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| In the
mid-1980s, European countries agreed to significantly cut back on tariffs on goods that
were transported within the European market. Because the changes were to happen in 1992,
"Europe 1992" became a rallying cry. The assumption was that the Common Market
would finally become a common market. The specter of a truly unified Europe struck so much fear into non-European countries that many others decided they, too, had to band together. The U.S., Canada, and Mexico agreed to Nafta. Brazil, Argentina, Paraguay, and Uruguay set up a free trade zone called Mercosur. Other countries made individual arrangements to lower trade barriers. A wave of semi-free trading swept the world. But, in the end, 1992 came and went almost without notice. European economies remained largely local. Few pan-European commercial giants swept through Europe—and fewer still through the world market. Now Europe is trying again, with a more powerful weapon than tariff cuts. This time, Europe is taking the scary step of agreeing to a common currency. Because the currency, called the euro, raises so many issues for international businesses, Context asked two experts on the subject to lay out what problems and opportunities the currency may create when it debuts Jan. 1, as well as what the implications are for doing business in Europe. One, Patrick Poncelet, is the director of business development at S.W.I.F.T., a Brussels-based cooperative that is owned by 3,000 of the world's banks and that provides secure messaging to banks in more than 170 countries. The other, Lode Beckers, is a former bank official who now consults with many of the major European banks on the implications of the euro. Both say the euro will quickly revolutionize banking in Europe and will, over time, change the face of business for everyone. PATRICK PONCELET: I think the euro is going to have an enormous impact, which has been underestimated by most players in the market. Banking in Europe will never be the same after Jan. 1, 1999. Banking in Europe has been tremendously fragmented for centuries by national borders, national laws, different cultures, etc. Now, economic borders will disappear. All banks in Europe have had enormous domestic franchises and have made a lot of money off them, but, all of a sudden, everybody will be able to compete in their market with them. Banks will have to reposition themselves totally. The companies that are best-positioned may be the non-European ones, because they saw the market differently and operated across all of Europe. One of the most direct effects of the change will be consolidation. Germany has, I think, 4,500 banks. Italy also has a huge number of small banks. But the euro will be a big accelerator to mergers. What would happen in maybe five or 10 years will happen in one or two. We're seeing consolidation today, but within national borders. What we will see soon is cross-border mergers—a big German bank merging with a big French bank. You'll also see mergers involving other industries, such as insurance—really spanning all of financial services. The euro will also lead to the appearance of a pan-European capital market or securities market. Capital markets in Europe have been very fragmented, so big borrowers might stay away, because they couldn't get the right funding. Now, they'll be able to tap into an enormous euro market. Banks will also be able to offer commercial paper, which is nonexistent in Europe. This is where banks will make a lot of money. Again, the best-prepared seem to be the U.S. investment banks. A huge boost will come from investment managers who, today, are limited by law to investing perhaps 10% of their assets outside their countries. Soon, they'll be able to invest anywhere in Europe, as long as it's in the euro. So, all these guys are going to start, all of a sudden, shifting their portfolios. There's going to be an enormous amount of opportunity, which I think will offset the loss of foreign-exchange business. But this means that many banks either have to retreat from the market because they're not prepared, or they have to invest a lot to prepare themselves for new opportunities. The euro is the most important event for European banks in decades. LODE BECKERS: The introduction of the single currency raises three types of issues: conversion, commercial, and strategic. When you replace 15 currencies with one, that raises problems just in the sheer quantity of conversion work to be done. It creates very specific problems, too, in banking matters, in payment matters, in I/T systems. But many banks feel the conversion problems are also opportunities. As for commercial consequences, we already see companies tackling issues like European unit prices and what to do with payment terms. Can we afford to lengthen them because we are going to have sustainably low interest rates? Other commercial consequences will be the use of the euro as an invoicing currency, access to euro-denominated instruments in capital markets, and the reshaping of distribution networks, which will be organized by function or product rather than by country. Eventually, people will look at Europe as this one, big, internal market and evaluate the strategic consequences: How can we capitalize on it to be more competitive in the global context? PONCELET: The first companies to win will probably be the nonfinancial ones. Many small and medium-sized enterprises have been reluctant to find markets outside their domestic ones. But the euro means they'll have fewer currency-exchange risks. All