WORLD

Here comes the euro

The continent’s new currency will have global impact

BARRY CAME December 28 1998
WORLD

Here comes the euro

The continent’s new currency will have global impact

BARRY CAME December 28 1998

Here comes the euro

WORLD

The continent’s new currency will have global impact

BARRY CAME

IN LONDON

Like many a bold adventure, it begins with a race, a headlong dash against the clock. The runners are already in place, 30,000 in London alone, countless legions more in banks and brokerage houses across Europe and around the globe. The big moment comes on New Year’s Eve, at precisely 5 p.m. London time, when a signal from 11 European finance ministers will set the bankers and brokers in motion. For the next three days, they will frantically scramble to convert millions of financial instruments—Italian bonds, German shares, French securities— into a brand new currency. And it will all have to be finished by the time the world’s markets reopen for business on Monday, Jan. 4.

‘That’s when the euro at long last arrives,” says Geza Tatrallyay, a London-based senior vice-president of the Royal Bank of Canada.

“And like it or not, we’d better be ready.”

Even the skeptics admit that the impending birth of a single new currency in Europe is an epochal event, a giant step along the road towards the age-old dream of unifying the continent. In terms of immediate financial impact, it contains the seeds of revolution. For the euro is, as the Royal Bank’s Tatrallyay points out, “not just another currency but rather the most important signal yet of the radical restructuring of the markets on the European continent.” And it will, he notes, affect the entire planet. By melding the currencies of 11 key European states into one, it creates at a single stroke a new economic superpower: the world’s second-largest trading zone (after North America) with a mass market of 290 million people and a gross domestic product approaching $10 trillion (United States: $12 trillion). If the euro succeeds— and all of the early signs indicate it will—it is bound to accelerate the financial integration of Europe. Over time, it may also trigger even closer political union, giving Europe a

political heft in world affairs to match its economic muscle. “At the end of the day,” says Tatrallyay, “the vision is of a federal Europe.”

For the moment, however, that day remains distant. Large chunks of the continent, in fact, are taking no part in the new monetary regime. All of Eastern Europe is out. So, too, are four of the 15 member states of the European Union, each of which helped draft the Maastricht Treaty that established the European Economic and Monetary Union, or EMU, in 1992. Britain, Sweden and Denmark have chosen to stay on the sidelines, waiting to see how the euro works before plunging in. Greece desperately wanted to trade its currency, the drachma, for the euro but failed to meet the stringent fiscal conditions for entry. But eleven others did— Germany, France, Italy, Spain, Portugal, Ireland, Belgium, Holland, Finland, Austria and Luxembourg. And when the new year dawns, they will collectively form the new “euro zone,” a slice of the continent that some have already dubbed “Euroland.”

It is a place whose upcoming birth pangs are likely to be rigorous. At 5 p.m. GMT, the finance ministers of Euroland’s 11 countries will “irrevocably and irreversibly” fix the rates of exchange between their various national currencies and the new money. Then, the finance people get going. “Basically, we have 55 hours from the moment the conversion rates are set until the Far East markets open at midnight on Jan. 3 to get all our ducks in place,” says a worried Manfred Bartling of Frankfurt-headquartered Deutsche Bank. “Anything could go wrong.”

Financial houses are determined to avoid the pitfalls. Banks and businesses in Europe are estimated to have spent more than $150 billion developing new software and adapting existing hardware to handle euro transactions. Over the past two months, the entire financial community in Paris has conducted three full-scale dress rehearsals for “conversion weekend.” Due to London’s role as a global financial centre, 30,000 normally high-flying denizens of the City—London’s financial community—will welcome the new year at their computer screens instead of quaffing champagne. The London office of Merrill Lynch, the U.S. investment bank, has booked 200 downtown hotel rooms for the weekend. “I think we’ve managed to identify the risks,” Bank of England governor Eddie George remarked at a recent meeting of financial industry executives, “but that doesn’t mean they are likely to happen. I’m pretty confident that nothing is going to go seriously wrong.”

Ironically, all of these intricate preparations are in place for what will remain nothing but a virtual currency for some time. No euro notes or coins will be available for cash transactions until Jan. 1,2002. Six months after that, German marks, French francs, Italian lire, Spanish pesetas and all the other currencies are scheduled to disappear forever. In the meantime, those units will exist as “non-decimal denominations,” or subsets, of the euro in much the same way that dimes and quarters are subsets of the dollar, ft all of this sounds complicated, it is. Until the euro debuts as physical money, conversions between currencies will have to be “triangulated”—translated first into euros. There will be no way, for example, to trade a Dutch guilder for an Austrian schilling without converting both into the euro equivalent. In the same fashion, a Canadian businessman sending dollars to a trading partner in Lisbon requiring payment in Portuguese escudos will first have to translate his loonies into euros. “There are going to be a lot of initial headaches,” concedes Rosario Almeida, spokeswoman for the European Central Bank, the Frankfurt-based institution set up to oversee the new monetary regime.

Eventually, however, the euro is going to make life a lot simpler and much cheaper for anyone dealing with Europe. Businesses, consumers and European-bound vacationers will no longer be required to change money—and pay the charge. “Current estimates indicate that world businesses will likely save $100 million a year in exchange fees alone,” says Hung Tran of Holland’s Rabobank International. Moreover, companies doing business in Europe will no longer have to use costly hedges against sudden exchange rate fluctuations.

The euro is certain to bring with it a new transparency, permitting businesses and shoppers to compare the price of goods as well as labour and services right across Euroland. That, in turn, is likely to stimulate a new spirit of competition. The unified currency will also permit greater economies of scale, which should help boost growth.

Over the longer term, the euro has the potential to develop into a monetary heavyweight, outperforming the Japanese yen and rivalling even the mighty U.S. dollar as the world’s favoured reserve currency. The principal reasons lie in the strict fiscal rules members must follow under the Maastricht Treaty. “It’s a formula for longterm success,” argues Diego Delvecchio of the Banca di Roma. “Any place with low interest rate and inflation targets, combined with highly competitive labour costs and stable government policies, is bound to draw business.”

That includes Canadian business, even if the advent of the euro poses both a challenge and an opportunity for companies in Canada. “It’s certainly going to open up a whole range of new possibilities,” says the Royal Bank’s Tatrallyay. “But at the same time, it means that we are going to have to run that much harder to keep up to speed.” He points to the potential impact of the euro on the loonie. ‘Traders may begin to focus on the Canadian dollar once all these other currencies disappear,” he says. “That could appreciate the value of the dollar, provided we are doing all the right things with our economy. If we are not, the impact could well be negative.”

That question, like many others about the euro, will only be answered once the currency is safely launched. But make no mistake—there is a big new kid on the financial block.