The Euro: Already Here
by Prof. Barry Eichengreen
Euro banknotes and coins finally arrived at the beginning of this
year, in the triumphant culmination of the half-century-long project
of building a financially integrated Europe. The continent's residents
and officials are looking forward to this momentous event, it must
be acknowledged, with some trepidation. Banks are encouraging their
employees to take up weightlifting so that they will be able to
heft heavy bags of newly-minted coins. Vending- and automatic-teller-machine
operators are gearing up for an unprecedented conversion effort.
Patrons of European parking garages where coin-operated payment
machines have taken the place of attendants harbor fears of being
trapped inside indefinitely.
How should American investors regard this historic event—as
positive, negative, or inconsequential? My answer, perhaps typical
for an economist, is "all of the above." The immediate
impact will be inconsequential because the main effects of the introduction
of the euro have already been felt. They were felt in 1999 when
the exchange rates between the participating national currencies
were irrevocably locked and responsibility for monetary policy was
handed over to the European Central Bank.
The effect of these events was to greatly stimulate the growth of
European financial markets. In particular, the replacement of 11
national bond markets with a single Continent-wide market organized
around a common benchmark asset, the German bund, for the
first time gave Europe a market with a depth and liquidity comparable
to the U.S. treasury bond market. The result has been the explosive
growth of corporate bond issues, investment-grade and "junk"
bonds alike. This liquidity has financed a tidal wave of mergers
and acquisitions, evident both within Europe and in European companies'
acquisition of their American rivals. None of this would have been
possible without the locking of currencies and the establishment
of the European Central Bank.
Similarly, there will be strong pressure for the creation of a single
European stock market (or maybe a couple of competing exchanges
along the lines of the New York Stock Exchange and the Nasdaq) as
investors, no longer having an incentive to concentrate their transactions
where business is denominated in the local currency, take their
business to the most efficient exchange. Pressure in this direction
is already evident in the negotiation of strategic alliances among
the continent's existing exchanges, although which of these alliances
will ultimately survive remains to be seen.
There are good reasons to think that the creation of U.S.-style
stock and bond markets will ultimately render the European economy
more efficient and better able to innovate and compete. U.S. experience
suggests that stock markets have advantages over banks in periods
when technology is changing rapidly—that individual investors
more than stodgy bankers are prepared to take bets on competing
technologies through purchases of initial public offerings and stakes
in established companies. There is no reason why the same financial
formula that works in the United States, in other words, cannot
also work in Europe now that it too has deep and liquid financial
markets.
Admittedly, all this financial activity has done little to stimulate
European growth to date. This reflects teething difficulties. The
growth of securities markets has intensified the competitive pressure
on European banks, as long-time corporate customers suddenly able
to float bonds take their business elsewhere. Some of Europe's largest
and longest-lived financial institutions, the Deutche Banks and
Credit Lyonnaises, will therefore have to downsize and restructure.
Small companies, unable to issue bonds but finding their banks under
pressure and reluctant to lend, are finding it harder to access
external funds. There may be painful adjustments and a period of
slow growth, in another words, as securities markets gain market
share at the expense of the banks.
So what should investors anticipate as a result of the introduction
of euro notes and coins at the beginning of 2002? On impact, this
will be a non-event, because the effects of the euro have been working
their way through the European economy since 1999. The slow process
of adapting to this new financial environment will if anything make
economic life somewhat more difficult for the next few years. But
once that adjustment is complete, the single currency, which is
allowing the continent to build deep and liquid securities markets
for the first time in its history, will mean a more competitive
and dynamic Europe.
--
Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor
of Economics and Political Science at the University of California,
Berkeley. Among his books is European Monetary Unification: Theory,
Practice, Analysis (MIT Press, 1997).
