|BANKING ON THE EURO|
January 1, 1999
As revelers rang in the New Year round the globe, the European Union started the New Year with a new common currency, the Euro. Following a background report by Tom Bearden, listen to four policy experts discuss the political and economic ramifications of a unified currency -- In RealAudio.
TOM BEARDEN: The new money is called the Euro. It won't be jingling in anybody's pockets for another three years, but as of New Year's Day it is the currency of choice for banks and other financial institutions in most of Europe.
Eleven of the European Union's 15 countries are taking part -- Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain -- with a combined population of over 289 million people. Britain, Sweden, Denmark and Greece are staying out, at least for now.
Residents of the 11 nations, which have taken the nickname Euroland -- aren't giving up their francs, deutschmarks and lire just yet. The conversion to the Euro is gradual. On New Year's Eve, finance ministers announced the final exchange values between their currencies and the Euro.
JACQUES SANTER, EU Commission President: The First of January 1999 marks the beginning of a new era.
TOM BEARDEN: Each nation is being assigned a 6-digit conversion rate which will be permanent and unchanging. What this means is that one euro will always be worth 6.56 french francs, or 1.96 German marks, for example. The ministers also set exchange rates with foreign currencies.
But that rate will fluctuate in accordance with supply and demand. The announcement was capped off with a celebration in the courtyard of the European central bank in Brussels.
But real business will start after the New Year's holiday when governments and businesses will keep their accounts in Euros. So will banks and stock exchanges. Also after the holiday, the recently-created European Central Bank -- housed in Frankfurt's euro tower -- will begin to set interest rates and make other monetary policy decisions for Euroland.
On January 1, 2002, Euro coins and bills -- which are already being minted -- will begin to circulate. Exactly six months later, the old currencies will be unusable. In the meantime, banks like this one in
France have installed converters to help customers calculate how much the new money is worth. But that's not all that banks have to do.
The publication of the full set of official currency exchange rates on Thursday also marked the start of a frantic 100-hour race to convert cash balances, redenominate bonds, re-code computer programs and much more -- all of which falls onto the shoulders of thousands of bank employees. Banks have hired information technology specialists to work the weekend to integrate banking systems with other banks around the world.
VENDELINE VON BREDOW, Merrill Lynch: We have about 500 people in Europe working full-time. It is a major logistical effort. We have catering facilities. We have booked hundreds of hotel rooms. We have hired mini-buses. These are just some of the details."
TOM BEARDEN: Many retailers across Europe have been preparing their customers for the euro for some time. Stores like 'Le Clerc' in France have been advertising the Euro price alongside the price in Francs. They even produced 'mock Euros' to let shoppers experience in advance what shopping with the new money would be like.
PHIL PONCE: Elizabeth Farnsworth in San Francisco has more.
ELIZABETH FARNSWORTH: Some perspective now from Phillipe Schmitter, professor of political science at the European University Institute in Florence Italy and author of an upcoming book on democracy and the European Union; Horst Ungerer, author of a book on the history of European monetary integration and former staff economist at the German Central Bank; Jurek Martin, freelance journalist and former foreign editor of the "Financial Times," a London-based international newspaper; and Stephen Overturf, economics professor at Whittier College in Southern California and author of "The Economic Principles of European Integration." Thank you all for being with us. Just to get this clear, Mr. Schmitter, for the time being the euro will be used mostly in electronic financial transactions.
PHILIPPE SCHMITTER: And in bank statements. Most people will not be aware of it as money until they get their first bank statements, and then presumably they will be continued to be denominated in the national currency and then underneath there will be notion in euro.
ELIZABETH FARNSWORTH: And if you're in Italy and you have to buy something, the interest rate on that is determined by this Central European bank in Frankfurt.
PHILIPPE SCHMITTER: That's true, but through this process of convergence, interest rates now in European countries are very similar anyway, so there's going to be no dramatic change that people will notice in interest rates because they've been forced to converge on a relatively narrow range. I think Italy, in fact, is the only country - at least for the basic rate - which is still out of line -- if they didn't change yesterday.
ELIZABETH FARNSWORTH: How historic is this? Is this a milestone in European history?
PHILIPPE SCHMITTER: Absolutely. I think especially for those of us who are interested in European politics because the question we have always asked - and which has no answer - and which has generated an enormous amount of controversy is what is the nature of the relationship between economic integration and political integration? How far can you go to opening up your markets and allowing people to live in each other's country and to circulate, so to speak, and not have a common political authority that people recognize as a legitimate government?
ELIZABETH FARNSWORTH: So you're saying --
PHILIPPE SCHMITTER: Many people said it will stop at economic integration and there will be no political integration; that the two are separate. I believe they're very closely connected. And I believe that monetary unification is the missing link, which will drive Europe toward greater political unification.
ELIZABETH FARNSWORTH: So that's why you think this is historic, because of that possibility?
PHILIPPE SCHMITTER: Absolutely.
ELIZABETH FARNSWORTH: Mr. Ungerer, is that why you see this as historic?
