Economic Report President

Third, asymmetric shocks and limited factor mobility may diminishover time as EMU itself leads to greater real integration among the Europeaneconomies (see Box 7-2). For example, as intra-European trade continuesto grow in response to European integration and EMU, thecreation of a common free market for goods, services, and factors ofproduction could make idiosyncratic national shocks less prevalent, if itreduces the geographical concentration of industries in certain countries.Finally, it has been argued that EMU is likely to exert discipline infavor of structural reform. As there will be no national monetary andexchange rate policies, and fiscal policy autonomy will be constrained,the ability to use instruments of macroeconomic policy to delay structuralmarket reforms will be reduced; governments will then havestronger incentives to pursue policies that further long-run economicgrowth. Critics of this view contend, however, that EMU could actuallyslow the drive for structural reforms: because reforms are sociallycostly, the flexibility deriving from monetary, exchange rate, and fiscaldiscretion could ease the transition costs as resources are reallocated.With EMU, the absence of these social shock absorbers may slowstructural reform.THE EURO AS AN INTERNATIONAL CURRENCY AND THEIMPLICATIONS FOR THE DOLLARMonetary union in Europe is a positive development that couldsimultaneously benefit the continent itself, the United States, and theworld economy. Some have expressed concern, however, that a strongEuropean economy and the emergence of the euro as an alternativeinternational currency, rivaling the dollar, are likely to harm the UnitedStates. Such concerns are largely misguided. The United States haslong benefited from a prosperous, growing Europe, and ever since theMarshall Plan, U.S. policy has supported the development of strongmarket economies on that continent. The United States will benefitfrom an open and integrated economic area in Europe. American producerswill be able to export to a large, integrated European marketwith no cross-national restrictions on trade. U.S. firms producing inEurope will benefit from the lack of exchange rate volatility, commonstandards for goods and services, and a large, open market. Indeed,U.S. corporations have more experience selling into a large, unifiedmarket than do their European counterparts. American financial institutions,in particular, are already quite competitive in commercial andinvestment banking services and securities products and can benefitfrom the opportunities provided by the broadening and deepening ofintegrated European financial markets.The emergence of the euro as an international currency should notbe viewed with alarm, for a number of reasons. Even if the euroemerges as a strong international currency, the negative effects onU.S. economic welfare are likely to be small and outweighed by the297