Economic Benefits Prove Euro’s Worth Goes Beyond Face Value
Most Americans--and many Europeans--think Europe’s 6-month-old experiment with a single currency is proving to be a disaster. At its latest exchange rate, the euro is worth only about $1.04, 12% or so less than it was worth at its introduction New Year’s Day. The currency’s devaluation in world markets has been an emotional letdown for the old continent.
But the emotions are mistaken, and the euro’s beneficial effects, in terms of creating new financial markets in Europe and fresh opportunities for investors the world over, are actually surpassing the most optimistic predictions.
“Growth of Europewide investment is developing much faster than we expected,” says Rolf Knigge of Metzler-Payden, a joint venture of Frankfurt’s 325-year-old Metzler Bank and Los Angeles’ Payden & Rygel, an investment management firm.
Because of the euro, European companies--which traditionally borrowed from banks--are increasingly financing their activities by selling bonds to European investors. The bond market is an option that American firms have relied on for decades. Now the single currency enables a European company to draw funds from investors in many countries. That spreads the investment risk and thus lowers the interest rates.
The euro underlies a new expansiveness in Europe. French company Alcatel borrowed 1 billion euros ($1.04 billion) and used the money to buy Xylan, an Agoura Hills-based Internet equipment firm. Mannesmann of Germany and Tecnost of Italy sold bonds totaling 12 billion euros to finance their takeover fight for Telecom Italia, which Tecnost won. The euro made the bond market available, and it made the capital available.
The euro also allows investors to compare companies in different countries because currency differences no longer obscure the results. Lo and behold, investors have been choosing companies offering the best returns. The concept of “shareholder value” has arrived, and European investors are welcoming it. Germans are investing across Europe and are also eagerly backing start-up companies in the Neuer Markt, a rough equivalent of America’s Nasdaq, although still tiny with fewer than 100 stocks trading.
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Buoyed by the sense of unity the euro has conferred, the European Union is stepping out in the world. The EU will attempt to negotiate trade agreements with Latin American countries at a historic summit starting Monday in Rio de Janeiro.
“The euro’s value is down today but will rise tomorrow because Europe’s growth will be faster than that of the U.S.,” Knigge says.
That growth rate is not a certainty--the big economies of Germany and France are struggling to achieve any growth at all this year. But Europe is moving in the right direction. Germany last week announced a tax cut for business and a reduction in government spending.
To be sure, there are signs of worry. Romano Prodi, president-designate of the European Commission, the EU administrative body, last week warned Italian industrialists that if they didn’t get costs in line, Italy would have to drop out of the euro. Financial markets went wild over Prodi’s remarks, which he intended as motivational rhetoric, not economic prediction.
“Our politicians should take lessons from Greenspan,” remarked one distressed banker.
What does all this mean for Americans? Opportunity in investment and more. If Europe truly can restructure its industries and get its economy growing, that will expand the potential for business in the world. It would lend support to the idea that today’s high U.S. stock prices reflect not an investment mania but the promise of new global opportunity.
Also, the development of broad and deep capital markets in Europe, similar to U.S. markets, will ensure financing for economic improvement in many parts of the world.
But, if all that is true, why is the euro’s value down? For many reasons, including sluggish economic growth and investor hesitancy during the war in Kosovo.
Europe’s economic patterns were set over 50 years, and reforms will take time. Germany and France are slow to change highly regulated, high-wage systems even though unemployment rates are chronically above 10% for both countries.
They are reluctant to adopt what is derided as American-style corporate restructuring, private pension funds and emphasis on shareholder returns.
Yet they are being forced to accept such reforms, not by American ideas but by aging populations. Birthrates have been down in Germany, France, Italy and other European countries for decades. They now have negative population growth and a looming crisis: There will be more retirees collecting pensions than workers paying taxes to finance those pensions. A lot of the menial work in European countries is being done today by immigrants from Russia, Africa and elsewhere.
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Thus there are rising pressures for investment funds to build up retirement savings. State companies are being privatized and made into efficient vehicles for investment.
This is creating the phenomenon that economist Stephen Roach of the investment firm Morgan Stanley calls “the globalization of restructuring”--the reorganization of companies, whether government or privately owned, to bring them the discipline of investment markets.
The process frees up capital so that financing is available for new ideas, new ventures. That’s what happened in the United States in the 1980s and most of the 1990s. And now, Roach says, that healthy restructuring “is the force shaping the global economy and world financial markets over the next three to five years.”
A microcosm of that global force is the venture between Germany’s Metzler, a family-owned investment company dating 13 generations, with L.A.’s Payden & Rygel, a 15-year-old firm started by investment manager Joan Payden to specialize in fixed-income securities for institutional investors.
Faced with the emergence of a bond market in Europe, Metzler wanted to learn how such markets work. Payden for its part wanted the German firm’s expertise in judging European investments for clients.
And that’s how it is working out. The Europeans are investing in U.S.-dollar securities because their own bond markets are still developing, explains Scott Weiner, who heads the Metzler-Payden venture. And the firm’s U.S. clients are making long-term investments in euro securities, including bonds of East European countries scheduled to join the EU in 2003.
“The short-term value of the euro doesn’t mean much,” Weiner says, “but long term, it’s going to be one of the two reserve currencies of the world. And we’re making long-term investments.”
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New Currency, New Finance
European companies, traditionally limited to borrowing from banks, are raising capital by issuing bonds, denominated in euro, on growing public markets. Corporate bonds issued in Europe, in billions of U.S. dollars:
1999 to date: $56 billion
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Note: Before 1999, bonds were issued in individual countries currencies.
Sources: Capital Data Bondware, Metzler-Payden *
James Flanigan can be reached at jim.flanigan@latimes.com.
