Euro Already Paying Off for Some Nations

Launch of the euro, Europe’s single currency, is still more than a month away, but it’s already been a sweet deal for Caffarel, an Italian manufacturer of fine chocolates.

In September, Caffarel’s factory here in the foothills of the snow-dusted Alps began turning out candy bars wrapped in a foil likeness of the 500-euro bill.

“We’ve beaten the European bank to it,” jokes Laura Poli, director for exports.

More prosaically, the coming currency, and the fiscal strictures the Italian government had to apply to qualify for it, has so remade the economic landscape that Caffarel now plans to lease an additional plant to grind cocoa beans into liquid, the initial step in the chocolate-making process.

Inflation, 5.8% in Italy in 1995, dropped to an annualized rate of 1.8% by August. Consequently, Italian banks have dropped interest rates on commercial loans to around 4.5% and may go lower soon, said Giovanni P. Bonfante, director of administration and finance at Caffarel.

Net result: It’s cheaper for the 172-year-old chocolate manufacturer, whose specialty is a traditional Piedmontese hazelnut-flavored concoction called gianduiotto, to borrow.

So executives writing the 1999 budget have penciled in plans to ask Swiss parent company Lindt & Spruengli for permission to take out a $1.2-million loan for a new bean-grinding plant.

“Interest rates we’d have to pay on a loan are at an absolute low,” explains Bonfante. “Company-wise, it [the euro] has been a good deal.”

As an economic storm has raged in other regions of the world, it might seem an inauspicious time to be launching a new currency to displace the franc, lira, mark and other currencies in 11 European nations.

Yet the economic weather in Western Europe has been, on the whole, rather good. Some analysts credit the steadying influence of the pending euro and belt-tightening measures that customarily free-spending governments, typified by Italy, have enacted because of it.

“For many policymakers, EMU [economic and monetary union] has proven itself a shield against global turbulence,” said Michael Saunders, in charge of Western European economies at the London offices of Salomon Smith Barney/Citibank, an international investment bank. “Policymakers have looked at the relative stability of the euro-area financial markets, compared to the instability of countries like Sweden, Denmark and Norway, who are staying out of EMU.In Italy, for example, it has been said that were it not in EMU, it would have been hit hard.”

Though euro coins and bank notes won’t go into circulation until Jan. 1, 2002, the foundations laid for the new money have already given a steadier footing to some nations, including Italy, whose currency has been a target in the past for speculators. Consider the consequences of August’s currency devaluation and what was in effect a debt default by Russia.

Already hurt by the crash in Asia, investors throughout the world panicked over Russia’s actions and pulled billions of dollars worth of assets out of investments that carried a danger of risk and put them in others deemed risk-free, like German government bonds.

Caught in the storm, Sweden, a European Union country that is not shifting to the euro, saw its currency, the krona, plummet in value by as much as 13.7% from its yearly high. Non-EU member Norway’s krone dropped as much as 12%.

Italy’s lira, in contrast, remained steady. That, experts say, is because in May, when this country and 10 other EU member states officially became the inaugural members of the euro club, their currencies were pegged to one another to ensure stability.

For weaker currencies like the lira, this in effect meant having the German mark, Europe’s most powerful and respected money, as a bodyguard.

And that was very good for business, explains analyst Saunders, because when a country’s currency comes under pressure, a government typically responds by raising interest rates.

That slows domestic demand and adds to a business’ debt service costs. For Caffarel, higher interest rates might mean scrapping of new-factory plans.

To be sure, whatever the benefits of Western Europe’s single-currency plan so far, new and major challenges will have to be faced when the euro officially comes into being in January. The global economic mood has become much more downbeat than six months ago, when membership of what’s been dubbed “Euroland” was set.

“I wonder if it’s really the right moment for Europe to launch a common currency,” Amartya Sen, who was awarded the 1998 Nobel economics prize last month, recently told a Greek newspaper. “A single currency considerably reduces the margin for maneuver of governments when they must face problems like the rise in unemployment or a temporary recession. They deprive themselves, for instance, of the adjustment tool that are exchange rates.”

