FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I am glad to have this opportunity briefly to address European economic and monetary union and its implications for the United States. Let me state my conclusion at the outset: we have everything to gain and little to lose from the success of this momentous project. Now more than ever, America is well served by having an integrated and prosperous trading partner on the other side of the Atlantic. Europe will benefit greatly from a single currency that supports these ends -- and if Europe benefits, this will greatly benefit the United States.

Three questions arise in thinking about EMU: what its effect will be on the economies of Europe; what implications the Euro might have for the dollar; and how EMU will affect Europe's role in the world and its relations with the United States.

I. European Economic Policy After EMU

Economic integration in Europe took off toward the end of the 1980s and it has not looked back since. In diverse markets, barriers have come down and standards have been harmonized, yielding considerable benefits for European business and for United States companies with operations, or aspirations, across the Atlantic. Most recently, in the preparations for EMU there has also been remarkable convergence in interest rates and inflation performance, substantial cumulative reductions in fiscal deficits and a recovery in European confidence and growth.

The fundamental long-term challenge facing Europe can be summarized in a single sentence: establishing a strong and stable foundation for job-creating growth. As the Europeans themselves have recognized, this becomes a more pressing issue after EMU. Because the governments of "Euroland" will not then have the same capacity to respond to shocks down the road when governments no longer have the old monetary and exchange rate levers in their hands.

When trouble hits Texas, several things happen automatically. People move out to find jobs elsewhere, capital moves in to take advantage of lower costs, the federal tax take goes down -- and federal spending on government programs goes up. The question Europe is coming to grips with is which of these margins for adjustment will operate in Euroland.

In so many ways, the answer to this question is going to depend on European governments' efforts to press ahead with structural reforms to give labor product markets the flexibility and dynamism to adjust quickly and effectively to shocks. Indeed, it is the fundamental paradox of EMU that while it has often seemed to distract policy makers from the structural agenda, their success in addressing Europe's structural challenges will be critical to the success of monetary union itself.

Europe entered the 1990s with three deficits weighing down on rapid long-term growth -- a fiscal deficit, a jobs deficit and an investment deficit. Impressive progress has been made on the fiscal side. But as European governments know well, the shortfalls in investment and jobs remain:

• despite the recent upturn, average unemployment in the EU last year was roughly twice what it was in 1979 -- and more than twice the rate in the United States;
  
• meanwhile, by some measures, real domestic capital investment is no higher today, in real terms, than it was in 1991.

Reviving private investment will be a major part of reviving employment -- and the key to both will lie in structural reforms to provide a more attractive environment for that investment, whether it comes from within Europe or from abroad. Indeed, it will be particularly important in this context to maintain open markets and support closer integration of Europe, not merely between European countries but between Europe and the rest of the world.

The countries that have made the deepest structural reforms, such as the Netherlands, Ireland and Portugal, have recently enjoyed the most vigorous recoveries of the EMU countries. Here as elsewhere, EMU has the potential to open up new opportunities for private investment and employment, with hugely beneficial opportunities for European and American business and for global growth.

If EMU is a success, this may well fuel ever closer cooperation in other areas, particularly when it comes to fiscal policy and deeper regional integration of regulations and standards. And America and American business would benefit from this bringing together of European nations for the same reasons that we have benefited from the development of the single market. The challenge will be to combine this integration with reforms that help give European product and labor markets the flexibility and dynamism of which we all know they are capable.

II. Implications for the International Financial System

The advent of the Euro is potentially very important to the international financial system. One sometimes hears the view that the Euro will be so strong and robust that it will displace the dollar as the world's reserve currency of first resort. At other times -- though not always, it must be said, from other people -- one hears the view that the Euro will decline in value so far that it will substantially raise European competitiveness at the United States' expense.

No doubt currencies will fluctuate in the future as they have in the past. But I am convinced that the best prospect for maintaining a sound currency is to maintain strong fundamentals. The Administration has always held to the view that the buck stops -- and starts -- with us. In the end, the dollar's relative standing in the international financial system will always depend more on developments here than on events overseas. If we stick to strong and credible policies, the dollar will remain a sound currency.

Now more than ever, the effects of the Euro will be extremely complicated and it is difficult to predict with any certainty what the role of the new currency will be. On the one hand, there will certainly be implications for the demand for Euros. And many will point to the fact that the standing of the dollar is presently disproportionate to the size of our economy or the United States share in global trade.

And yet, there will also obviously be effects on the supply side of the equation as European financial markets start to become deeper and more liquid. The total value of equities in US markets last year was close to $11 trillion, compared to around $5 trillion for the Euro eleven.

The bottom line is that the attractiveness of the Euro will ultimately depend on the same factors that determine the attractiveness of the dollar: the long-term credibility of the policies underpinning the currency and the efficiency of financial markets.

III. Europe's Global Role

Europe is already an economic superpower. With a successful move to EMU, and the integrating forces that EMU could unleash, many Europeans look forward to the day when Europe will more fully punch its weight in international policy-making, not merely in economic issues but in the broader global arena.

By far the most pressing question today relates to Europe's capacity to respond to the financial crises in Asia -- and work with the United States to support global stability and growth. As the Vice-President has said here today, by continuing the policies we have pursued in the United States over the past five years -- policies that have delivered a balanced budget, lower interest rates, low inflation and strong growth -- we have made and will continue to make a major contribution to supporting growth and financial confidence around the globe. But we cannot carry the burden alone. And Europe has a particularly important role to play.

It is striking that private forecasts are now suggesting that the United States current account deficit could rise from 1.9 percent to 2.8 percent of GDP this year, or around $235 billion. By contrast, forecasters are predicting little or no change in last year's current account surplus of the European continental economies of 1.8 percent of GDP, or roughly $110 billion.

It goes without saying that the global economy's adjustment to the shocks of the Asian crises will be smoother, the more widely it is shared. What perhaps needs to be said more often is how well such an adjustment would fit the longer term economic needs of Europe itself. For as its policy makers recognize, Europe's large current account surplus is simply the flip-side of the low domestic private investment mentioned earlier.

European leaders have already committed themselves to working closely with the United States and others to resolve the present crisis, and to create strong mechanisms for helping to prevent the next one. But perhaps the largest contribution that Europeans could make to the continued stability of the global market system today would be to take the structural reform steps needed for a rapid upturn in private investment.

Alone among the major regional economic blocs, Europe has the capacity to increase domestic investment levels substantially. And with the advent of EMU it has the clear and compelling reasons to do so: namely, reducing unemployment and, more broadly, ensuring that the recent recovery in European growth will be sustained. Truly, by acting to improve Europe's capacity to respond to external shocks on a regional level -- they would also be taking a major step toward containing them at a global level.

Looking ahead, EMU has of course raised important issues about the future evolution of the G-7, and Europe's participation in organizations such as the International Monetary Fund. We will continue to monitor progress and engage with the EU on these matters as the starting date draws near. In this context the proverbial American question -- of which number to call when you want to call Europe -- will take on even greater salience as Europe seeks to establish the respective roles of the European Central Bank, European Commission and various national authorities.

Some have argued that a Europe with a single number in the global directory might ultimately pose a threat to the United States. But in a global economy, the United States has infinitely less to fear from an open and integrated Europe, that continues to take its share in global responsibilities, than a Europe that turns inward and seeks insulation. This has been true since the very start of the European project in the early 1950s and it is true today.

The United States has an enormous stake in Europe emerging under EMU with the capacity to play a more active and constructive role on the world stage -- and with the capacity to be an even stronger economic ally to the United States in the century to come. As ever, Europe is a partner, not a rival. And as our partner succeeds, so will we. Thank you.