solid house beside a Bavarian brook, Schmid experienced the inflationary chaos that gave Hitler his start. He was drafted into the German army and captured on the Russian front. When he put his life together after 1945, rising early, never taking a vacation, it was the rock-solid German mark that measured his passage to a modest affluence.
His conclusion: play with currencies and you play with fire. So, like about 60 percent of his fellow Germans, he is alarmed by a plan to ditch the world's second-largest reserve currency, the mark, and use a new money to change Europe.
"The mark is part of us," Schmid said. "What do we need a worthless new money for?"
But several European governments -- including Germany's -- appear ready to scrap their national currencies and replace them with a single money, the euro, by 1999. They are set to impose the currency on restive, sometimes openly hostile, citizens, for whom union has become synonymous with stagnation and sacrifice. The political risk is enormous.
That risk is being taken with a bold aim: to forge greater European unity in an attempt to arrest the continent's relative decline in an American-dominated world.
"There is nothing more political than money," said Richard Descoings, director of the French Institute of Political Studies. "Once each person has a euro in his pocket, the money will unite us as Americans are bound by the dollar."
But this has been a lousy decade in Europe. Unemployment is at levels not seen since the 1930s. Over the past five years, growth averaged little more than 1 percent, less than half the American level. The globalization embraced by the United States has struck fear into the European soul; war in Bosnia has shaken the continent.
For some time now, Europe has labored under a dread conviction that Asia is rising, America roaring along, while the old Continent sleeps amid its predatory ghosts.
The euro is potent medicine for this malaise. Each country that joins the common currency will surrender part of its national sovereignty by turning over key economic decisions to a European Central Bank in Frankfurt. This bank will set interest rates and impose a fiscal discipline so strict that a profound reshaping of Europe's costly welfare state appears inevitable.
In the United States, too, there is a broad push to reshape welfare programs. But Europe is a customs union, not a country, and the cuts in spending required by adoption of the euro result from the planning of faceless central bankers rather than an election in which one vision for the future has trumped another.
Skeptics worry that the architects of the euro are inviting disaster by imposing a single economic policy on diverse countries with vastly differing traditions, national identities and economic philosophies. But supporters insist that this surrender of national sovereignty is the only way for Europe to challenge the United States' global economic power, closing the American century with an act of European emancipation.
Chancellor Helmut Kohl of Germany, already in the history books as the helmsman of German reunification, thinks he has a vision that will immortalize him a second time: end a bloody century -- in which Europe twice ripped itself to shreds and the United States twice came to its rescue -- by creating a single money in a market of 372 million people. Which will usher in a united Europe with a united Germany at its heart.
To reassure his fellow Europeans once and for all about his country's intentions, Kohl stands ready to sacrifice the country's best-loved symbol, the mark. It is an extraordinary political step -- akin to suggesting that the surrender of the American flag might somehow be in its people's interest. The euro will rise or fall with Germany, which accounts for 25 percent of the European Union's total output.
The outcome remains very much in doubt. The euro is to become Europe's money on Jan. 1, 1999. Will it bring strength or chaos, unity or renewed outbursts of European nationalism, as a Frankfurt bank becomes the scapegoat for massive unemployment?
Faces at the European Commission in Brussels tend to light up at the euro's potential to spur Europe's economy. But Schmid, the retired hairdresser, sees folly where so-called Eurocrats see fortune.
His fears are those of the average German burgher. He has given some of his savings in marks to his son, Toni, to change into dollars. He equates the dollar's 20 percent appreciation against the mark over the past year with the mark's looming demise.
Franz Schmid was 12 years old when, in 1923, inflation reached more than 2 billion percent. To buy $1, 4.2 trillion marks were needed. In the same year, the young Adolf Hitler was arrested after he tried to lead a march on Berlin.
His family ruined, Franz was sent to work as an apprentice to a barber, only to be drafted into Hitler's army just as he had acquired his first hairdressing salon and was beginning to make his way.
Poland, France, Russia: Schmid invaded them all, an ordinary German swept along in a tide. Then, in 1944, he was captured by the Red Army and taken to a prison camp in Siberia. On carts in summer, on sleds in winter, he carried corpses out to woods where the wolves ate them. Only his skills in cutting Soviet officers' hair saved him.