of a sudden, they'll have a big, natural, 400 million-person market in one currency. Accounting will be easier, too. Companies will be able to do cash pooling and concentrate their treasury management. There will be less pressure for non-financial companies to consolidate across borders because tax situations and labor costs will still differ from country to country. CONTEXT: Will companies be ready for the onset of the euro by Jan. 1, or might they face the same kinds of glitches that many are predicting will happen in the year 2000. PONCELET: I think the euro is manageable—more, maybe, than the year 2000. With the euro, you have this transition period that is a safety net. If some systems aren't ready, an individual institution or even a payment system could fall back to the old currency until matters are straightened out. There will probably be a bit of chaos in early January, but I think the I/T issues are the first things that banks and other financial institutions tackled, and from what we hear they seem to be ready. BECKERS: As far as I/T conversion packages are concerned, some companies are a bit discouraged, mainly for two reasons. One, for a while, expectations were raised that there were going to be some magic solutions available, that providers of software packages would have something that could be applied to all functions within a corporation. Now, it appears that won't be the case. Companies also found out that the I/T work is far more time-consuming than they anticipated. The manual updating, the manual conversion work, absorbs a lot of time. Therefore, there is a bit of fear now that there will be manpower shortages. The fear is more acute because most companies are having to wrestle with the Year 2000 issue at the same time. CONTEXT: Is there any possibility the euro system will fall apart? After all, England is abstaining, and there are plenty of reports of resentment in other countries. PONCELET: I have some concerns about the sustainability of the economic convergence. We will still have national central banks and national economic policies. If one of the countries gets into serious economic trouble, what will happen? There will be some turmoil, I think, not in 1999 because we'll all benefit from the high from the introduction of the euro but maybe a year or two later. But the euro is the only great project that politicians can offer to the European youth for the foreseeable future, so it is the No. 1 priority in every single European country. The euro has become a matter of survival, I would say, for all governments and all bodies within the countries. It will start on schedule. The political will is strong. BECKERS: Almost every week, there is an article in some newspaper that says, here is why the euro will not work. But the issues fade away in two or three weeks. Maybe this confirms that the political will to make the euro happen is so strong that the sea serpent has to go under the water again. Apart from the political determination, there is also a business world determination. I know of no leader of a large corporation who continues to speak out negatively about the single currency. Quite to the contrary. PONCELET: Not even in the U.K.? BECKERS: I can't think of anybody right now. We cannot say that all citizens feel comfortable about the euro. We still have several countries where a majority of people is against it. For instance, many Germans think the euro will be weaker than the Deutschemark. So there is a continuing need to explain, and it's not always easy to do so. On the other hand, I can tell you that when the surveys are periodically updated, they show that the more people become informed, the more positive the feelings are. That probably means that there was an element of bad information or misinformation underlying any negative feelings. PONCELET: I think even England will join later on. They've done that in every single step of the European construction. They've never been there at the first step. It's their way of judging things. I mean, they like to observe, see what happens. They don't like to be rushed into a sort of big bang decision. It's a matter of political sensitivity—you know, the idea that they'll lose their independence, as well as their traditional island status. But if you talk to English businesses, they are convinced of the benefits of the euro, sometimes more than their continental counterparts are. And if you have the U.K. business world behind you, you'll have the U.K. in, probably before the end of the three-year transition period. Actually, London is preparing itself as a euro financial center very, very much. The best documents, by the way, that I read in the banking world around the preparation for the euro are the ones produced by the Bank of England. CONTEXT: What still has to happen before Europe becomes a truly common market? BECKERS: Once we have a single currency, we will see more clearly some of the remaining inefficiencies in Europe, such as the differences in tax regimes and tax rates in different countries. Tax harmonization will finally come, one way or another. Then it will be difficult not to talk about more transfers of political power to a centralized unit. A big question is: Are we going to have a federal budget? What we have now is barely on the order of 2% of the gross domestic product of the member states, and 60% of that 2% goes to agriculture. Where would the U.S. be if you had the Federal Reserve System but no federal budget? Mr. Poncelet is reachable at patrick.poncelet@swift.com. Mr. Beckers is reachable at lobo@ping.be. |
