-Caveat Lector-
EUROPE MAY REGRET THE EURO
Starting on January 1, 11 European nations began the first step
toward abolishing their monetary sovereignty. It is likely that
once the euphoria wears off many Europeans will regret the
change, and those nations like Britain that have remained outside
the euro area will be thankful that they did so.
The main difficulty that the Europeans face is coordination of
economic policies. Although trade barriers have been greatly
reduced, individual nations retain much control over such
important areas as taxation, labor policy and business
regulation. As a consequence, the euro area is not nearly as
economically integrated as the 50 American states. Nor does any
body exist that can effectively eliminate remaining barriers to
integration the way that the U.S. Supreme Court is empowered to
strike down laws hampering interstate commerce.
Perhaps the biggest problem facing the Europeans is in the area
of taxation.
o Tax rates and tax burdens vary much more among the euro
nations than among the American states, which means full
mobility of labor and capital, goods and services cannot
occur.
o Also, the euro nations have very high tax burdens in
comparison to their major competitors -- total taxes as a
share of the gross domestic product averaged 45.4 percent
last year in the euro area, but they came to just 32.4
percent in the U.S. and 31.1 percent in Japan (see
figure http://www.ncpa.org/pd/gif/euro_area-gdp.gif ).
o This fact alone will prevent any major shift toward the
euro from U.S. dollars by the world's investors.
Finally, many of the leading euro nations are now governed by
left-wing parties that are pushing hard for lower interest rates
and an easy money policy. This suggests higher inflation and
interest rates will result.
Source: Bruce Bartlett, senior fellow, National Center for Policy
Analysis, January 11, 1999.
For text http://www.ncpa.org/oped/bartlett.html
For more on Currency Issues
http://www.ncpa.org/pi/internat/intdex2.html
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