A second lesson in the vagaries of money awaited him on his return to a devastated Germany in 1947. His life savings -- a bank deposit of 1,500 Reichsmarks -- were worthless, devoured by the inflationary financing of the war. Dollars alone, sent by two sisters who had emigrated to New York, bought him food until a new currency, the Deutsche mark, was introduced on June 20, 1948.
"The new currency was hope, the first hope, really," Schmid said. "I got married eight days later, and the photographer asked for 100 marks, and that seemed a staggering amount. But with time, the mark became part of us. It was stable. Germany without the mark is not Germany! I feel I'm about to lose my money for the third time."
Schmid is now 86. But almost one-third of Germans are over 55, and even many younger people grew up in homes where old, devalued Reichsmark bills were kept as symbols of money's vulnerability. It is, at the root, fear of chaos that leads 60 percent of Germans to say they oppose the euro project.
"It is amazing how deep the trauma goes," said Hans-Georg Gerstenlauer, the European Commission's representative in Berlin and an enthusiastic supporter of the euro. "I remember my parents talking repeatedly about hyperinflation, and they were infants when it happened."
During an interview, Hans Tietmeyer, president of the Bundesbank, talked repeatedly -- almost obsessively -- about the "sustainability" of monetary union: that is, the question whether Germany's low inflation and solid currency can be enduringly extended to the European Union. He repeatedly expressed concern that the euro might be blamed for the continent's economic woes. He seemed to be fighting his own doubts.
In the end, Germany fears the euro as money but favors it as strategic salvation. This country is, on some levels, still trying to persuade wary neighbors that its nationalism was buried with the Third Reich.
"We are looking for a different identity because nationalism is really taboo," said Walter Hasselkus, the German chief executive of Rover. "That identity is Europe."
The economic logic behind the plan is simple. "What," asked Jean-Claude Trichet, governor of the French Central Bank, "would the single American market be without a single money in Texas and California?"
In other words, the European Union's single market in goods and services is incomplete without a single currency and will be invigorated by having one. Over 60 percent of the trade of European Union states is with other countries in the union: The euro will simplify and stimulate this trade.
Like many European executives, Horst Teltschik, a member of the executive board of BMW, the German auto maker, sees the case for the new money as self-evident: "We export one-third of our production to other European Union countries, "and we've suffered a lot from exchange rate fluctuation. The euro will eliminate that risk."
For example, since BMW bought the British Rover auto company three years ago, sterling has appreciated more than 10 percent against the mark. As a result, the new Rover dealerships opened by BMW in Germany are having difficulties. "We should raise Rover prices to match the mark's level," Teltschik said, "but we can't, so for now we take losses."
Of course, companies trading between New York and Phoenix do not face such fluctuations. In this sense, the euro is intended to make Europe more like America. Corporations including Siemens and Unilever have made clear that they believe they will benefit greatly from the change.
Executives say that business will be spurred by easier corporate planning, pricing and billing. European financial markets will be opened up to new competition; inefficient policies will be less sustainable; pressure will rise on countries to make their economies attractive to business. The dollar will at last have a real rival.
The union's economy is roughly the same size as America's; it accounts for 20.9 percent of world trade, more than the United States' 19.6 percent; its population is bigger by about 100 million people, providing the largest single market in the world.
Why, therefore, should the euro not eventually make strong inroads into the dollar's international dominance, expressed in the fact that the dollar is the currency for close to 60 percent of international trade and 80 percent of financial operations?
Imagine oil priced in euros rather than dollars. Imagine the United States no longer able to assume that its deficits are automatically financed because the world wants dollars. Imagine Europe one day showing the same "benign neglect" for the euro that America does for the dollar because the domestic European market will be so big.
Such visions are by no means shared by everyone. "A German racket to take over the whole of Europe," was what Nicholas Ridley, a former British Industry Minister, once called the euro. The remark was revealing of a corner of the British psyche. Abstruse and abstract, but as intimate as the coins in a pocket, the euro beams a spotlight into the diverse recesses of the European heart.
Up to now, Britain, Denmark and Sweden have indicated that they will probably not join the planned "first wave" because of their reservations about the project. To these countries, the economics look too risky and the politics of a formal abandonment of national sovereignty too sensitive. But they may join later.
