December 30, 1998


Primer on Euro: From Birth to Growth as Unifying Force

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    STRASBOURG, France -- This border city in Alsace-Lorraine has been French and then German and then French again, depending on who won the last war. But today it is a placid outpost in more unified Europe: a home for the European Parliament, and a mecca for cross-border shoppers.

    So it is not surprising that Europe's single currency, the euro, arrived well before its official introduction this Friday. At the Cora supermarket just outside of town, everything from bananas to televisions have been priced in euros (as well as French francs) for months. At upscale restaurants like the Roma, euro-pricing on menus is a fashion must.

    And residents like Michel Raymond, who shops for Grand Marnier in France but port wine Germany, are opening euro checking accounts right after the New Year. "It will make things simpler for everybody," said Raymond, a retired French businessman. "Some things are cheaper here and others are cheaper on the German side. This will make the payments easier."

    After decades of dreams, diplomacy and delays the euro is suddenly real. On Thursday, 11 European countries are to lock their exchange rates to the euro, now worth about $1.17, and cede to the new European Central Bank the power to set interest rates and monetary policy.

    On the street it may look as if little has happened. But currency conversion represents the most important step in Europe's long quest for political unity. In getting to this point, the 11 euro nations for the first time have adopted a common economic policy that has reined in public spending, reduced debt and tamed inflation.

    This achievement has altered the political debate dramatically; indeed governments in Germany, France and Italy have fallen in large part because of the spending cutbacks required to create the euro. Business strategy has been transformed, and more and more residents and visitors are thinking of Europe as a single place instead of a jigsaw of nationalities and a hodge-podge of currencies and laws.

    Today's German marks, French francs, Italian lire and eight other currencies may be used for three and a half years more. (Euro notes and coins arrive on January 2002.) But beginning Monday, the value of each currency will be based only on the value of the euro. Local currencies are to be removed from circulation by July 2002.

    Also on Monday, European stock and bond trades will be denominated entirely in euros. All transactions between banks, which is frequently how Europeans pay their bills, will be in euros, even within the same country. Bank customers can write checks in euros, and many credit-card purchases will be calculated in euros. Euro traveler's checks are making their debut.

    Though Americans are largely bystanders, the euro will affect them, too. Travelers will be spared the necessity of changing dollars into several different currencies, and currency headaches and risks will be reduced for money managers handling multinational accounts. That alone is expected to yield substantial savings.

    While the euro was once viewed as a currency weakling because of doubts that Spain and Italy would have the discipline to get into fiscal trim, all signs now suggest the euro will start off strong and may come to rival the dollar as a reserve currency held by central banks around the world. If that happens, economists say, it could push up U.S. interest rates slightly. It could also make European goods more expensive for Americans to buy.

    The new currency may also be a means for Europe to grow into a stronger competitor with the United States: The move to a unified market and a single currency has forced the transformation of Europe's biggest industries. Many are merging with rivals to cut costs; others selling off businesses to refocus on their strengths. And quite a few, like DaimlerChrysler AG, have been doing both.

    One major European country that is not party to the euro is Britain, which has always viewed itself as separate. It is taking a wait-and-see attitude because of public fears that using the euro would erode Britain's independence.

    British businesses definitely favor the currency, however, and worry that they will suffer a disadvantage by holding on to the pound. But Prime Minister Tony Blair insists Britain will consider using the euro after the next round of national elections, which are likely by 2002, and only after a national referendum.

    The Origins: Postwar Dreams, Post-Cold-War Fact

    Why did the 11 other nations go to all the trouble?

    The idea of a single currency dates back to the 1950s, when postwar leaders like Jean Monnet, a diplomat and president of a precursor to the European Union, sketched out sweeping visions for economic and political unification aimed at avoiding another war. The idea was that the more each nation relied on the others for economic and political security, the more reluctant they would be to send their armies into battle.

    But the real impetus came with the fall of the Berlin Wall in 1989. The prospect of a reunited German powerhouse alarmed many Western European governments, French President Francois Mitterand pressured German Chancellor Helmut Kohl: France would support German reunification if Kohl would commit his government to replacing the German mark with a plan for a single currency and administered by an independent European central bank.

    "After reunification, a lot of the neighbors around Germany were afraid that it might become politically and economically too strong," said Peter Wolf-Koeppen, who oversees euro projects at Commerzbank in Frankfurt. "They first tried to make a political union, but they failed. A monetary union was the best they could do."

    Kohl quickly became the euro's strongest champion, driven in part by his desire for a place in history and in part by his own memories during World War II.

    "I have often been told that the euro was a technocratic idea, invented by finance ministers," remarked Christian Noyer, vice president of the European Central Bank. "That is clearly not the case. They had the simple idea that the money, the currency that people use every day, was a way to foster European integration."

    Two years after the fall of the Berlin Wall, in the Dutch city of Maastricht, European leaders reached a basic agreement, with a strongly German imprint. Countries would have to meet strict limits on budget deficits and would have to bring inflation rates down to Germany's levels, or about 3 percent. But the Bundesbank, the influential German central bank, would take a back seat to a new and independent European Central Bank, which would focus almost exclusively on fighting inflation.

