Steven Rattner: Midsummer madness - Financial Times 97-06-18

The author is deputy chief executive at Lazard Frères, New York

… It is time to put the euro out of its misery. The project should at least be postponed until Europe comes to recognise the fantasy of believing that a unified currency and a set of arbitrary fiscal benchmarks could turn a variety of inert economies into a match for the vibrant American colossus…. '

Even with genuinely integrated policies, the experience of the US suggests that competitiveness might not always converge. Take our experience with productivity, which increased rapidly in the 1950s and 1960s, slowly in the next two decades, and may have risen somewhat faster in the 1990s. But we know neither why productivity slowed nor even how fast it is growing at the moment - much less how government policies influence it.

Without convergence of competitiveness, different growth rates will inevitably develop. Without monetary and exchange rate policy to redress these imbalances, the consequences of adjustment will be magnified: rising unemployment, enormous downward pressure on wages, loss of investment to more competitive countries and the like.

France provides an important lesson of why the euro cannot work on its own. Once historic currencies have been abolished and only the euro remains, what will happen when the populace of a country like France decides not to bear the pain any longer? The answer is a move to expansionary policies such as those now being adopted by Paris. This would be destructive.

Proponents of the euro have argued that a single currency will help bring about greater political integration. In that sense, the French elections also provide an important lesson by showing, if nothing else, that when the going gets tough, political convergence becomes less, not more, likely. In reality, the euro has a chance of succeeding only once true political integration exists.

Supporters of the euro continue to argue that the US has had one currency and yet has worked through differences in regional growth rates without huge dislocations. That comparison should be recognised as weak. For two centuries, the US has had a strong central government with a dominant role in formulating fiscal and regulatory policy, easy migration of labour, few language or regional cultural differences and a variety of federal programmes to ease the pain when a region goes into recession.

The US experience holds other lessons for Europe as well. We have learned over the past two decades, for example, that in such a fast-changing world, categories of money supply hold so little meaning that the Federal Reserve has embraced a more impressionistic approach to guiding our economy, concentrating on price stability and full employment. How would such decisions, be made in a Europe of varying unemployment and inflation rates?

… A truly integrated Europe would hold great promise, not only for itself but for the rest of the world. Unfortunately, the present course of events offers little reason for optimism.