The Euro: Is there sense in the change?

The Euro: Is there sense in the change?

Moses, Max G

On January 1, 1999, the “Euro” officially came into existence. The Euro is the new official currency of the Economic and Monetary Union, which consists of 11 European countries that have agreed by treaty to scrap their own currency eventually in favor of a single uniform currency that would be used as legal tender in all of those countries.

To understand the Euro, where it came from and how it will work, it is important not to confuse who the players are. There are just too many names of entities each of which seem to have the word “European” in them, and the result can be total confusion to the casual observer.

We have provided a scorecard of the players for you as a sidebar to this article. However, in a nutshell, here is the basic information you need to know to keep the players separate:

Fifteen countries in Europe are a part of the European Union (EU). Eleven of these countries are participating in the Economic and Monetary Union (EMU). It is these 11 countries that switched to the Euro on January 1, 1999.

Following is a list of the countries participating in the EMU that switched to the Euro. (In parentheses is the name of each country’s currency prior to the switch to the Euro.)

Austria (schilling)

Belgium (franc)

Finland (markka)

France (franc)

Germany (mark)

Ireland (punt)

Italy (lira)

Luxembourg (franc)

Netherlands (guilder)

Portugal (escudo)

Spain (peseta) Following is a list of the countries that did not switch to the Euro on January 1, 1999:

Denmark

Greece (Did not meet requirements to participate)

Sweden

United Kingdom

The reason underlying the Euro can be summed up in this phrase: “The whole is stronger than the sum of the individual parts.” While some of the individual currencies of the countries participating in the Euro are quite strong (for example, Germany’s mark) and others are considered extremely weak (for example, Italy’s lira), the plan is that the Euro will be much stronger than even the hardiest of the current currencies. The expectation is that, eventually, the Euro will become one of the major currencies in the world along with the dollar, the yen, and perhaps the British pound.

There are those who contend that the European market could rival those of Wall Street as well as the major markets in Chicago. Eurobonds could attract just as much capital as Treasury bonds.

Expected benefits from the Euro include lower interest rates, healthier public finances, and the efficiencies that come from a single market for currency Smaller and mid-sized companies should be able to compare costs more easily between countries and save money on foreign exchange hedging.

This hoped-for strength will not come about simply through the combination of the 11 currencies into one. For the Euro to work, each participating country needed to look like each other economically by requiring those countries intending to switch to the Euro to comply with strict economic requirements.

For example, Italy’s decision to participate gave rise to a concerted effort to “put its [economic] house in order,” said Giuseppe Roma, director of Censis, an Italian think tank. “For the first time, the country couldn’t keep postponing” measures needed to revitalize its economy, he said.

Specifically, Italy had to bring government spending under control. It was forced to reduce public debt severely Its high inflation was significantly lowered. Interest rates were adjusted to be more in line with the other countries participating in the switch to the Euro. It privatized many functions previously undertaken by the government including telecommunications and banking functions.

What happened on January 1,1999, was the first major stage in the conversion to the Euro. Noncash transactions within the 11 participating countries were denominated in Euros. Interbank dealings and public debts were converted to Euros. Foreign exchange trading in the currency of the 11 participating countries ceased. Trading in the Euro began. The expected value of one Euro against the dollar was $1.17 on December 31, 1998, the date the finance ministers of the participating countries fixed the rate.

Effective January 1,1999, private companies were given the choice of converting to Euros for their noncash transactions or sticking with their local currencies. Many large, multinational companies plan to make the switch immediately However, most smaller companies seem intent on waiting until the last minute to implement changes from local currency to the Euro.

That last minute is December 31, 2001. By that date, the Euro will become the only currency that may be used by companies in preparation of tax returns, account statements, and bookkeeping.

It is also by the end of 2001 that the printed and coined Euro will appear on the scene. Existing local country currency for the 11 participating countries will be abolished by July 2002.

What if you or companies you advise do business in Europe? According to Deloitte Touche Tohmatsu, a professional services firm that worked closely with the European Commission, the implications of the Euro for any enterprise with subsidiaries, partners, customers, suppliers, or manufacturing operations in any of the countries participating in the Euro are significant. These companies “will need to adjust all their business processes, from accounting and procurement to information technology and human resources management,” according to Patricio Gonzalez, chair of DTT practices in Latin America.

The Euro is not without its potential problems, however. For example, according to many of the experts, “failure is not an option.” There are no provisions in the agreements that created the Euro for any country to extricate itself from the Euro once it is part of the EMU.

Leonard M. Salter, a learned student of the world economic scene, offers a look at the Euro from the economic and political aspect in the article below.

Copyright Commercial Law League of America Jan/Feb 1999

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