The United States has its doubts as well, although European integration has been in the American interest for more than 40 years. It has provided a steady opening of markets on which American corporations from IBM to Toys 'R' Us have thrived. It has been a bedrock of America's postwar emergence as a European power.
Richard C. Holbrooke, a former ambassador to Germany and assistant secretary of state for Europe, was blunter: "Almost a decade has gone by since the Berlin wall fell and, instead of reaching out to Central Europe, the European Union turned toward a bizarre search for a common currency. So NATO enlargement had to fill the void. Tell me, would you leave your money in German marks if the mark is going to become the lira and you can move to the dollar?"
Italy, however, is eager to dissolve itself and its lira into Europe as soon as possible. "We've always had a healthy inferiority complex here about tall, blond people," said Luigi Spaventa, a former Budget Minister. "For us, it's the euro or Africa."
In Portugal and Spain, where a decade of membership in the European Union has been synonymous with the end of dictatorship and the advent of prosperity, the euro is similarly coveted.
France is ambivalent. It cares little for the franc. Moreover, in the heady days of the Cold War's end, it was France that exacted a commitment from Germany to adopt the euro as a condition for reunification. The strategic desire to harness German economic power inalienably to French political ambitions remains. But the cession of sovereignty that the euro entails raises the specter of an end to "La France."
In Britain, the ripples of Ridley's remark have not entirely faded. Tony Blair's Labor government has called for a sober look at the euro. But unease persists about loss of sovereignty to a bank in Germany and the less flexible economic model of continental Europe. The Conservative Party has torn itself apart over the issue.
To attempt to marry such diversity by creating a European money may appear the folly of this fin de siecle. "Kohl wants the euro for the history books," said Denis Tillinac, a French writer. "But why must we pay for his obsessions? You can share a home, you can even persuade people to eat together, but you can't force them to make love."
The political theory in Paris and Bonn is that you can. As Norbert Walter, the chief economist at Deutsche Bank in Frankfurt, put it, "Why not try to be great?"
Perhaps the answer is because it can be dangerous. Historically, monetary union has usually followed political union. The Federal Reserve was not established until 1913. Europe has opted to do things the other way around.
There is no European government, and peanuts would be a kind description of Europe's budget. Paltry would be an overgenerous portrayal of Europe's foreign policy. As the Bosnian war illustrated, political Europe is still as feeble as it is fragmented. The projected expansion of the union in the next century to bring in Poland and other Central European countries could cause yet more fragmentation.
By minting a money without making a government, and by surrendering control of monetary policy to a central bank while shunning the creation of other federal institutions, European states are heading into largely uncharted territory.
"This is the first time in history that the creation of a single money on a territory is not being accompanied by political centralization," said Olivier Klein, a French economist. "But money corresponds to a state power. And that is why we will have to move toward a more federal political structure in Europe."
Yet many European voters appear to despise the very federalism that the euro seems to promise. A recent cartoon in the daily Le Monde shows a despondent Frenchman. "Funny," he says, "We seemed to have more fun before Maastricht!"
Herein lies the paradox of the euro, a project sometimes suggestive of a journey begun so long ago that nobody can remember why a certain destination was chosen.
"We are going a new way in Europe," Tietmeyer, the Bundesbank president, said. "I don't see a readiness for a European super-state with one tax system, one big central budget, one security system. I have to accept that. So the basic question is whether there is enough common ground for monetary union."
The planned European Central Bank will -- if the euro is broadly adopted -- set a single monetary policy from Rotterdam to Rome, from Berlin to Barcelona. National room for economic maneuver after Jan. 1, 1999, will be limited.
Thus, if Italy hits a recession as the Netherlands booms, Italian authorities will no longer be able to lower interest rates to stimulate activity. They will not be able to devalue the lira.
Italians are unlikely to migrate en masse to Amsterdam for jobs, as Americans might move to a booming Arizona from a depressed Vermont. Europeans, in general, do not like to move.
Nor will a European federal budget transfer resources to Italy, as the United States federal budget transfers money to depressed areas through Medicare and Social Security payments.
