US wakes up to threat of potential rival to the dollar

FRANCO-GERMAN rivalry and the 11th hour fudge over who should head the European Central Bank provided United States reporters and analysts with a welcome escape route this weekend. They could concentrate on age- old European national discord and how that would hamper plans for a single currency, rather than the more awkward implications for the US if the project succeeds.

"An inauspicious start," said the New York Times correspondent. "... Experience of the EU suggests that abiding by a single monetary policy will not be easy." "Feud underlines risk, breadth of massive venture," said the Washington Post. On television, America's main source of news, the start of the euro barely registered.

Officials in Washington offered lukewarm congratulations, tempered with mild surprise that the European currency had got even this far. They then returned to more pressing matters - for them - such as today's Middle East peace talks in London, President Bill Clinton's visit to China and new warnings of war in Kosovo.

But the media's preoccupation with Brussels rivalry disguised a considerable turnaround in the US so far as the euro is concerned. Suddenly, those Americans commonly lumped together as "US policy-makers" are waking up to the euro. They are neither as unconcerned nor as pessimistic about its fortunes as the weekend's headlines suggest.

The change is partly the result of a propaganda blitz by Europeans. Leading Washington journalists have recently been taken on "fact-finding" trips to London, Paris and Frankfurt. Last week saw four different euro-events in Washington, with speakers from Britain, the US, Germany, Austria, and the EU Commission among others: diplomats, businessmen, economists, bankers.

But there has also been a marked shift of official opinion over the past 12 months about whether European countries would accept, let alone qualify for, a common currency. Jeffrey Frankel, of the US Council of Economic Advisors, is perhaps typical. From the adoption of the stability pact, he says, to the lengths so many leaders were prepared to take unpopular fiscal policies in order to meet the membership criteria, he has gradually realised the euro will happen.

Now you can hear analysts from right and left describe the euro as "arguably the biggest thing that's happened to Europe for quite some time". So far there is no American consensus on what the euro could mean.

The Clinton administration and much of the left tends to the benign interpretation that anything which brings Europe together is good for Europe and for the US. According to this view, a single currency will make conflict less likely; it could make consumer goods cheaper across Europe, and also create a bigger, more accessible market for American exporters.

There are, however, less optimistic forecasts. Some argue that the project will simply never come to fruition and a few predict nationalist backlashes and ultimately new European wars. There are differences, too, on what the euro will mean for the US economy and the dollar. While some economists, like Paul Krugman at Harvard, argue that any effect will be slight and long-term, others believe the euro could be competing with the dollar for the status of leading world reserve currency within three to five years. The development of at least three highly protectionist blocs, trading freely internally - in dollars, euros or yen - but externally defensive, is as likely, say some.