Perspective
The Debut of the Euro

Barry H. Massey

By Barry H. Massey

The introduction of the Euro is a continuation of European economic integration, which has been driven by political, economic, and social forces. At the end of the Second World War, it was clear to leading thinkers, such as Monnet and Schumann, that Europe needed to try a different approach. Europeans were aware of their unique cultural heritage and wanted the benefits of a large, integrated market like the United States enjoyed. The process of economic integration began with the treaty of Rome, which led to the formation of the European Common Market and Customs Union in 1957. The EC 92 initiatives did much to harmonize and simplify customs clearance procedures, other initiatives helped remove non-tariff barriers, and a growing body of European law governs the economic, business, and social areas.

Although economic integration has accomplished a great deal, leading to a tremendous increase in European standards of living and improving Europe's position in the world, we still do not have a level playing field. Europe's 15 separate financial, banking, and fiscal systems have caused enormous inefficiencies. Separate currencies have led to a considerable lack of clarity in factor costs, increases of at least $80 billion annually in transaction costs for individuals and businesses, and greater uncertainty in exchange-rate risk.

A number of different policy strands—including geopolitical, economic, financial, and social—have supported the introduction of the Euro. The French Ministry of Finance—key policy-makers in that country—offered early support. France and the smaller European countries have always been wary of German economic power, and the problem has been how to bind Germany into Europe so that they cannot again "go it alone."

The introduction of the Euro is an important aspect of the Economic and Monetary Union (EMU). The European Central Bank (ECB) has been established in Frankfurt to harmonize monetary and foreign exchange policy. The ECB sets Euro zone interest rates, and all Euro zone countries have relinquished their national currencies at a fixed exchange rate. In the area of fiscal policy, Euro zone countries have also agreed to set limits on their budget deficits and level of public debt.

In most European countries, substantial regional markets have been sheltered by their different currency regimes. This led to increased costs for consumers, a lack of transparency, and a much-reduced supply of inputs for firms in other countries. Introducing a common currency should help remove inefficiencies, increase competition, increase transparency, lead to greater freedom in sourcing options for firms, and level costs.

Labor and social costs can vary enormously from one European country to another for a variety of reasons, including different legal, insurance, and taxation regimes; the strength of labor unions; efficiency of labor usage; and custom. In many cases, national governments have lacked the political will to correct these inefficiencies. When firms and workers are able to compare wage rates and labor costs directly, it will lead to greater efficiency in the allocation of labor and exert pressure for reform on noncompetitive labor practices throughout Europe.

The introduction of the Euro will bring greater transparency and discipline into the funding and financial decisions of local and national authorities. Borrowers will no longer be able to rely on a cozy local currency market for their funding, but will have to adhere to procedures and credit standards that will apply across Europe. Less creditworthy or poorly run organizations will have to pay a premium or be unable to "place their paper." This has already led to squeaks of anguish from Italian regional politicians.

What has happened thus far? The Euro has been legal tender for intra-European transactions between companies since January 1, 1999. Consumers have been free to use the Euro only since January 1, 2002. The effect on consumer prices has not been large, but anecdotal evidence suggests that expenditures on luxury and impulse items may have increased, while expenditures on shopping goods have been squeezed. Some firms have introduced new products as an excuse to increase margins.

European banks have traditionally earned well from intra-European Forex trading, and an estimated 30,000 to 35,000 jobs are dependent on this. Banks have sought to maintain this by charging a 3 percent fee on Euro clearings between European countries, excused by the different national clearing systems. Consumers are angry about these charges, which have been rejected by the European Commission.

Efficient smaller and mid-sized companies are likely to benefit greatly from the Euro in gaining bigger markets, a wider range of suppliers, and better access to financial markets. Larger companies will experience lower financial and transactional costs. Consumers will gain access to a wider range of offers and more competitive prices. In the resulting restructuring process, inefficient regional companies will close, companies in areas with higher labor costs will shed workers or relocate to lower wage-cost areas. There is likely to be a positive effect on tourism, due to increased efficiency and a wider range of offers, and also to the transportation market, due to increased intra-European business.

The Euro is becoming a de facto alternative currency over a wide range of the Balkans and Eastern Europe, and this process is likely to continue. It is likely that a number of the smaller, new applicants to the European Commission will be effectively using the Euro prior to their official accession.

Barry H. Massey has taught business management and computer studies for UMUC–Europe since 1981. Prior to that, he worked in the private sector, where he ran a number of companies. During the past 30 years, Massey has lived in five European countries and worked in more than 20; he speaks several languages. He reports that he is still enthused and fascinated by European cultures and still somewhat optimistic about the dream of Europe being united.