Nor, finally, will there be room for generosity in national budgets, because of the new fiscal discipline: no deficits larger than 3 percent of output. This has been the Bundesbank's draconian condition.
Europe, in other words, had better be a truly convergent economy, more or less responsive to the same economic medicine from Helsinki to Lisbon, or there will be tensions that will find a readily available target in the European Central Bank.
"How will a Europe with the euro deal with regional recessions?" asked Paul Krugman, a professor of economics at MIT "I would put the odds of a collapse at one in four."
It is easy enough to imagine, for example, the invective of a group of newly unemployed French citizens told in mid-1999 that the government is essentially powerless because of decisions made in Frankfurt. Rather than uniting Europe, an unstable euro in a depressed continent might easily spur new nationalisms. Currency speculators would be quick to seize on instability.
"One can certainly imagine potential disasters in the one-size-fits-all approach to monetary policy," Eddie George, governor of the Bank of England, said in an interview. "I am feeling nervous for the whole of Europe."
Toni Schmid, the hairdresser's son, works for the Bavarian state government. He is nervous, too. But unlike his father, he may be more willing to accept the euro, however reluctantly. He sees that giving up the mark is the price for a united Europe to which Germany is irrevocably harnessed, a Europe whose economic policy is largely set by a bank in Frankfurt.
A member of the postwar generation, Schmid sees the euro as shaped less by the direct trauma of Nazism than by the angst of being German in the aftermath of the Holocaust. Born in 1950, he was a member of the first generation of Germans to go abroad after the war. Everywhere, the mark was the finest money. In Western Europe it was admired, in Eastern Europe coveted.
But respect was not the only thing encountered outside Germany. There was the realization, in Schmid's words, "that you were not normal." Your fathers had started the war and butchered millions of people. You had not chosen those fathers, but there it was. You were different.
On a visit to Ireland, Schmid recalled befriending a couple. He was French, she British. On parting, the woman said to him, "You know, it's really strange, I never thought I would have a German friend." The remark stuck in his mind.
And there, perhaps, lies the root of Germany's euro dilemma: a strong, much-loved money, the mark, on the one hand; an uncertain identity, a bad history, on the other.
A half-century after the war, the country, whole again, stands squarely at the center of Europe. Its economic domination is clear enough. The German economy is almost a third bigger than France's.
But Germany also has its doubts. And it knows -- especially since reunification -- that its allies need constant reassurance. Indeed, the euro was given a decisive push by unification. It was the most convincing reassurance, the most sweeping sacrifice, that Kohl could offer his neighbors.
There is a telling symmetry in the fact that the scheduled readoption of Berlin as German capital -- the return to the Reichstag and the Brandenburg Gate -- is set to coincide with the adoption of the euro in 1999. The reunification with Germany's past will thus be tied to the abandonment of the mark, the very emblem of German postwar strength. Put another away, Berlin will be reclaimed but with the lessons of Bonn.
"If you give away the mark you give away respect," Toni Schmid said, "and most Germans hate the idea. But Europe has been sacred for 50 years. No political party can say no to it. That is why Germans are not yelling."
Kohl is gambling that he can win over people like Schmid to his vision of a Europe where morale and growth can return to France and Germany, and where, perhaps, a new European identity can be born.
It will also be a place where interest policy reflects the interests of all European states.
The Bundesbank's insistence during much of the 1990s on high interest rates to tame the inflationary pressures of German reunification imparted a crippling blow to the economies of other European countries, which had to apply the same interest rates as the continent entered recession. The euro's image was thus battered.
The challenge facing the German chancellor is therefore enormous, and German history offers a cautionary tale. The last German leader to embark on such far-reaching change was Bismarck, who declared the creation of the German Empire in 1871. His united Germany, bringing together 18 states, grew out of the customs union, or zollverein, between German states established in 1834, just as the euro seems set to emerge from European customs union.
Within 19 years of German unification, however, Bismarck was ousted. Kohl, who reunited Germany in 1989, has been in power 15 years. The vote he faces next year will hinge on the politics of the euro. Like Bismarck, Kohl may yet find that his countrymen's memory is short.
"Kohl wants to be a European saint and he is ready to pay with the mark," said Toni Schmid. "But to many of us, the price looks too high."