This month, the Organization for Economic Cooperation and Development (OECD), a think tank in Paris for the world’s leading free-market economies, issued a mixed forecast for the coming years. The gloomy news was that troubles in Southeast Asia, Japan and Russia mean growth in the global economy is slowing.The cheering news for euro countries, according to OECD, is that they will economically outperform the U.S. and Japan, with 2.5% growth in 1999 and 2.7% in 2000 (versus 1.5% and 2.2% for the U. S.).

To enter EMU, Italy and the other countries--Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Portugal and Spain--had to meet or come close to meeting identical criteria, including tamping down budget deficits to less than 3% of national wealth. But the countries, as disparate in their economic makeup as Italian wine is from Irish stout, are at varying stages of the economic upswing that began in Europe in 1993-94 (one non-euro country, Britain, is so far ahead of the curve it may be entering recession).

“Holland is ahead of the cycle, and Italy is a bit behind,” said Paul E. Atkinson, head of the OECD’s Economic Prospects Division. “They’re converged at the moment, but that doesn’t mean they’ll stay converged.”

The global slowdown means Italy’s economy, the industrialized world’s sixth-largest, may grow this year by only 1.5%, instead of the 1.8% forecast by the government, Giorgio Fossa, chairman of the Confindustria employers federation, said this month. Given the uncertainties worldwide, Italian Treasury Minister Carlo Azeglio Ciampi has warned that “recession is a risk that cannot be ruled out.”

The biggest challenge for the new European Central Bank will be devising a fiscal policy that fits all. Oskar Lafontaine, finance minister in Germany’s new Social Democrat-led government, sees fighting joblessness and boosting growth as “the central objective of the new economic policy among European states.”

That could mean a showdown soon with the fledgling bank, which has a different and arguably conflicting mandate: keeping inflation under control.

For many European companies, especially in the financial area, the euro has already transformed what they do. In January, bond and stock markets in Euroland will convert to euro-denominated transactions. Many big transnational corporations, such as Dutch-based Philips, will start using theeuro in internal operations.

At San Paolo bank, Italy’s largest with 1,500 branches, 4.5 million customers and more than $205 billion in assets, executive Piergiorgio Manavella leads a 300-member team in charge of converting to the euro. It entails spending a lot of money. “The euro, for a bank, means costs,” Manavella explained. “It means lower interest rates, lower conversion fees, because the number of currencies is decreasing.”

Because there will be fewer types of European money, foreign exchange business worth an estimated $3 billion will dry up in Europe by the time the euro becomes sole legal tender in mid-2002. Overall, foreign exchange revenues for banks in the European Union are expected to drop by 70%. Moreover, the euro-stimulated drop in inflation, and resulting “flattening” of the profit a bank can make by charging interest, mean bank revenues have taken a big hit already.

But San Paolo’s leadership has decided that, in sum, the euro is a juicy business opportunity, and for months the bank has been getting ready to squeeze maximum benefit from it. All employees, including the 4,000 who work in the home office near the main railroad station in Turin, have gotten a daylong crash course in the new currency.

The teaching process, which cost $2.7 million, ended in September. Now, Manavella and his team, which began work early in 1997, are building networks of employees at headquarters and in branches from the Italian Alps to Sicily who will specialize in the euro.

San Paolo bank views the new money as a potentially huge profit center. If all works as planned, there will be commissions to collect on cross-border fund transfers in euros, fees for advising businesses on how to deal in the new money, and a piece of the action on what is widely expected to be a boom in European stock markets.

Converting to the euro, including changing the denomination that depositors’ accounts are calculated and posted in, will cost the Turin-based bank an estimated $12 million a year for five years. For San Paolo and Italy’s economy as a whole, the trouble should be well worth it, Manavella believes.

“For Italy, it’s the only way to solve the public indebtedness problem, shall we say, without provoking a lot of trouble,” the banker said. “Also, it will give us a lot more economic stability. And that is what we will leave to our sons and daughters.”