Larry Summers: American eyes on EmuWEDNESDAY OCTOBER 22 1997
The US relationship with Europe has long been the cornerstone of our economic and foreign policy. We have supported European efforts toward closer integration since the very start, from the creation of the European Coal and Steel Community to the common market, the single market and now plans for further enlargement. Today, another ambitious project, the creation of a single European currency, seems close to becoming a reality and is attracting serious attention in the US.
The administration has never thought it fitting to enter the debate over whether economic and monetary union is right for Europe, nor over the details of how it should be structured. But we can hardly be said to be indifferent to how the project turns out. The US is well served when Europe is vibrant economically and working to open its markets and strengthen its ties with the global economy. Europe will prosper from an economic and monetary union that supports these ends. And if Europe prospers, this will help prosperity in the US.
There are two sets of issues that interest us particularly. First, how will Emu affect the EU as a major economy and international partner of the US? And second, what will be its impact on the international financial system as a whole?
Recent efforts towards increased European integration - including some of the changes that have been associated with preparations for Emu - have already brought significant gains. Yet no one doubts that Europe still faces serious economic challenges that will need to be overcome if Emu is to succeed.
First among these is Europe's high rates of unemployment and, partly as a result of those labour market failures, its serious fiscal imbalances. In recent years, many countries have made significant progress on the fiscal side. But as governments have themselves recognised, Emu will make it even more vital to proceed with structural reforms to give their economies the flexibility and dynamism needed to spur rapid job creation and investment growth.
If there is a shock to demand, individual members of Emu will no longer have the freedom to respond by devaluing or revaluing their currency, or cutting or raising interest rates. Nor, given the terms of the stability and growth pact, will they be able to use fiscal stimuli to support growth.
Policymakers cannot afford to allow Emu to distract them from pursuing fundamental reforms. As we have seen in the recent flood of cross-country mergers and acquisitions, the European private sector is already responding to the new situation. Governments need to build on the growing consensus in favour of reform and put it to work achieving genuine changes on the ground.
It is equally vital that Emu does not distract from the important international challenges that Europe faces, particularly the expansion of the EU to incorporate several countries of the former Soviet bloc. This offers an historic chance to cement these countries' transition to a market democracy.
Turning to the second set of issues, clearly the US has a strong interest in the euro's potential impact on the international financial landscape. Two questions have been raised in this context: the effects on the international role of the dollar; and the implications for short-term trade and exchange-rate fluctuations.
We generally do not speculate about the future values of existing currencies, be they our own or others. This extends to future trends in the values of currencies that do not yet exist. With these qualifications, however, I would like to make a few general observations.
The first point we in the US must remember is that the buck stops - and starts - with us. In the end, the dollar's relative standing in the international financial system will always depend more on developments here than on events overseas. If we stick to strong and credible policies, the dollar will remain a sound currency.
It is difficult to predict with any certainty what the role of the newly created euro will be. Those who foresee it growing very rapidly in importance point to the fact that it will be the common currency of countries representing a significant share of global output. Those who are more sceptical argue that the euro will be without a proven track record. Investors, they say, will want to observe progress towards price stability before making a commitment.
Where there is little disagreement is that, barring major policy errors, international currency holdings do not change at great speed. In particular, European financial markets are unlikely to transform themselves overnight. It will take time before the range of euro- denominated assets comes close to matching the variety available in the US; or, given differing perceptions of the creditworthiness of government securities, the homogeneity of the US market for public debt.
On the matter of future trade and exchange rate fluctuations, we should remember that the main continental European currencies have been fixed among themselves for some time now, with little tendency to fluctuate. Equally, each country has tended to recognise the importance of strong monetary policies for achieving robust growth, and the need for these to be underpinned by a sturdy financial system, sound fiscal policies and independent central banks. In that sense, Emu will be a force for continuity. Indeed, the fiscal controls envisaged within Emu could well be a force for lower interest rates in the US.
Clearly, the US government has no direct role in most of the preparations for Emu. It is a different story for American private sector companies actively involved in international trade or finance, or those with European operations. They have a lot of work to do in such domains as accounting, finance, and information management - work which, given the close proximity of Emu, probably needs to speed up in the months ahead. Although I cannot guarantee US business that Emu will occur as promised, I would advise them to be ready.
The advent of the single currency will also raise issues for the future evolution of the G7 and for Europe's future participation in international organisations such as the International Monetary Fund.
We look forward to engaging with the EU in these matters next year after the selection of the first members. The aim must be to ensure that Europe emerges out of Emu with the capacity to play an active, constructive role on the world stage on political, monetary and other matters. The corollary is that European policymakers will have to avoid being overly preoccupied with building and refining the architecture of monetary union.
But let me end by repeating the bottom line. The more the single currency helps Europe develop a robust and healthy economy open to world markets, the more welcome the project will be on this side of the Atlantic. Put it another way: if Emu works for Europe, it will work for us.
The author is US deputy secretary of the treasury. This article is adapted from testimony he gave yesterday to the Senate Budget Committee
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