What if they launched a new currency and nobody really seemed to care? The European Union's economy has become increasingly diverse, driven by a range of manufacturing and service industries. Yet since the beginning of the year, one issue has dominated European business: the euro. Launched on January 1st in what was called the largest peacetime logistical operation in history, the euro has been rapidly adopted across Western Europe.

However, the fact that most EU citizens have made the changeover seamlessly to the common currency doesn't mean the euro has been an economic success or that foreign firms are excited about Europe's potential this year. Many businesspeople and economists worry that the euro-zone's two key nations, Germany and France, will struggle this year, posting anemic growth rates and dragging down European-U.S. trade. Yet other, smaller euro-zone nations (as well as the UK) that have slashed regulation, focused more intently on trade, and boosted productivity stand to gain as much from the common currency as Germany and France have to lose.

Good. Bad. Ugly.

Since the switch to the euro, which entailed transferring roughly $600 billion in new bills and coins, has proceeded in a relatively orderly fashion, consumers are benefiting from the price transparency that comes from using a single currency, while European businesses are slashing their currency hedging and transport costs.

Once the EU is done congratulating itself on a successful changeover, however, it faces a grim reality. The common currency has emboldened criminals and hurt many retailers, who had to hire many temporary staff during the January-February changeover period. "The euro will help money laundering and other criminal activity, since criminals can easily move the common currency across the Continent," says Mark Tantam, a fraud specialist at Deloitte & Touche. Indeed, the Basque separatist group ETA began demanding bribes in euros well before January 1.

More importantly, Germany, the largest economy in Europe and a key source of exports to America, seems unable to restart its economic engine. Economists believe that Germany's excessive regulations, nascent venture capital market, and fixed labor costs have made some of its top companies uncompetitive and have scared off investors.

Because 2002 is an election year, German politicians desperately want to tackle unemployment, yet Germany's budget deficit already is close to the cap imposed by the euro-zone nations to prevent inflation, so Berlin will be unable to utilize fiscal stimulus to goose the economy. What's more, greater price transparency will hurt Germany's powerful manufacturing sector, much of which is concentrated in low-margin, price-dependent industries like automobiles.

France suffers from similar problems. French unemployment also is rising, the victim of a government-mandated 35-hour work week, ineffective corporate management, corruption, and powerful unions--France's bank workers union even threatened to go on strike on January 1, the first day of the euro. As in Germany, the French Central Bank has little room to stimulate the economy because of the euro-zone cap; the French government estimates that the economy probably will grow by only 1.5 percent this year. Meanwhile, French politicians' anti-globalization statements have discouraged some skilled immigrants who could contribute to the country's nascent IT sector from putting down roots in Paris or other cities. As Philip H. Gordon, a senior fellow at the Brookings Institution, a think-tank, notes: "Some of the best-known 'French' companies are now majority-owned by foreigners" yet French "leaders compete in their promises to control" globalization.

Smaller Countries Thrive

Many smaller European states are more quickly adapting to global trade and the common currency; Finland and Ireland in particular are hot targets for investment and sourcing of exports. Though it has been stung by recent upheaval at Dublin's Allied Irish Bank, which in February discovered that one of its U.S. traders had lost $750 million speculating on currencies, Ireland's diverse economy remains probably the strongest in Western Europe.

According to Shaun Dougherty, an analyst at The Dismal Scientist, an economic forecasting group, Ireland has halved its unemployment rate since 1994, achieving this near-miracle by aggressively reducing corporate taxes, providing investors with incentives, and focusing on education, Dougherty says. As a result, Ireland can take some licks and stay standing. AIB's troubles and the global information technology collapse clearly have hurt the "Celtic Tiger," which had lured numerous American tech companies to the Emerald Isle. Yet Ireland's leading airline, Ryanair, has become the most profitable carrier in Europe, and the government continues tweaking its favorable tax structure and investing in its highly educated and English-speaking workforce.

Since Ireland relies less on low-margin industries than Germany or France, the country also is better prepared to handle the price transparency created by the euro. Little wonder that Ireland this year will receive roughly one-third of all U.S. investment into Europe.

Meanwhile, Finland, which once produced mostly speed skaters, lumber, and dour art, has developed an open, world-class economy that rivals Ireland's. Since the early 1990s, when Finland was forced to rethink its traditional economic ties to Russia, the Helsinki government has adopted sound macroeconomic policies, cut taxes and wage restraints, and reached out to new trading partners and investors. As a result, Finland has been transformed from an economy reliant on natural resources exports to a diverse economy based on mobile technology (Nokia, for example) and other high-value manufactured goods in recent years. Though Finland, like Ireland, has been hammered by the international IT collapse, the Finns still run a huge trade surplus, and businesspeople expect the small Nordic nation to bounce back quickly. Indeed, the World Economic Forum, a group that focuses on globalization, ranks Finland as the world's most competitive economy and best overall business environment for investors and exporters.

And then there is Britain, where the most popular tabloid newspapers encourage people to thumb their nose at the euro yet the economy actually stands to benefit from the common currency. According to Lisa Anderson, an economist at The Dismal Scientist, "the U.K. economy is standing out as the star performer and looks set to remain the fastest-growing economy among the G7 countries." Unlike Germany and France, Britain has few wage restraints, and British companies are more aggressive in cutting costs than their European counterparts. More important, studies show that London, Europe's premier financial center, will benefit from a series of European corporate mergers expected over the next few years.