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Follow the Euro

CAMBRIDGE: Now that the Euro has arrived, so what? It is useful to review what it can be expected to do. It is also interesting to ask what new risks, opportunities or ideas it offers emerging markets in Latin America or Eastern Europe.

First a negative: the claims of the great gains to be made from transparency, competition, and efficiency are overstated. Price discrepancies in Europe reflect two facts: like politics, all prices are local. Second, price discrepancies do have a lot to do with limited retail competition and a long tradition of anti-competitive practices. Of course, there will be gains in transactions costs from a single money. But that must wait until the money is actually there, a few years from now.

Another negative: will the Euro help unemployment? Per se, the Euro does very little to create jobs or reduce unemployment. True, more financial stability on the periphery and as a result somewhat higher growth must be expected and that brings limited help. The central fact is that higher growth and substantial dismantling of supply side obstacles to job creation and job acceptance are the real cure.

Here is something the Euro will do: reinforce financial deregulation (national and cross border) in Europe to create a broad and deep capital market. Europe comes from a dinky and segmented national, bank-based financial structure. It is on the way to a US-style capital market where households hold funds and companies issue paper and stocks, intermediation margins are small and governance significant. European companies will benefit from the transformation, the most significant supply side influence we will see.