The Euro Currency Age: challenges and opportunities for U.S. businesses

Business America, July, 1998 by Matthew Breitfelder

With less than six months to go until the euro currency will be introduced on January 1, 1999, U.S. businesses should address the implications of the European Economic and Monetary Union (EMU), preparing strategies for the EMU transition while maximizing their opportunities to enter and expand business in the European Union market. A major step forward in the process of European integration, EMU will merge the monetary policies of the "euro-zone" countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) and promote the further convergence of the EU economy and its product markets. The U.S. Government is committed to helping American companies deal with the uncertainty relating to EMU and increase their competitiveness in the EU market.

During the past year, as European governments have prepared for EMU, there has been substantial progress on several fronts: interest rates and inflation performance have converged throughout Europe, and significant reductions have been made in national fiscal deficits, most to below the Maastricht Treaty's EMU qualifying rate of 3 percent of GDP. This progress has buttressed the EMU initiative and has occurred simultaneously with signs of renewed economic growth in Europe, increasing the probability of continued steps toward further restructuring of the European economy.

President Clinton has said, "A strong and stable Europe, with open markets and healthy growth, is good for America and for the world. A successful EMU that contributes to a dynamic Europe is clearly in our best interest." Together the United States and European Union produce close to half of all goods and services in the world, and account for over half of all world trade. The EU is by far our largest commercial partner -- with two-way trade and corporate affiliate sales in each other's markets of $2 trillion. While in recent years much emphasis has been placed on emerging markets, a revitalized European market presents enormous opportunities for American firms.

With the establishment of EMU, it is essential that European governments continue to proceed with reform. In order to ensure a smooth transition and enhance the competitiveness of the European market, key reforms will be needed, especially those that will increase labor market flexibility, lower costs, promote tax harmonization, and bring down unemployment (currently averaging some 11 percent). Other market reforms will also be necessary to further smooth the flow of products, services, and capital by promoting greater market opening, and will be supported by the new Transatlantic Economic Partnership initiative, announced at the May 18 U.S.-EU Summit in London.

By meeting the challenges that EMU implementation presents for European policy makers, the EU would advance EMU's greatest benefit -- strengthening the European Single Market. With the introduction of the euro, firms may operate in a much more integrated economy, increasing the possibilities of greater certainty and efficiency, enhanced competition, lower costs, and increased investment.

Companies doing business in Europe will benefit from the elimination of currency conversion and fluctuation costs for cross-border trade. This could save large businesses tens of millions of dollars a year in transaction and hedging costs, and enable small- and medium-sized firms to undertake more aggressive cross-border business strategies within Europe. These savings will be enhanced by the possibility of lower supply prices and a more efficient allocation of resources as a result of price transparency. The more flexible businesses will gain the most.

U.S. firms are well poised to benefit from EMU. The fact that many American companies have long approached Europe as a single market, or potential single market, bodes well for their prospects in the euro currency age. It is clear that the larger American firms, particularly those with extensive European operations, have forward-looking eurostrategies in place which cut across business functions. But it appears that many other American firms operating in or exporting to Europe have not yet begun to identify the range of challenges EMU may create, or to adequately address them. By developing a strategy to minimize the costs of transition to the euro, U.S. firms can focus their energies on taking advantage of the new opportunities it may bring.

During the three-year EMU transition period, companies and individuals throughout the "eurozone" will be able to make payments in either the euro or a national currency (although euro cash will not be introduced until 2002), which will become nondecimalized denominations of the euro. There will be no exchange rate, per se among euro-zone countries, but instead a fixed "irrevocable" conversion rate. Just as temperature remains the same, whether measured in Celsius or Fahrenheit, so it will be of no economic importance whether an amount is noted in a national currency or in euros. In some euro-zone countries, arrangements have been made for commercial banks to accept euros for all cashless transactions. Many bank accounts will show both euros and the national currency, and some credit cards will use euros.