NCPA - National Center for Policy Analysis

Europe May Regret The Euro

January 11, 1999

Starting on January 1, 11 European nations began the first step toward abolishing their monetary sovereignty. It is likely that once the euphoria wears off many Europeans will regret the change, and those nations like Britain that have remained outside the euro area will be thankful that they did so.

The main difficulty that the Europeans face is coordination of economic policies. Although trade barriers have been greatly reduced, individual nations retain much control over such important areas as taxation, labor policy and business regulation. As a consequence, the euro area is not nearly as economically integrated as the 50 American states. Nor does any body exist that can effectively eliminate remaining barriers to integration the way that the U.S. Supreme Court is empowered to strike down laws hampering interstate commerce.

Perhaps the biggest problem facing the Europeans is in the area of taxation.

  • Tax rates and tax burdens vary much more among the euro nations than among the American states, which means full mobility of labor and capital, goods and services cannot occur.
  • Also, the euro nations have very high tax burdens in comparison to their major competitors -- total taxes as a share of the gross domestic product averaged 45.4 percent last year in the euro area, but they came to just 32.4 percent in the U.S. and 31.1 percent in Japan.
  • This fact alone will prevent any major shift toward the euro from U.S. dollars by the world's investors.

Finally, many of the leading euro nations are now governed by left-wing parties that are pushing hard for lower interest rates and an easy money policy. This suggests higher inflation and interest rates will result.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 11, 1999.

 

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