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Jürgen von Hagen

Professor of economics at the Center for European Integration Studies
at the University of Bonn
.

Member Research Council of Deutsche Bundesbank, 2000-


The Euro: One Size Fits None
Jürgen von Hagen:
Britain, Sweden, and Denmark - If I were them,
I wouldn't join until Germany has reformed

Business Week 24/1 2003

Too much political capital is at stake -- especially in Germany and France, the euro zone's key economies -- for the euro ever to crumble. But as Germany's economy slumps into its second year of recession, the difficulties of designing a single monetary policy for 12 different countries are increasingly evident.

That's worrying many of the senior businessfolk gathered in Davos, Switzerland, for this year's World Economic Forum. "The euro zone's monetary policy isn't a case of one size fitting all but of one size fitting none," says the chief financial officer of one Spanish company. "The result is that Germany is having to cope with higher interest rates than it needs, and its economy is slowing as a result. And that's affecting everyone across Europe."

Some eminent economists, such as Robert A. Mundell, professor of economics at the School of International & Public Affairs at Columbia University, argue that the Stability Pact should be scrapped and that the ECB should be given a broader mandate. Yet many European business executives take the opposite line.

Gerard J. Kleisterlee, president and chief executive officer of Dutch manufacturing giant Royal Philips Electronics, says the single currency needs to be underpinned with sound state finances. Ironically, German government officials agree. Caio Koch-Weser, Germany's Secretary of State of Finance, says it would be a mistake to abolish the pact.

"At the end of the day, though, the euro zone doesn't have a demand-side problem, it has a supply-side problem," says Jürgen von Hagen, professor of economics at the Center for European Integration Studies at the University of Bonn.

Kleisterlee agrees: "Germany and other highly regulated economies need to reform their labor markets and make other structural changes that will allow growth to happen." He's among the business leaders who insist that strong growth in Europe -- even Germany -- is achievable if the politicians take action. "What's needed is flexibility," he says.

The euro zone's woes seem to be persuading Britain, Sweden, and Denmark -- the three EU countries that don't yet use the single currency -- to stay away. The betting on the Continent is that the Swedes will reject introducing the euro when they vote on Sept. 14.

And opposition is mounting in Britain -- especially among business executives, who have so far been generally in favor.

"Britain has a higher growth rate than the euro zone in general and Germany in particular," says von Hagen. "It's hard to see why they would want to tie themselves more closely to the Continent. If I were them, I wouldn't join until Germany has reformed and shown it is capable of growing at a much higher rate than we have seen for the past decade."

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