Comment - On the future potential of the euro
Don’t let the euro’s foreign exchange performance last year colour your judgement about its long-term viability. Despite its bumpy ride on the money markets the euro has been successful in many important senses and has assumed its position alongside the dollar as a major world currency. Two key factors held the euro back last year: the sustained strength of the US economy and a lack of direction in German economic policy (Germany accounts for one third of eurozone economic output). However, the euro’s plight was beneficial for many eurozone businesses, providing cheaper borrowing and making exports more attractive to end markets. A lower value euro also helped the French turn their economy around, through making its exports more competitive and, more recently, has provided Germany with a fairer wind than may have been expected. The euro also propelled European companies into an unprecedented era of mergers and takeovers: the staggering value of these forms of corporate activity within continental Europe during the first nine months of 1999 (£150bn) was three times higher than for the previous nine years. And while the acceleration of open market culture has clashed with the principal of consensus management in countries like France and Germany, this is part of the process of rapid market reform. On the international bond markets the euro proved to be the most popular currency, with £370bn worth of bonds issued in euros during 1999. It wasn’t only the Europeans taking advantage of low euro borrowing rates – US firms borrowed more. So, as a symbol of economic strength and unity the euro may have been disappointing, but in most other respects it was a resounding success. Now, with YK2 off the agenda, the pace of change is likely to accelerate, with corporates placing higher priority on centralising treasury functions and actively managing their liquidity across Europe. If you believe in free market economics, the euro is a force for positive change that will drive open market reform and make Europe more competitive. In or out, the UK stands to benefit from the euro.