US worries over effect on dollar as euro gathers reality

The past week has brought the clearest possible signal that the single European currency will be born in 1999: the Americans are finally becoming interested in it.

From cocktail party chat at the annual meeting of the International Monetary Fund (IMF) taking place this week to the formal meeting of the Group of Seven finance ministers last weekend, Emu has been a surprisingly common subject of conversation in Washington.

Kenneth Clarke, Britain's Chancellor, reported: "This has become a live issue." He added: "The Americans have reached the conclusion that Emu is likely to go ahead. They therefore wish to contemplate what preparations they must make."

Robert Rubin, the United States Treasury Secretary, told journalists that the administration was concerned about the mix of fiscal and monetary policy in Europe. With most European governments tightening their belts in order to get budget deficits below the Maastricht ceiling next year, the US thinks the level of interest rates on the Continent should be lower to compensate. "It is very important to the US that Europe grows," Mr Rubin said.

One US official described as "loopy" the German insistence that cutting budget deficits would actually increase output thanks to lower long-term interest rates set by the financial markets.

The US worry got short shrift from the Germans, however. By the end of the G7 meeting Mr Rubin was stressing the need for "credible programmes to reduce fiscal deficits". Ministers also highlighted the need for continued structural reform - in other words, deregulation of labour and industry.

But the short-term outlook has not been the only preoccupation of the round of meetings. The US has also started to turn its mind to the broader implications of Europe's move to a single currency.

The thought uppermost in the mind of US administration officials was voiced by Wim Duisenberg, governor of the Dutch central bank, attending the IMF annual meeting. "There will be three players on the field of virtually equal strength," he said. This should not have come as a huge surprise to anybody. After all, the size of the market encompassed by a single currency has always been presented as one of the key economic benefits.

The Americans are beginning to fret about what it will mean for the chronically weak dollar when the euro comes into existence, especially if the euro behaves a lot like the German mark. The dollar's role as a world reserve currency could diminish further.

Another implication much discussed by officials in Washington was that the creation of the European Central Bank would be matched faster than anybody has been anticipating by a single European view on fiscal policy. Many now expect that finance ministers in the euro area will have to form a collective view, leading to a very rapid integration of fiscal policy.

For small countries such as the Netherlands, this is an attractive avenue to greater influence on the world economic stage. For Italy and Britain, numbers five and six in the G7, it points to the shrinkage of their influence in the longer term. It also indicates the scale of the potential cost to the United Kingdom of staying out, and to Italy of failing to qualify.