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Economists Discuss European Currency

By Matt Neimark

MIT economics professors gathered for a panel discussion yesterday afternoon to discuss the proposed unification of European currency. European economic issues have enjoyed a high profile lately, with France narrowly approving the Maastrict treaty on Sunday and the German Bundesbank continuing to maintain high interest rates.

The professors, Olivier Blanchard PhD '77, Rudiger W. Dornbusch, Stanley Fischer PhD '69, and Paul R. Krugman PhD '77, all agreed that a common European currency would have unfavorable economic repercussions.

"There is very little reason for a common European currency," Fischer said.

Blanchard stressed that the appeal of currency unification is in part due to the success of a common currency in the United States. One drawback to adopting a single European currency is that participating countries might experience an increase in unemployment. However, historical data on the United States suggests that such unemployment will eventually decrease and stabilize, a fact which mitigates apprehension about the single European currency, he said.

But, Blanchard says, unemployment would probably not stabilize in Europe as easily as it did here. In America, workers can easily move between states, thus relieving unemployment shocks; while in Europe, language barriers between countries might hamper or eliminate similar migration.

"Currency unification works in the United States because labor can move between states. The labor mobility in Europe is negligible," he said. European adjustment to the unemployment would be "very long and painful," he predicted.

Krugman suggested that sufficient trade must exist among the areas sharing the currency for a single currency to be effective. That is, the amount of trade between two cities in two different countries should be comparable to the amount of trade between cities within the same country.

He cited as an example Canada and the United States: in spite of the low tariffs between the two countries, far more trade occurs between any two Canadian cities than between two cities on opposite sides of the border. He adds that even less trade occurs in Europe because of differences in language, culture, taste, and attitudes.

While the economists expressed apprehension about a common currency unit, some European students welcomed the idea. Patrick M. Piccione '95, a student from Belgium, said, "I think a common currency would force more coordination among countries in the European economic community."