    The euro's proponents argue that it will make Europe more efficient and competitive because pricing differences will stand out. Trade will be enhanced because foreign-exchange risks will be minimal. (Europe abolished most tariffs and other trade restrictions six years ago.)

    But more important, supporters predict that the greater attention to prices will force cost-cutting by manufacturers. And while that may contribute to Europe's high unemployment, it may also trigger much-needed changes in costly regulations that hinder competitiveness today.

    "This can work like a reform program for Europe, and be very good for the competitiveness of Europe," said Juergen Stark, vice president of the Bundesbank. "On the one hand it is a great political challenge. But on the other it is a great opportunity for Europe to combine sound monetary and fiscal policy with more flexibility."

    The Change-Over: Banks and Stores Do the Arithmetic

    In many respects, the euro will seem at first like a phantom currency because notes and coins are not slated to enter circulation until Jan. 1, 2002, to give Europeans a chance to get used to the new currency and merchants time to adjust. And while euros will be usable beginning Monday in the ether of electronic payments, nobody can be forced to accept them before 2002.

    "I've gotten lots of mail about the euro from my bank, but I have not read much of it," said Karine Rousselle, a school teacher in Strasbourg.

    Many bankers argue that the long transition period simply makes the process needlessly costly and complicated. Instead of just converting to a new currency, banks have to change first to a system of dual currencies, which will become obsolete in 2002.

    Deutsche Bank, Germany's biggest bank, estimates that it will spend more than $200 million on the conversion over the next four years. "The dual currency makes it much more expensive than it would have been otherwise," said Peter Wolf-Koeppen, at Commerzbank in Frankfurt.

    But European merchants are reaching very different conclusions about how fast to offer goods priced in euros.

    In France, big supermarkets like Le Clerc and Caro are already posting all prices in euros and plan to accept euros for credit-card payments soon after the new year begins. In Germany, where many people are still hostile to trading in their solid marks for untested euros, big retailers are moving more slowly; most plan to post dual prices on some items right away, mainly to educate customers, but they are reluctant to make a full conversion in 1999.

    For the moment, managers at the Cora hypermarket simply steer attention away from the euro price. A big sign promoting a widescreen television announces a price in francs: FF 7,990.00. The euro price -- e 1,206.97 -- is only printed in small letters on the price tag.

    In part because of marketing uncertainties, some consumer-product companies are delaying the switch.

    "We are keeping the national currencies as long as possible, because God knows what is going to happen," said Peter Csandi, a spokesman for Adidas, the big sportswear company. "We're going to let someone else find out the answers on how to teach consumers about the euro. We don't intend to be pioneers."

    But a growing number of Europe's biggest industrial companies are converting rapidly, convinced that they can quickly recoup the cost by saving money on foreign-exchange dealings. DaimlerChrysler and Siemens plan both plan to convert all their business systems early in 1999. They are also pressing suppliers to bill in euros, which is likely to speed up acceptance.

    The Future: Not by Euros Alone Do Economies Live

    The euro has confounded naysayers ever since European leaders laid down the timetable in the early 1990s. As recently as four years ago, many market analysts were convinced that few countries would overcome national pride to abandon their currencies.

    When it became increasingly clear that monetary union would indeed occur, most people assumed it would be limited to about eight "core" countries, led by Germany and France. But Europe's poorer and shakier countries -- Italy, Spain and Portugal -- started clamoring to join the club. And to the amazement of many, they brought their budget deficits and inflation rates down enough to qualify.

    But there could be some nasty surprises. European economic growth is uneven. There are inflation risks in some fast-growing countries like Spain and Ireland; at the same time growth is slowing in countries like Germany and France, where unemployment rates remain above 10 percent.

    The challenge for the new central bank is set uniform interest rates that will foster growth everywhere.

    The political landscape has also changed dramatically. Some leading politicians who pushed for the euro are out of power now, casualties of voter objections to relentless budget cutting, especially on social programs. New governments in Germany, Italy and France are not so beholden to the rules set out to create the euro.

    After Kohl and his center-right coalition were defeated last September by Gerhard Schroeder and the left-of-center Social Democratic Party, Germany's new finance minister, Oskar Lafontaine, quickly became a vocal critic of both the Bundesbank and the European Central Bank. He argued that tight-money policies brought about by the euro were the real reason that European unemployment mostly remains high.

    Under the Maastricht Treaty, political leaders have no authority over the European Central Bank, which is led by a former Dutch central banker, Wim Duisenberg. And a separate treaty theoretically calls for huge fines on governments whose spending generates deficits of more than 3 percent of gross domestic product. The rules also say that once a nation enters the euro union, it cannot withdraw.

    In practice, many experts are skeptical that European leaders would ever impose such punishments.

    "Countries have to realize that the misbehaviors of one country can damage all the others," said Stark, the Bundesbank official. "If a big country runs a high deficit, it is pretty clear the European Central Bank will have to react with a rate increase."

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