Here Comes The Euro

Not so fast. For now, the euro exists only electronically--that is, European consumers can make payments in euros by writing checks, charging their credit cards or making bank transfers. Starting this week European stock and bond trades will be conducted entirely in euros, as will bank transactions and much business-to-business activity. Euro notes and coins will go into circulation on Jan. 1, 2002. Francs, lire, Deutsche marks and other member states' local currencies will be museum relics by July 1, 2002.

Two reasons: peace and power. Since the end of World War II, when Europe started its long march to the single market, the Continent has turned from one of the world's bloodiest parcels of real estate into one of its most peaceful. Euroland's champions also hope that monetary union will lead to new geopolitical and economic clout. The region is already the world's second largest economy--after the United States--and the largest trading power, accounting for 20 percent of the world's exports and 16 percent of imports.

It won't affect U.S. consumers directly. But the currency is already making its mark on businesses. It will reduce transaction costs (the need to change currencies for cross-border trading) and exchange-rate uncertainty, encouraging trade and investment within Europe. The euro will also make comparison shopping easier, driving down prices and forcing companies to cut costs. That could make Euroland businesses fiercer competitors to U.S. companies. And a euro-driven wave of corporate restructurings and mergers is already reaching U.S. shores--witness Daimler's acquisition of Chrysler and the recent takeover of Bankers Trust by Deutsche Bank. There's more in store.

The U.S. dollar has been the dominant currency in world trade and finance since the 1980s. Some 60 percent of foreign-exchange reserves held by central banks around the world are in dollars, and half of global trade is conducted in dollars. The euro is expected to give the greenback a run for its money, cutting into its supremacy more than did the mark or the yen. That could lower the dollar's value, raising interest rates and making European goods more expensive for Americans. On the other hand, the euro is a newcomer with a still-uncertain future--while the dollar is the currency of the world's only superpower.

American stocks have ruled the world for the past 15 years. Now it may be the turn of Eurostocks. While corporate restructuring has pretty much run its course in the United States, it's just beginning in Europe. A company's profits--and stock--can rise from restructuring alone, even if sales are sluggish. The single currency is also unifying and energizing Europe's stock markets. The Euroland equities market is currently worth only about one third that of the United States, but low interest rates and mutual-fund marketing are luring more Europeans into stocks--and that could help spark an equities boom. The single currency should also make it easier for corporations to sell bonds, which are now issued mostly by governments. But remember currency risk: if the dollar rises against the euro, your return will fall. You have to be in it for the long haul.

Alarmist view: the EMU collapses, dragging Europe into an economically disastrous blame game. More realistic worry: the single currency may force a confrontation between the popular demand for social protection and the needs of economic competitiveness. Typically, when a nation's economy is on the rocks or its labor costs are high, it can devalue its currency to make its exports cheaper. But with the single currency that option is out, making wage flexibility and labor mobility key for the Euro 11. The new leftish governments in Bonn and Paris, however, seem to be encouraging workers to continue to expect cushy benefits--a prescription for social uproar. What can we do about all of this? Not much. Just hope the Eurolanders get it right--and maybe that foie gras and champagne are a little cheaper next New Year's Eve.

A ROLLING COIN

The transition to the euro kicked into high gear last week. What lies ahead:

JAN. 1, 1999-DEC. 31, 2001

Conversion rates are fixed; the euro comes into use electronically.

JAN. 1, 2002-JUNE 30, 2002

Euro bank notes and coins are introduced. Retailers complete their transition to the euro.

JULY 1, 2002

Deadline for the phase-out of national currencies. They are no longer legal tender.

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