30 December 1999 - 5 January 2000

The euro: one year on

by Anthony Manduca

History was made on 1 January 1999 when 11 sovereign nations, all member States of the European Union, voluntarily replaced their national currencies with a single European currency and handed over control of their monetary policy to the European Central Bank in Frankfurt. The birth of the euro represented the single most important event in the last 1000 years of European financial history. Actual euro notes and coins will be in circulation in January 2002 but since 1 January 1999 financial transactions not involving cash could be carried in euros.

The members of euroland, as the bloc of countries belonging to the single currency is known, are France, Germany, Spain, Italy, Belgium, Luxembourg, Holland, Austria, Portugal, Ireland and Finland. Three countries decided to opt out for the moment, namely Britain, Sweden and Denmark, but Sweden has now made it clear that it intends to join some time in the future and the British government, believed to be in favour of joining, has promised a referendum on the single currency. Greece hopes to replace its currency with the euro in January 2001. Only Denmark has shown no inclination to join in the foreseeable future. Malta, as a candidate country of the EU, has already made it clear that it intends to exchange the Malta lira for the euro when it joins the Union and when it fulfils the Maastricht criteria on the single currency. How has the euro fared after one year of monetary union? There is no doubt that the euro has greatly contributed to political and economic integration in Europe. The "godfathers" of the single currency, Jacques Delors, Francois Mitterand and Helmut Kohl, no doubt were well aware of this and viewed monetary union as another landmark in the quest for greater European integration. It is still far too early to talk about the immediate economic merits of the single currency as this is definitely a long-term process. However, for European investors and consumers, the euro has brought about many benefits.

First of all, the single currency has brought about a wave of mergers which create stronger and more profitable companies. It is estimated that merger activity in Europe in 1999 amounted to over US$600bn. Although the Single Market that came into effect in 1992 created a lot of mergers, the euro was necessary to stimulate large-scale cross-border mergers, and it has.

The second benefit of the euro is the huge growth in Europe's capital markets. All euroland government debt has been converted into euros, which means that the US Treasury bond market, at US$1.8 trillion, is no longer the world's largest and is beaten by the euroland market which stands at US$2.3 trillion.

Furthermore, the euroland equity market in now worth US$4 trillion, and although this accounts for only 15 per cent of the global equity market, experts believe that in 10 years' time this could grow to 24 per cent, as extra demand by investors draws a new supply of stocks into the market.

Another benefit of European Monetary Union is that it allows euroland investors to diversify their portfolios. If investors cannot find appropriate companies in their own market, they can buy them somewhere else. This no doubt creates a more liquid market for larger European companies' shares and the single currency is providing the impetus for a common trading system for all of Europe's companies. It is possible that in the near future, traders will be able to buy and sell on a single exchange.

Finally, the single currency has benefited consumers. Although euro notes and coins will not be in circulation for another two years, prices in euroland are often quoted in both the national currency and in euros, giving consumers the chance to compare prices in the various euroland countries. One need not travel abroad to compare prices: with the Internet, prices can be compared and orders placed. Prices will therefore tend to go down, which means lower inflation and consequently low interest rates. Of course many problems could still lie ahead for the euro.

Many critics say that history has shown that monetary union always follows political union and not vice-versa. Others say that cultural and other differences determine the different cycles and patterns of economic activity and that Europe is too diverse to have a single currency and a single interest rate. After one year of the single currency, certain benefits have emerged but it is still far to early to talk about economic benefits on a national or European level. There is still a great debate throughout Europe, especially in Britain, about the benefits of the single currency, but only time will tell.

One thing is for sure: there is no turning back for the 11 euroland members. The process is irreversible so it is in their interest to ensure that the euro is a success.