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People in the German border town of Passau probably don't think of themselves as champions of the euro. Yet this August they scored a victory for Europe's single currency. On a warm Friday afternoon, about 500 people, led by Mayor Albert Zankl, drank beer, ate bratwurst and — for almost five hours — blocked a road into neighboring Austria. Their target: the price of gasoline in Germany which, at about j1.15 per liter, is about 20% more expensive than in Austria. Every day since the beginning of this year, an estimated 2,000 German motorists have filled their tanks at a new BP station on the border, built on the site where national passports and customs controls used to be. The Austrian gas station's success has come at the expense of its 17 rivals in Passau, some of whom have laid off staff, and has provoked the ire of local authorities because traffic clogs the narrow streets of the district near the border. Mayor Zankl is demanding that the German government reduce gasoline taxes or at least give Passau residents a subsidy. Zankl estimates the nation now loses about €1 billion in gasoline tax revenue annually from motorists in border areas. "Only more pressure will make a difference," he says.

What does this have to do with the euro? Passau is a textbook example of what is supposed to happen after a monetary union. Long before the euro became legal tender in 12 European countries on Jan. 1, 2002, many economists and policymakers pledged that one of its biggest benefits would be the ease with which prices could be compared across borders. That, so the theory went, would lead to greater price competition for goods, and increase the pressure on national economies to become more competitive with one another.

Such "price harmonization" was but one of the many economic virtues that the euro was supposed to usher into reality. As well as making life easier for travelers, the euro was also touted as a major boost for business: it would eliminate many transaction costs and put an end to the currency devaluations of the past that were often bruising for governments and companies alike. Savers and lenders were supposed to benefit from a bigger capital market. And overall, the euro was supposed to be a shot in the arm for growth, investment and employment because countries that joined it were bound by strict rules that aimed to limit inflation and deficits. There were many skeptics, of course, some of whom went so far as to predict that monetary union would never get off the ground. Who was right? After nearly three years in our wallets, has the euro made much of a difference? What are its true economic effects — for good or ill — so far? Time put those questions to a range of economists, business leaders, consumers and trade groups across Europe. Here's the euro scorecard.

[ECONOMIC GROWTH] One of the optimistic projections about the economic impact of the euro was made in 1992. A panel of economists chaired by Michael Emerson, then the European Commission's chief economist, estimated that the elimination of currency transaction costs alone would boost gross domestic product of between 0.5% and 1%. But since 2001, Euroland has experienced a protracted period of subpar growth, even as budget deficits in half of the 12 nations have soared beyond the 3% of GDP that is technically allowed under the monetary union's rules. Germany has suffered the worst downturn, but France, Italy and the Netherlands have also had virtually no growth. Meanwhile, Ireland, Greece and Spain have boomed — if not overheated. Some believe that the euro has exacerbated these differences because of its one-size-fits-all monetary policy, with the same interest rates set for all by the European Central Bank. "In the short term, monetary policy is driving economies apart, not bringing them together," says Mike Taylor, a European economist for Merrill Lynch in London. But the Center for European Policy Studies' director, Daniel Gros, who also served on the 1992 panel, continues to stand by the growth prediction, although he adds that "this is now impossible to prove."

A recovery of sorts is under way, but it's a weak one compared with Britain and the U.S. In its latest forecast issued last week, the Paris-based Organization for Economic Cooperation and Development (OECD) predicted that Euroland's economy will grow by 2% this year. That's a big increase on the 0.4% growth it posted in 2003, but less than half the growth — of over 4% — that the OECD expects for the U.S. and Japan, and well below the 3.4% it's predicting for Britain. Economists have numerous theories as to why growth is so sluggish, ranging from a chronic lack of labor mobility to massive overregulation. Whatever the causes, it's clear that the euro has not been enough to overcome what many economists see as a key weakness: productivity, which has remained flat in Euroland even as it has soared in the U.S. And central bankers and business leaders worry that, if the rules for monetary union laid down in the E.U.'s Stability and Growth Pact are diluted, as some governments including France and Germany now want, the economic cost will be huge. "Everything that damages the credibility of the euro is inherently bad," says Jürgen Strube, president of the European employers' association, unice.

