How Did The Eurozone Come About?
ROBERT SIEGEL, host: We hear so much about the euro, the eurozone and Euro bonds, we thought that a primer was in order and we'll start with January 1st, 1999. On that day, a new currency came into being designed to supplant the deutsche mark, the French franc, the lira and several other venerable currencies in Europe. European commissioner Yves-Thibault de Silguy described the euro in millennial terms.
YVES-THIBAULT DE SILGUY: I think it's a very important new step in the European constrictions after 40 years of defaults. And it's the first time for the fall of the Roman Empire that Europe will have its own currency.
SIEGEL: The first time since the fall of the Roman Empire, he said. Well, what did it mean that Germans, Italians and others were using the same currency and what bearing does that have on the troubles in Europe today? Well, we're going to ask Fred Bergsten, director of the Peterson Institute for International Economics in Washington. Welcome to the program once again.
FRED BERGSTEN: Good to be here.
SIEGEL: And first, what's the big difference between, as they now number, 17 European countries having, say, 17 currencies or, as it now stands, 17 countries with a single currency?
BERGSTEN: The big difference is the absence of costs of converting from German marks into French francs into Italian lira as you transact, as you trade, as you do finance across Europe itself. In theory, if a company or an individual had transacted across the whole of Europe, he would've had to make 17 different currency conversions over the course of his business and that would've doubled the cost of the business or more. Now, you do it with no cost, same currency, avoid all of those transaction costs, add deeply to the integrated economy of Europe.
SIEGEL: Now, we've heard talk about Euro bonds. What is a Euro bond?
BERGSTEN: A Euro bond would be a financing instrument through which the eurozone countries would, together rather than separately, borrow on world capital markets and jointly, rather than individually, promise to finance and service the bond. This is a big deal because when the Europeans created the euro currency, they did not, at the same time, create any kind of fiscal union. They called their process economic and monetary union, but it was all monetary. It did have a common currency, the euro, a monetary institution, the European Central Bank, but it had no economic union.
There was no common fiscal policy and no economic governance institutions to run the thing. Under the throes of the current crisis, they are being forced to move in that direction.
SIEGEL: So using the United States, our situation, as an analogy here, the situation there now and in Europe is as if, it were here, all the states could borrow and issue bonds for their own needs, but there would be no federal budget, no federal borrowing authority?
BERGSTEN: That is right. The U.S. has a fiscal union. Our individual states, of course, do borrow on their own account, but they have constitutional requirements that try to prevent their running budget deficits and, for the whole, work out so that they balance their books. When they get into difficulty, they receive automatic financial transfers through Washington. What the federal government in the United States essentially does is take money from the wealthier states, pass those on to the weaker states which run deficits with Washington, but we don't think of it as surpluses and deficits because they're all part of a fiscal union.
In Europe, it's not like that at all. Until now, the center has not been able to borrow on its own at all. So when Greece or Portugal gets into trouble, the European Union has to quickly have a crisis meeting, go to the Germans and the Dutch and the few other rich countries and see if they will put up the money to lend to the weak sisters to keep their economies afloat and keep them from threatening the European Union as a whole.
SIEGEL: Well, Fred Bergsten, thanks for talking with us once again.
BERGSTEN: Glad to do it.
SIEGEL: That's Fred Bergsten, director for the Peterson Institute for International Economics in Washington D.C.
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