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Monday, Dec. 31, 2001

The euro's tangible new legacy

Special to The Japan Times

On New Year's Day, many traditional Japanese performance arts come into their element. Rakugo is a time-honored version of standup comedy. Well, sit-down really, since the kimono-clad performer actually sits on a cushion and uses nothing but a towel and a fan as props -- any kind of prop that may be required. The tragicomic stories that these linguistic magicians tell are countless.

A rarely performed piece deals with a little prince who has lived a very cosseted life. So aloof is he from worldly things that he knows not what money is, nor what it looks like. Thus, when he sees a coin pierced with an artistic hole in the middle, he thinks it must be a sword guard that has detached itself from a saber belonging to a princely doll not unlike his own royal self.

Euro coins do not have designer holes, and communication networks are such that even the most cocooned of royals around the globe today will by now not confuse them with a piece from a child's toy.

The introduction of euro notes and coins Tuesday may seem like a small step compared to what was regarded as the truly giant leap of faith required to launch the euro in January 1999. Yet the move from a virtual currency confined to bookkeeping space to a circulating currency is the true giant leap.

It is not so much the novelty of the new notes and coins, and the possible confusion that may arise as a result. Nor is it a question of the degree of its ready availability across the euro zone. It is not even the concerns over inflation as suppliers round up the prices of their wares in converting them into euros. Neither is it the matter of fraud and counterfeits. While these are indeed issues that need close monitoring, they are by nature transitory matters.

The significance of euro notes and coins lies not in their appearance on the scene but rather in the disappearance of the "legacy currencies" -- the deutsche mark, the French franc and the Italian lire.

Only now will people really begin to think in euros and nothing but euros. Indeed they had been discouraged from doing so to the extent that the legacy currencies remained in circulation and price tags were denominated in familiar DMs and Ffrs.

Now that the genuine article has arrived, people will genuinely be able to compare prices across borders. Their scrutiny will force producers to seek efficiency and quality to an extent that was never really required of them while shoppers continued to think in terms of their local currencies.

Given no other option but to earn, calculate and spend in euros, Tuesday will be a rude awakening for euro-zone market participants. The resultant shifts in production sites and the overall reallocation of economic resources across the euro zone and beyond will be the true test of the single-currency project.

Will domestic politics within states constituting the euro zone be able to tolerate the competitive pressures that force companies to relocate outside their national borders, taking job opportunities with them and away from the domestic labor markets?

To be sure, these were all issues that have existed in theory and to a certain extent in practice ever since the initial birth of the euro as a cashless currency. Yet the remaining presence of the legacy currencies has up to now acted as a veil over people's minds and calculations to make the realities of living in a single currency area just that less evident than would otherwise have been the case.

The advent of the real euro also has a bearing on its position in the league of global currencies. Much has been made of the euro's potential as an alternative to the U.S. dollar in the role of international key currency. Leaving aside for the moment the validity of the key currency concept itself in today's global setting, the euro's eligibility for such a position will depend critically on how the competitive forces play out within the euro zone.

If economic efficiency is seen visibly to improve in response to the price transparency, if structural reforms required to make such allocatable efficiency possible are seen to go forward, if political egos are not seen to be getting in the way of sensible economics, the euro could very well overthrow the dollar as a dominant global currency.

If none of it works, euro weakness will become a permanent fixture of the global foreign exchange market.

It could be argued that the half-baked solution of the virtual euro as a stepping stone toward the real thing has been the cause of the largely indeterminate level of the euro in the forex markets to this day. Belonging to a single-currency area is always a double-edged sword. One of the more economics-based aims of the by-and-large politically driven European single currency ideal was to insulate Europe from the vagaries of American economic management and currency policy.

Thus far, the euro zone has achieved precisely the opposite in that the single currency has made the member economies collectively more vulnerable to the deflationary winds blowing out of the United States. For the moment, the euro remains a currency singularly lacking in the ability to determine its own fate: a residual third currency whose value rides on the coattails of the yen-dollar relationship. This is only to be expected now, when the currency is still in its infancy. All the more so because its track record thus far has been charted through a virtual existence. Real life begins now, with the dissipation of the legacy currencies.

It is no easy matter for new notes and coins to gain legitimacy in the eyes of the populace. In the world of rakugo, which has been in existence for a lot longer than the yen, bank notes are an object of constant derision and suspicion. A master of the art was in the habit of referring to yen bank notes as "picture postcards printed by the Bank of Japan."

The euro notes are indeed as pretty as any picture postcard. The tough battle for legitimacy beyond postcard status begins tomorrow.

Noriko Hama is the research director and project manager at the Research Center for Policy and Economy at the Mitsubishi Research Institute, Inc.

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The Japan Times

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