[PRICES] Mayor Zankl reckons that filling up the tank in Austria saves Passau motorists as much as j30 per tank. Of course, the euro itself is not responsible for price differences, and residents on both sides of the border have long looked for bargains. But there's scant evidence overall that retailers are bringing prices in national markets closer into line. In a study this year of more than 300 products in 10 E.U. nations, the Belgian consumer association Test-Achats found a huge gap between the highest and lowest prices — as much as 45% for DVDs and 38% for car radios (see box). And when prices do move, they don't always come down. Stelios Haji-Ioannou, the founder of low-cost airline easyJet, says that the euro "has reduced the currency risks of running a business in Europe, and that must lower costs and hence prices for consumers." But he tells Time that it has also given some of easyJet's competitors in southern Europe the opportunity to raise prices to north European levels. "The problem is that [fares] are beyond the purchasing power of the locals," he says.

[INFLATION] Indeed, there is a widespread perception among European consumers that their new currency has driven up prices. In many countries the song is the same: when prices switched over to euros, they went up. "First they rounded up the prices and then very quickly, when the merchants saw people didn't understand what was going on, they raised them," says Stefano Zerbi of the Italian consumer group organization Codacons. "And the prices continue to rise." Earlier this year, a judge in the Italian seaside town of Ladispoli, near Rome, upheld the complaint of a local retiree backed by Codacons. He alleged that a Ladispoli café had unlawfully hiked the price of his cappuccino at the time of the switchover to the new currency from 1,500 lire (€0.77) to €1. The judge handed down a €0.23 fine and ordered the café to pay the man's legal costs. Many across the Continent share his frustration. A European Commission survey last December asking who won and lost in the currency changeover returned a crushing result: 89% of respondents said the switch had been bad for consumers.

Economists see the inflation picture as a bit more mixed. Official statistics show that the euro pushed up consumer prices by a tiny amount, somewhere between 0.12% and 0.29%. But while the price of many big-ticket consumer durables, such as automobiles or refrigerators, remained stable or fell, the cost of many everyday services — hairdressers, cafés, vending machines, parking meters — soared. "They may not amount to a large part of people's budgets, but they are very visible," says Jim Murray, director of the Brussels-based consumer lobby group beuc.

The issue remains highly charged as several countries consider whether to follow the lead of Finland and the Netherlands and eliminate 1¢ and 2¢ coins because they are expensive to mint and are viewed as an inconvenience by many shoppers. France, for one, won't follow suit. Getting rid of the small coins "would have a very bad psychological impact, as consumers already have the impression that the price of basic goods has come unglued because of the euro," the governor of the Bank of France, Christian Noyer, said earlier this month.

The bigger macroeconomic question is how to deal with inflation as it arises, given the one-size-fits-all monetary policy of the European Central Bank. During the period 2001-03, countries with the highest inflation rate, such as Spain, Portugal, Greece and Ireland, actually enjoyed negative interest rates after adjustment for inflation. By contrast, Germany, which had the lowest inflation, had to live with short-term rates that, at 3%, were too onerous for its slumping economy. "It's very hard to make a case that the single currency has led to improvements in the workings of the euro-zone economy. You could argue that in the case of Germany it's made things worse," says Merrill Lynch's Taylor.

[IMPACT ON BUSINESS] Back in pre-euro days, Germany's TWD Group, a mid-sized textile manufacturer, did about 20% of its sales in German marks. Now the firm, based in the Bavarian town of Deggendorf, does about 60% of its business in euros. While it still must deal with the ups and downs of the dollar, it's subject to far less exchange-rate turmoil than it faced a decade ago, when the Italian lira was abruptly devalued and other currencies came under strong market pressure. That enabled rivals in neighboring countries to undercut German prices. "It's a relief," says Yorck von Schmeling, TWD's chief executive, who says the euro has been "all positive" for his business.

