By David Fairlamb
By the time church bells rang in the new year across Europe on Jan. 1, celebrations to welcome the region's new currency were in full swing. At the stroke of midnight, most ATMs in the 12-nation euro zone were paying out euro notes, while shops began giving change in the new money. Despite predictions of long lines, anger, and chaos, one of the biggest logistical operations ever undertaken in peacetime went ahead relatively smoothly.
A few glitches did pop up: There was a shortage of euro notes in Finland, where less than 40% of cash dispensers were able to pay out the new currency on New Year's Day. Long lines were reported at roadway toll gates around Rome and outside Paris as motorists returning from their holiday break struggled with change. And reports of problems came from some small Italian and Greek businesses where staff were insufficiently prepared for the conversion.
For the most part, though, it was an efficient, good-humored transition. In Germany, some were sad to see the old national currencies go. But even the skeptics realized there's no turning back. And most people on the street seemed to be keen to see and feel the new money for the first time. (See BW Online, 1/2/02, "Day One with the Euro")
"Of course, I feel a bit sorry to lose the [German] mark," says Dorothea Langgärtner, a German psychologist who withdrew 200 euros from a Deutsche Bank ATM on the first day of 2002. But we have to move with the times, and I believe the politicians when they say the euro will have a positive economic impact."
Political leaders across the euro zone were quick to extoll the new currency's virtues. Romano Prodi, president of the European Commission, argued that it would boost cross-border commerce by making it much easier for small businesses to buy and sell goods in other European countries. He also predicted that the euro would usher in a new era of industrial restructuring and economic reform that would give Europe's faltering economy a much-needed boost.
"The physical euro will help knit the economies of Europe into a single, more efficient and productive whole," declared Prodi at the launch party held in Brussels on Jan. 1. "By making it easier to compare prices and tax levels across national borders, it will encourage governments to make much-needed economic reforms. It marks the start of a new era for Europe."
"JUST A START."
Hopeful business execs have their fingers crossed. Although manufacturers, bankers, and service-industry chiefs acknowledge that the single currency's arrival is a big step in the right direction, they say plenty more needs to be done to break down the overt and covert barriers that are holding back economic integration. They're raising pressure on national and European-level politicians in an attempt to force through more comprehensive changes.
"Regulation and supervision, the handling of cross-border payments, how governments award contracts all need reforming," says Richard Needham, vice-chairman of Dyson Appliances, the British white-goods manufacturer. "And that's just a start."
The euro has already given European business a welcome boost since its electronic launch as an accounting currency on Jan. 1, 1999. Even though it has lost almost 30% of its value against the dollar since then, it has spawned the development of a single, Continentwide capital market that is already approaching the U.S. capital market in depth and dynamics. That makes it easier and cheaper for companies to raise cash.
And by unleashing a wave of domestic and cross-border mergers and acquisitions, the euro has created a number of corporations -- mobile operator Vodafone, for one -- that are market leaders on a global level. It has also allowed multinational companies -- such as Paris-headquartered insurer AXA -- to cut costs by rationalizing their financial and other back-office operations.
The introduction of the physical specie takes the process an important step further. By making it easier for consumers to compare prices across the euro zone, it should help drive down costs, increase competition, and boost efficiency. Andrew Rose, an economist at the University of California in Berkeley, says it could boost intra-euro-zone trade two or three times over the next five years. Also, the arrival of euro notes and coins could change the psychology of businesspeople and regulators, thereby setting the scene for another wave of cross-border mergers.
Seasoned economists, such as Richard Reid, chief equity economist at investment bank Schroder Salomon Smith Barney in London, predict that the new money could also finally persuade some governments to make much-needed structural reforms by increasing transparency and exposing differences between countries. "It's a catalyst for change," he says.
WHICH PLUG TODAY?
European execs also hope the euro will encourage EU countries to harmonize administrative rules and standards. They often vary from country to country, raising costs for manufacturers and making it more difficult to sell products cross-border.
Take the humble electrical plug. While European executives who travel widely no longer have to worry about currencies and exchange rates, they still can't leave home without a selection of different plugs for their electrical devices. After years of trying, European countries have yet to agree how big and how many prongs a common euro socket should have. The new currency notes could break the logjam by changing the way politicians and regulators think.
Such psychological changes could also increase the euro's exchange value. Now that it exists in physical form, many forex traders predict the euro will strengthen -- by as much as 10% over the coming year. "The conversion seems to have gone astonishingly well so far, and I think that will give the euro a big boost," says Nick Parsons, chief currency strategist at Commerzbank. "This shows that Europe can get something right." So let the church bells ring.
Fairlamb covers currency markets for BusinessWeek from Frankfurt
Edited by Douglas Harbrecht