Professor Jonung points to several challenges that face the European Union in the age of the euro. The most daunting one he describes relates to the capacity of the EU to manage the lack of a "common European business cycle," and the fact that Europe is not an optimal currency area.

Look at the United States, where the 50 states grow and contract at different rates. Is the U.S. an optimal currency area? What is different is that the U.S. has a single fiscal policy, so that revenues flow in and out of the states depending on their place in the business cycle.

Yes, the EU does lack this "fiscal federalism." Better coordinated taxing and spending policies will help. Other potential adjustment mechanisms also exist, such as more flexible wage levels, greater mobility of labor between industries or regions, and the freedom to hire and fire workers in response to the demand for products and services.

Another point raised by Professor Jonung concerns the sequencing of events: "Never before in history has a group of independent nations given the power of framing monetary policy to an independent entity like the European Central Bank, the ECB, while still maintaining control over all major aspects of economic policy making, like taxation, government expenditures and fiscal policies."

Are the EU countries that "independent" from each other? Less so than any group of countries in the past, in fact, except for those coerced into cooperation by a hegemonic or colonial power. The single market (which guarantees free movement of people, labor, capital and goods), common trade and competition policies, the common agricultural policy and many other aspects of policy-making are already supranational in character within the EU. European Monetary Union (EMU) should be viewed as the natural culmination of these previous steps toward integration, and as the forerunner to the common fiscal policies he mentions.

Will governments will be tempted "during election years to make fiscal policy more expansionary than otherwise?" The EU countries have shown in the run-up to the euro their impressive determination to satisfy the exacting requirements of the Maastricht criteria on inflation rates, deficits, debt, interest rates and exchange rate stability for joining EMU. This success reflects a change in public opinion and a new consensus around sound economic policies, and away from old-fashioned demands for quick fixes through unsustainable surges in public spending.

Why should there be a contradiction between the European Central Bank meeting its mandate of price stability and European governments pursuing jobs and growth or exchange rate stability? Unemployment in Europe is not due to overly high interest rates, but rather to structural problems in the European economy. Moreover, central banks with similarly strict inflation-fighting mandates, such as the German Bundesbank, have shown their success in sticking with their goal of price stability while governments chose to pursue, or not to pursue, policies oriented toward growth or stable exchange rates. The ECB should be able to do the same.

What about the "democratic accountability" of the European Central Bank? While the bank is currently accountable to the European Parliament, there have been proposals to give an oversight role to national parliaments in the EU as well. This would increase democratic accountability, but would probably also be cumbersome to manage in practice.

Finally, there is the question of a "lender of last resort, to guarantee the soundness and stability of the financial system" in Europe. This important question may best be answered as part of a broader effort to create a new, more sound global financial architecture in the wake of the Asian-Russian financial crisis.

Peter S. Rashish is executive vice president of The European Institute, a Washington-based public policy forum on transatlantic relations. An expert in international economic issues, he has previously worked at the World Bank and the Paris-based Organization for Economic Cooperation and Development.

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