When Karl Marx and Friedrich Engels wrote the Manifesto of the Communist Party in 1848, they spoke of a specter haunting Europe. Revolution was in the air that turbulent year, and uprisings spread uncertainty all over the continent. Today, more than 150 years later, a different sort of specter haunts Europe–the specter of uncertainty. While uprisings seem unlikely, question marks hover over a wide range of issues–from the value of the freshly minted Euro to the shape of the continent’s relationships with the rest of the world.

As the new millennium approaches, Europe needs clear answers to these questions. In an attempt to shed light on these issues, the Wharton School of the University of Pennsylvania called together a number of experts from around the continent at its 1999 European Forum meeting to discuss how Europe could prepare for success in the next century. Anthony M. Santomero, Richard King Mellon professor of finance and director of Wharton’s Financial Institutions Center, spoke to Knowledge at Wharton before the conference about the challenges facing the continent.

One major question concerns the Euro, the new currency that was introduced with such gusto–call it europhoria–earlier this year. Despite the gung ho optimism that surrounded the Euro’s launch, the currency has declined in value against other currencies, particularly the dollar, in the past six months. So why is the Euro heading south? According to The Economist, a substantial part of the explanation lies in Germany’s economic performance. “Germany stalls, the Euro falls,” the influential newspaper’s cover headline proclaimed on June 5. Arguing that Germany accounts for a third of the Euro area’s output, The Economist notes that “the biggest problem for Europe today is how to revive the German economy.”

Santomero points out, however, that other factors too have contributed to the controversy surrounding the recent movement of the Euro. For one thing, he argues, the political decision to set the Euro’s value above the dollar was a mistake and an unnecessary distraction. However, the issue of the declining value of the Euro is real. Reasons have been offered for its movement, says Santomero, in that “some investment capital is withdrawing from Europe and moving to the U.S.” In some ways, this movement is evident in the spate of trans-Atlantic mergers, such as Daimler-Chrysler. Santomero points to the fact that the U.S. economy has been doing well, and if the Federal Reserve decides to raise interest rates, it will exacerbate the flow of capital from Europe to the U.S. “U.S. interest rates have already gone up at the long end, and the short-term rates could increase when the Fed meets,” he adds.

Another major issue facing Europe, according to Santomero, is the challenge of extending the evident success of some regions to others that are not doing as well. “France is beginning to come back, and so is Germany,” he observes. The Netherlands economy, however, is among the strongest in Europe, and the Dutch model of economic policy has won lots of applause. The Netherlands has had a high rate of economic growth compared to other European countries, and it has been able to add jobs while keeping inflation low. “The Dutch have an extraordinarily open economy,” Santomero says. “The Dutch model is the ideal European model.”

Among the financial questions that Europe must address as banking centers accummulate across the regions is whether a continental counterpart to London will emerge. Cities from Frankfurt to Milan and Paris to Madrid have sought to challenge London’s primacy–so far to little effect. Concerning the evolution of banking institutions, Santomero notes that Europe sometimes seeks to view the evolution of the U.S. banking industry as a model for what is likely to occur on the Continent, but this may not be the best course to pursue. “The U.S. model left cities like Chicago and Philadelphia without a bank and Boston with only one bank,” he says.

Europe also needs to come to terms with how countries that do not now belong to Euroland (countries that have adopted the Euro) can be financially integrated with those that do. Britain–where some patriotic citizens have been known to distribute pound coins with stickers that proclaim, “Save the Pound”–is clearly in a difficult position politically over this issue. At the same time, though, countries that have not yet joined the Euro zone are afraid that they might lose market share. Such anxiety is palpable in Switzerland as it is in Scandinavia.

Europe’s increasingly complex economic relationships with the rest of the world further compound these challenges. “The establishment of rules continues to be a challenge,” Santomero notes. A case in point: the recent spat over bananas exports between the U.S. and Europe. “The economics of that debate were interesting,” he says. “The argument was similar to a hegemonic point of view, where one side maintained that its historical colonies should get priority over the other side’s region of influence. This is silly stuff, but we will see more and more of it.”

Santomero warns that Europeans must be careful not to step upon hidden landmines that could blow up the continent’s thrust towards success in the 21st century. The two biggest dangers are political crises such as the one that engulfed Kosovo, and religious discord. Santomero believes that differences between Christianity and Islam represent a potential source of tension. In Turkey, for example, politicians like Bulent Ecevit complain that their country has been left out of the EU because other countries “do not want a Muslim country in their midst.” Says Santomero: “These are the unspoken issues in the new Europe.”

A Europe that confronts these issues and moves ahead, however, will be a formidable continent in the next century. As Marx and Engels might put it, “They have a world to win.”