Happy Birthday, Dear Euro

Monetary union has been a boon for Europe Inc. and the Continent's economy. But not everyone is a winner

Dexia doesn't plan to host a party celebrating the euro's fifth birthday on Jan. 1. But perhaps it should. Like other banks and insurance companies, the $414 billion-in-assets French-Belgian financial-services group has profited enormously from the euro. Now that it no longer has to deal with a hodgepodge of currencies and interest rates, Dexia is able to run its European operations as a single entity and manage its treasury functions more efficiently. The bank, headquartered in Brussels and Paris, estimates the euro saves it more than $10 million a year. "We were early believers in the euro and our confidence has paid off," says Rembert von Lowis, Dexia's chief financial officer.

Dexia's enthusiasm for the euro is matched by most corporate executives, politicians, and commentators across Europe. "It knits Europe together economically, and that's good for companies and the economy as a whole," says Daniel Gros, director of the Center for European Policy Studies, a Brussels think tank.

But if the euro is such a great success, why have the three European Union nations that decided against adopting it in its early years -- Britain, Sweden and Denmark -- continued to hold back? Sweden rejected the euro just a few months ago. And the consensus among analysts in Britain is it could be many years before it eventually introduces the single currency. "The last thing British business wants is a return to boom and bust -- and that is exactly what the euro would bring," says Simon Wolfson, chief executive of Next, the clothing retailer. Even some Continental commentators are skeptical about the euro. Louis-Vincent Gave, an analyst at GaveKal Research, an independent research firm, has serious doubts about the currency's survival. "The euro is a Frankenstein currency," he says. "It was introduced before countries had made the economic reforms needed to sustain it." Given continuing slow growth, Gave fears the heavy indebtedness of such countries as Italy could eventually become an intolerable burden forcing them to abandon the euro.

But that's very much a minority view. Indeed, those who once decried it as a dangerous experiment in economic engineering have much to be embarrassed about. For Europe Inc., the single currency has proved to be good business. It makes it cheaper for corporations to raise money from capital markets and easier for them to make acquisitions in other euro zone countries. ING Group, the Dutch banking and insurance giant, for example, has taken control of both corporate lending specialist ING BHF-Bank and online bank DiBa in Germany.


Indeed, the value of euro-zone mergers-and-acquisitions deals exploded shortly after the euro's introduction as companies delved into the new Continent-wide capital market as a source of financing for acquisitions and divest- ments. Although the value of euro-zone M&A fell back abruptly in the wake of the stock market meltdown in 2000, bankers say it is picking up again now. Meanwhile, a vast European corporate-bond market has developed as companies and investors have been attracted to the liquidity of a Continent-wide capital market. According to European Commission statistics, the corporate-bond market will be worth $950 billion by the end of this year, compared with just $240 billion at the end of 1998.

For manufacturers and service providers, having one currency makes it simpler to compare prices and costs in different countries, so companies can more easily spot the lowest-cost suppliers and hubs for services. Franco-Spanish tobacco company Altadis, Finnish pulp and paper manufacturer UPM-Kymmene, and France's Axalto, the world's largest maker of "smart cards," are among companies that have streamlined production, shortened supply chains, and rationalized distribution networks -- all thanks to the euro. Service companies also have gained, including France's Cap Gemini, Europe's largest computer services company, and Euronext, the Franco-Belgo-Dutch stock exchange. By abolishing currency risk in the euro zone, the single currency has allowed these and other companies to slash hedging and other currency-management costs. "It's great not having to worry about exchange rates within Europe," says Olivier Piou, Axalto CEO. "Telecom Italia (TI ) is a big customer of ours. But we no longer have to worry whether the lira is having a good or a bad day."

Of course, all is not well in euroland. Growth, ironically, is especially anemic now that the euro is strong. "Britain, Sweden, and Denmark have all grown faster than the euro zone," points out GaveKal's Gave. "It is better to be out than in." The hope was that the adoption of the euro would be followed by structural reform. "Now governments can no longer manipulate their currencies or monetary policies," says Gros. "The only way countries in the euro zone can compete is by making themselves more efficient. But so far they haven't really done that." What's more, the inflation-phobic European Central Bank has kept its key interest rate at 2% -- twice as high as the U.S. Federal Reserve.

To some degree, Europe has been hurt by the euro's success. For instance, the swings in its value -- from a steady drop to a record low of $0.8225, 30% below its launch value on Oct. 26, 2000, to almost $1.20 today -- have caused matching gyrations in industry. When the euro was low, it hurt many manufacturers because the energy and other imports they rely on were pricey. Now that it's high, it hurts exporters such as German drugmaker Schering (SHR ), which reckons the euro's 12% rise since January lopped 7% off its growth in the third quarter.


The Euro Zone's economic weakness was one key reason the Swedes voted against adopting the euro. And it partly explains why many Britons are more skeptical than ever about sharing a currency with their European neighbors. And even without competitive currency devaluations, tensions continue to flare among euro-zone member states. The most serious is the spat pitting Germany and France against smaller EU partners over allowing their budget deficits to rise above 3% of gross domestic product. The pressure to hold its deficit down hasn't given Germany, the euro zone's biggest and most sluggish economy, much room to breathe. As a result, the $8.4 trillion euro-zone economy will be hard-pressed to expand by 0.5% this year and 2% next.

Still, no one wants to go back. Indeed, the euro has become the unofficial second currency in more than a dozen nations -- Poland and the rest of Central and Eastern Europe, Turkey, North Africa, and even Britain. And if the 10 nations set to join the EU in May have their way, it will soon be the official currency in many more. That's as good a reason as any to pop the champagne corks and start the celebrations on Jan. 1.

By David Fairlamb in Frankfurt, with Andy Reinhardt in Paris and Kerry Capell in London

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