Many business executives around the Continent tell a similar story. At French hotel company Accor, executive vice chairman Benjamin Cohen says the absence of exchange-rate risk makes investing in places like Italy and Spain far easier. "The element of chance has disappeared," he says. Companies in Greece, Spain, Portugal and Ireland have benefited from a sharp decline in interest rates on their debt since joining the euro. While some retail prices did rise, "the balance of cost and benefit is so much on the benefit side, while the costs are small and temporary," according to Ulysses Kyriacopoulos, who runs a family-owned Greek mining company and chairs the Federation of Greek Industries.

Economists say it's impossible to quantify such benefits. But Jean-Paul Betbèze, an economist at France's Crédit Agricole, says the biggest effect is a psychological one, brought on by the European Central Bank's mandate to keep inflation in the mid-term at below 2%. "The stability of money is in people's heads," he says. "That's very important because it has an impact on wages, prices and competitiveness."

At the same time, the euro hasn't entirely insulated European companies from exchange-rate risks. Over the past 10 years, many firms have expanded beyond Western Europe to Asia and other places that trade using dollars. For example, Germany's huge machinery industry has seen its sales to China more than double over the past three years, to €6 billion annually, while sales to euro-zone countries have declined slightly. While the euro was weak against the dollar in its earliest days, "it was like sweet poison," says Ralph Wiechers, chief economist at the German Engineering Federation, because it allowed firms to export more competitively. After its 40% appreciation against the dollar in 2002 and 2003, the euro's current strength has the opposite effect: it gives noneuro rivals an edge.

[TRADE] One of the least expected benefits of the euro has been the boost in trade among countries that use it. When plans for the single currency were first created by the E.U.'s 1992 Maastricht Treaty, most economists didn't focus on that possibility. But groundbreaking work in 2000 by Andrew Rose, a professor at the University of California, Berkeley, showed how trade had risen substantially following monetary unions elsewhere. He calculated that in Europe, trade among euro-zone nations could increase by as much as 300%. Rose cautions that the number is theoretical, based on the experience in much poorer countries. But the first studies suggest he could be right about the trend, if not its dimension. Two recent studies by economists at the Inter-American Development Bank show that those countries joining the euro saw a boost to their trade ranging between 8-16%. And Britain, which didn't adopt the euro, has also seen some trade benefits — but far less than if it had joined the club. Rose says that while it's too early to have a definitive view about the total impact, he expects trade "will probably continue to rise for a long time yet." Still, he adds, "it's unclear that the benefit of increased trade is enough to offset the costs of losing [control of] monetary policy."

[INTERNATIONAL ACCEPTANCE] The euro isn't about to take on the dollar as the world's favorite currency, even if some initially thought it would. "Don't be fooled. This meek and mild-mannered Clark Kent of a story is really the Superman of financial news," commented Walter Russell Mead, a senior fellow at the New York City-based Council on Foreign Relations in 1999, warning that things "could turn ugly fast" for the dollar as international investors snapped up euros. Such claims were given credibility by the Nobel prizewinning economist Robert Mundell, who predicted around the same time that by 2010 the euro area would be bigger than that of the dollar and its growing role would likely provoke some tough policy reactions in the U.S.

The euro has gained some ground, but it is still far from threatening the dollar's pre-eminence. The amount of euro-denominated bonds as a share of the global total has risen from about 20% in 1999 to 30%, while bonds denominated in dollars have remained at around 45%. But the euro has conspicuously failed to take off as a currency used in foreign-exchange transactions. Globally it accounts for between 20-25% of the foreign-exchange market, which is about the same as the national currencies that made up the euro. Jean-Claude Trichet, the European Central Bank's president, blames that on "inertia." But others point to the critical absence of Britain. If Europe's leading financial center were in the euro, they argue, the currency's status and usage would rise substantially.

For all these early results, most economists caution that it's still too early to measure the full impact of the euro. "We always said it would take at least a decade," says Gros of the Center for European Policy Studies. He still believes that replacing national interest rates with the single euro rate will lead to stronger growth and investment. But that's a long-term forecast and, as the British economist John Maynard Keynes once famously said, in the long run we are all dead. Europeans like the bargain-seeking people of Passau would like to see some tangible results before then.

• PETER GUMBEL
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