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Berlin and the Euro — Under Construction

Does the fact that much of Berlin is under construction cast a shadow on the euro’s future?

November 6, 2000

Does the fact that much of Berlin is under construction cast a shadow on the euro's future?

Three years ago portions of central Berlin were a forest of construction cranes rising out of a sea of mud. Today, new neighborhoods around Potsdamer Platz have started to take shape, but a lot more remain to be done. The new Federal Government center around the rebuilt Bundestag is still being laid out.

In other words, Germany’s new capital is still a work in progress, and so is the “New Europe” which it has come to symbolize. Is it any wonder that the euro, the currency of that unfinished project, remains in the doldrums?

Periods of sustained currency weakness in Europe typically coincided with the rebuilding of the continent, which took place three times during the 20th century. The UK pound, the dominant currency in the first half of the century, began losing ground to the dollar following World War I.

Then, after World War II, the deutschmark replaced sterling as a key European currency, while Germany, along with the rest of the continent, was being rebuilt, the dollar remained strong against all European currencies.

The Western European political and economic system came into its own in the early 1960s, and European currencies, headed by the deutschmark, gradually regained ground against the dollar. In the mid-1990s, when the process looked set to culminate in Economic and Monetary Union, European currencies reached record highs versus the greenback. The deutschmark strengthened to an unprecedented $1.39 per deutschmark in early 1995.

The end of the cold war, while bolstering the geopolitical position of the United States, created an upheaval in Europe. The process of post-World War II rebuilding proved incomplete once Communist regimes in Eastern Europe collapsed and the region asserted its claim to membership in a pan-European system. Instead of a self-contained rich men’s club, the European Union became an open-ended project with an exposed eastern flank.

Now there is a major controversy in Brussels associated with the first wave of eastward expansion. Yet, discussions now focus only on the most advanced, westernized countries of east and central Europe. Difficulties will become insurmountable when poor nations further east, as well as former Soviet republics, get ready to join.

Not surprising, the future of the European single currency has become clouded once the markets began to appreciate the emerging difficulties. A variety of unpredictable political and economic forces are certain to buffet the euro in coming years.

And, believe it or not, this all comes to the fore in the new German capital. As it tries to join its two halves over the old divide, it has become a fitting visual symbol of the current state of the “United States of Europe”. Eventually, Berlin will no doubt become the capital of the united Europe, both because of Germany’s economic dominance on the continent and the city’s own cultural heritage and geographic location.

But for now, the city presents a work in progress — a mixture of historic buildings, bombed-out empty lots, international style structures in the West and dehumanizing Communist-era monstrosities in the East. Not unlike the euro — whose value, after all, depends on the ups and downs of eleven different national economies.