Two Cheers for the Euro

There was considerable griping in Europe when the euro was first introduced in 2002 — its low exchange rate against the dollar was an embarrassment, it was an excuse for stores to raise prices — and it was taking away the deutschmark, franc and other currencies that were sources of national pride.

Until recently, Europeans had been worrying that its exchange rate was actually too high against the dollar, reducing the competitiveness of their goods in global markets. Then the euro began plunging in late October, and the focus of worry shifted again to its weakness.

In light of the current financial upheaval, the moment has come to stop the complaining. Instead, everyone — Americans and Europeans alike — should offer a collective expression of thanks to the euro, because without it the world would not only be strapped with a banking crisis, but also with currency mayhem on a continental scale.

As financial markets continue to experience pain, it's not hard to glimpse what could be happening if the 15 European Union countries who adopted the euro were going it alone.

Just look at Hungary, an EU member state that has not (yet) made the changeover to the euro.

With a growing current account deficit and most loans denominated in foreign currencies (the euro and the Swiss franc), Hungary's economy was already under pressure.

Then, as credit markets across the globe started to freeze, the Hungarian currency, the forint, slid to a near-record low, losing 13% of its value in one month, and the Hungarian central bank was forced to raise interest rates by 3% in an effort to defend the currency.

Inside and outside the eurozone

What was a challenging, but probably manageable long-term problem — an overvalued currency co-existing uneasily with a strong dependence on foreign capital flows — turned into a full-fledged currency crisis because of events in global credit markets.

A similar story can be told about other European countries which have not yet joined the euro, like the Baltic countries of Lithuania, Latvia and Estonia.

Now, contrast what is happening in Hungary with the situation in the eurozone countries.

As in the United States, leading financial institutions have come under pressure, national governments have had to step in with plans to capitalize and in some cases take over big banks, and there is intense discussion of how to improve the regulation of financial markets in the future. But what has not taken place is currency panic.

Although certain eurozone countries — Italy, Portugal, Greece — continue to be vulnerable primarily due to their high indebtedness, their membership in the euro, a respected global currency, shelters them from the dramatic events that have taken place in Hungary.

This is not only good for the countries concerned, or the European Union more broadly, but also for the global economy as a whole.

Presented with the monumental challenge of finding a solution to the current financial crisis, the last thing governments and central banks need right now is full-blown currency chaos across Europe.

Besides preventing a run on European currencies, there is another way that the euro has been a force for stability. Like the dollar, the euro is not just a way of transacting business — it is also an expression of economic power.

The European Central Bank manages the monetary policy of France, Germany, Spain, Italy and 11 other countries — representing what is the largest single economy in the world, eclipsing the United States.

When French President Nicolas Sarkozy, who holds the rotating, six-month chair of the EU, called an emergency meeting of key European leaders to find a way out of the financial crisis, his bold action had greater impact because France is a leading member of the mighty eurozone economy.

Particularly before a presidential transition in the United States, the existence of another large and united currency zone helps to reassure markets at a time of testing.

Despite these positive contributions from the euro in the current crisis, a full three cheers are not yet in order.

When Ireland — without coordinating with other EU member states — announced that it would guarantee all bank deposits in the country, there was fear that customers across the EU would seek to move their accounts to Irish banks, exacerbating what were already severely compromised balance sheets in the other 14 eurozone countries.

Although most other EU governments followed with their own measures to pacify account holders, the message was clear: If beggar-thy-neighbor policies are to be avoided in the future, the euro needs to be matched by much closer coordination of national financial policies and regulations in Europe.

By working together in that way, the eurozone countries will also enhance their ability to cooperate with the United States to prevent, and if necessary to resolve, any future crisis.