Euro Death

Well, we have now heard from all the players in the Eurodrama. The French are angry with the Brits for canceling -- oops -- postponing their referendum on the constitution. It seems that it is not the French "non" but the British postponement that has put paid to this adventure in superstatism. The British are divided: some popped the champagne corks and danced on the constitution's grave, others felt cheated out of their chance to play the role of assassin, still others mourned the death of this latest effort to push the "European project" forward. The Germans refused to hold a referendum but want the Poles to go ahead with one, but the Poles are not certain that's a good idea.

Only America has not been heard from. Washington's official position is that it is for the Europeans to decide about the structure of Europe. The administration would say that, wouldn't it? After all, it would be unseemly to express official joy at the discomfort of Jacques Chirac, who has tried to convert the EU into an anti-American power bloc, and Gerhard Schröder, who won election by heaping scorn on George W. Bush.

Unofficially, many in the administration are delighted. Thoughtful officials in the Pentagon have always worried that the European army that Chirac gulled Tony Blair into supporting when the Nice Treaty was signed would rival NATO for resources. More important, the State Department, which Condoleezza Rice is converting from a center for undermining Bush foreign policy into a loyal implementer of that policy, sees this as possibly a historic moment in European history, and an opportunity for U.S. diplomacy.

The hope is that France and Germany will soon elect leaders who are less hostile to America. Both Schröeder rival Angela Merkel and Chirac rival Nicolas Sarkozy (the latter now Minister of the Interior) are expected to win the next elections in their countries. They are "more Atlanticist" than the incumbents they will unseat, which is good news for the U.S.

Also, the White House is delighted at an event that strengthens Tony Blair's hand in Europe at the expense of the Franco-German axis. Blair's agenda for his coming stints as president of the EU and chairman of the G-7 industrialized nations -- increased aid to Africa and limitation of greenhouse gas emissions -- is not the one Bush would have chosen. But at least we can look forward to some relief from the incessant sniping at us that characterized the EU under past presidents.

Which brings us to America's central bankers and the financial community. They have been concerned by the possibility that foreign central banks will reduce the portion of their reserves held in dollar assets. By holding on to dollars, or using dollars to buy our Treasury's IOUs, China, Korea and other countries have kept interest rates here down, making it easier for consumers to borrow, and prolonging the housing boom.

Recent data suggest that these central banks have been substituting euros for dollars. That shift might now stop. The political disarray in Europe has raised doubts about the long-term viability of the euro. Roberto Maroni, Italy's welfare minister, has called for a return to the lira; Jochaim Fels of Morgan Stanley is reportedly worried about the long-term sustainability of the Euro; Martin Wolf of the Financial Times writes, "The euro was a heroic project…. But the attitudes shown over the past week make [its] failure more likely;" and the Wall Street Journal says that "investors need to think about" the possibility that some EU members might undertake the arduous chore of abandoning the euro. That's what 56% of Germans, hankering for the prosperity of the deutschemark era, say they want to do.

There are several reasons the euro's survival is being questioned. The first is that the one-size-fits-all interest rate that is the necessary accompaniment of a single currency is too binding on some countries, stifling their growth, and too loose for others, stimulating inflation. The second is that countries such as Italy have traditionally overcome recessions by devaluing their currencies so as to stimulate their export industries. That option is not available to euro-adopters.

More important, it has always been understood that if it is to succeed, monetary union must be accompanied by political union that makes it possible to have a single fiscal policy, and for workers and capital to flow freely between countries. The votes in France and the Netherlands show that voters have no taste for further integration. France does not want Polish plumbers pouring in to force down wages, Holland does not want to be overwhelmed by Turkish construction workers, and both countries fear a flight of their industries to lower-wage, new EU members.

Central banks are finding the post-"non" world a risky place, and concluding that dollars and U.S. treasury bonds are the safest assets to store in their vaults. That should do two things: keep U.S. interest rates lower than they would otherwise be; and help to assure that any downward adjustment of the value of the dollar that results from the on-going U.S. trade deficit is more likely to be moderate and gradual than was the case before the French "non."

Some market-watchers say they see still another effect of the inability of the EU to get its economic house in order. German and French businessmen will find low-tax Eastern Europe, and the growing American economy increasingly attractive places to put their money. Any doubts about that were dispelled when France's new prime minister, Dominique de Villepin, announced plans to cut unemployment by expanding the number of civil servants employed by state and local governments. Hopes of economic reform in Europe seem to have died with the constitution.

A version of this article appeared in the Sunday Times (London).