Euro’s Value Promises to Be More Than Monetary

What difference will it make when Europe has a single currency, the “euro”?

It will make a big difference. “European monetary union has the potential to create the largest single financial market in the world,” says Bronwyn Curtis, the London-based economist of Nomura Securities.

Europe’s total capital market, if all the stocks, bonds and bank deposits of the European Union’s 15 countries are added together, is already larger than that of the United States--$27 trillion for Europe, $23 trillion for the U.S.

Of course, Europe’s stocks and bonds are not added together just yet. They remain denominated in pounds, marks, francs, lire and other currencies.

But as of Jan. 1, 1999, financial markets will begin keeping books in the new euro denomination as 15 European economies enter a two-year transition toward general use of the currency in 2001. So far, Britain and Denmark have declined to participate in the monetary union.

Most Americans remain skeptical or ignorant of the implications of a single currency for Europe, but they will be affected by it. In the long term, after all, the euro is one important step in a historic process that may produce a political union--a United States of Europe.

Even in the next decade, if the euro improves Europe’s long-stalled economies, the U.S. and the world will benefit.

Improvement is what the euro promises. A larger, unified capital market will give Europe’s people and businesses the kind of financial capabilities that U.S. companies and individuals take for granted.

Mortgages will be more abundant, to finance increased homeownership, for example. The U.S. mortgage market has expanded to its present $5-trillion scale thanks in part to the development of mortgage-backed securities 30 years ago. European societies, with smaller, national financial markets, lack such innovations and have lower homeownership.

On a grander scale, European companies will get the financing they need to operate globally. Europe’s companies are already combining forces. [See related story.] “And the single currency will facilitate cross-border mergers,” says Gary Apfel, a Los Angeles-based partner in the Akin Gump law firm who advises international companies on U.S. laws.

How important are large financial markets with abundant capital, many traders and frequent transactions? So important that more than 1,000 foreign companies, ranging from Daimler-Benz of Germany and L.M. Ericsson of Sweden to Toyota, Honda and Nissan of Japan, have come to the U.S. to list their stocks--even though they have had to reconcile their accounting with U.S. principles and accept the regulations of the Securities and Exchange Commission.

A large market offers big capital. In the London Financial Times list of the world’s largest companies based on value of their stock, 34 of the top 50 are U.S. firms. Only 12 are European.

Even more revealing of Europe’s problems is its lack of technology leaders. There is not a single European company among the world leaders in computers, semiconductors or biotechnology.

Many factors have contributed to the entrepreneurial surge that produced U.S. leaders in those fields, but among the most crucial are abundant venture capital and markets for risk-taking investors.

By contrast, Europe’s economies have sought equilibrium more than risk-driven growth. And that policy has not served them well. Unemployment now exceeds 12% in France, Germany and Italy.

European countries prefer civil servants to entrepreneurs. More than 25% of France’s labor force, 15.5% of Germany’s and 19% of Italy’s work for government. Those percentages compare with 14% of the U.S. civilian work force employed in government.

High levels of government employment, and the comparably large scale of government programs in their economies, explain why the European countries have found it difficult to reduce their budget deficits to qualify for inclusion in monetary union. Attempting to bring deficits below 3% of gross domestic product, they have cut back their economies and “produced frightening unemployment,” says economist Robert Levine of Rand Corp., the Santa Monica think tank. “They must change policies and create jobs.”

While the U.S. economy has created 12 million jobs in recent years, the European economies taken as a whole have created practically none.

But the European situation will change next year as money moves more productively, thanks to the euro. Companies won’t need to hold hefty reserves against currency changes among countries when the euro eliminates those differences. Capital will be freed up. Pension investments in the larger capital market will move money around and spur business.

And all will proceed in an atmosphere of heightened cooperation. With the coming of the euro, a central bank will be set up in Frankfurt, Germany, with regional banks in many countries--analogous to the U.S. Federal Reserve system. “Such a system will demand that monetary policy be aligned for all countries and perhaps tax policy too,” says economist Bill Montague of Transatlantic Futures, a Washington research organization.

In that light, as an instrument leading to monetary and fiscal alignment, it’s easy to see the euro’s importance in the long march toward a United States of Europe. The phrase and the dream belonged originally to Jean Monnet, the remarkable Frenchman who devised the European Coal and Steel Community and the Common Market as means to revive Europe after World War II.

Monnet’s vision began long before that, in 1906, when, as a youth of 18, he went to western Canada and roughed it, seeking orders for his family’s cognac in the saloons of Calgary and the Northwest Territories. Ever after, his perspective was of the economic possibilities of vast territories unbroken by internal boundaries, like Canada and the United States.

And even though Monnet’s vision has been doubted at times, the six original Common Market members have now swelled to a union of 15, with three more--Poland, the Czech Republic and Hungary--soon to join.

What, then, does the euro mean for the United States of America? It might mean a relative decline in the dollar’s importance and value because European governments that now hold dollars as official reserves will begin to hold euros instead.

But currencies are ultimately backed by economic strength. And the big story of the next decade and beyond will more likely be the increase in opportunities for U.S. companies and investors as monetary union creates robust capital markets and revives entrepreneurial spirits among Europe’s 350 million people.

The euro is not small change.