HORST UNGERER: Yes. I think I have more or less the same kind of documentation. We have to see this policy in a historical and in a political context. We cannot separate the monetary issues from the general economic issues or in the longer term at any rate from the political issues. The policies, after all, is going on since 50 years. It started all out with the Marshall Plan of the United States. It moved on to the European Payments Union, then we had the establishment of the European community, now called the European Union, and that road led to the Maastricht Treaty, which is the basis for what we are - what we see now, and with the establishment of the European Central Bank and the introduction of a single European currency, the euro.
ELIZABETH FARNSWORTH: Mr. Overturf, these are nations that slightly more than 50 years ago were fighting each other, and now they have established this monetary union. Did you think it would ever happen?
STEPHEN OVERTURF: Well, I was hopeful that it would. Actually, I was pretty sure it would in that historical context, and I'm glad to hear both the historical side of it mentioned here, as well as the political side, because if you look back at when it originally started, it was in 1952, with the idea of John Monet, it was to bring these nations together beginning politically, yes, it was through the economic back door, if you will, of these particular kinds of industries, coal and industry, the kinds of industries that would wage war. But then it moved on very quickly into the European economic community. And then they began to look at the monetary side in 1970 with the Werner Plan. That didn't work, but in 1979, the European Monetary System attempted to fix exchange rates. And that worked really well. From that a very energetic commission president, Jacques DeLores, put together a committee, which tried to build upon the single market to again create a common European currency. And I guess the emphasis needs to be made that this is all economic in nature. But there's a political agenda behind it, and here we are facing this very thing coming about very quickly here.
ELIZABETH FARNSWORTH: Mr. Martin, how do you see the economic and the political agenda, given the fact that Britain is not in it at this point?
JUREK MARTIN: Yes. It was one of the largest surprises to me, that Tony Blair decided, suddenly announced about 15 months ago that Britain would not enter the first stages of this grand and extremely important project until after there's been another election in Britain, which has to be by 2002. It could be before then. I think Britain has always underestimated - ever since the very beginning - this will in Europe to collaborate after the war. It underestimated even the coal and steel community; it underestimated -- sometimes it was frustrated by Charles DeGaulle, president of France, for example. But it has consistently underestimated European will. And I think that's cast something of a long shadow on Tony Blair. Tony Blair comes in, beating the conservative government, which had been torn to pieces with divisions over Europe, presumably with the opportunity or a lot of us thought with the opportunity, with the British economy in such very, very good shape last year, to leap in and say we're going to be a charter member. He chose not to I think for political reasons, rather than for economic reasons.
ELIZABETH FARNSWORTH: What do you mean, what kind of political reasons?
JUREK MARTIN: I think there are complicated political reasons inside Britain. It's always dangerous to underestimate the question of British sense of sovereignty. That is, after all, what Mrs. Thatcher had become famous for, for so long, emphasizing sovereignty, bashing the bureaucrats in Brussels with her hand bag every time they disagreed with her, and so on and so forth. So I think Blair was conscious of that. Blair was also conscious of the fact that the British press, large segments of the British press - none of it might I say run by Brits - they're run by either Rupert Murdoch, the Australian American, or Conrad Black, the Canadian, a virulently and viscerally anti-European in all its manifestations. I think Blair had to take these people on board, so he was cautious.
ELIZABETH FARNSWORTH: Mr. Schmitter, sovereignty is a concern in all the nations. I mean, everybody has to deal with some of the same factors that Tony Blair was doing - was dealing with. What were the benefits for say France, or Italy, that made it possible to overcome those sovereignty concerns?
PHILIPPE SCHMITTER: I'm not sure they're overcome. I think people are redefining what sovereignty means for these countries, and there has - as the gentleman just pointed out - it has different meanings in different parts of Europe. Sovereignty seems to be much more sensitive, incidentally in the United States, as well as in Great Britain, but the main difference, I think, is that people on the continent are more aware that sovereignty in the classic sense doesn't exist anymore, that countries no longer have the degrees of freedom and autonomy to act in those realms which they nominally are supposed to have their freedom in. So, in fact, the Bundesbank was serving as the European Central Bank before the European Central Bank was created.
ELIZABETH FARNSWORTH: Because the mark was so strong.
PHILIPPE SCHMITTER: So giving up sovereignty for the French franc - or least of all the Italian lira - was not giving anything up, because, in effect, they didn't have a wide range of choices for their currency or for their exchange rate.
ELIZABETH FARNSWORTH: Mr. Ungerer, do you agree with that? How would you describe the benefits for Germany that made Germany give up sovereignty concerns?
HORST UNGERER: Well, let me talk first about this problem of sovereignty. I completely - I agree completely with Mr. Schmitter. And we are not talking anymore about abandoning, giving up sovereignty. We are talking about sharing sovereignty, and that this is in the context of a totally different world, compared with 100 years ago. And it was this extreme concept of sovereignty, which, after all, over centuries brought Europe into a situation there after World War II -- it realized - well -- the way out is to cooperate.
ELIZABETH FARNSWORTH: So, Mr. Ungerer, are you saying that for an ordinary German who goes out to buy whatever they have to buy Monday morning - and I know they don't have to use the coins yet -- but they understand that the euro is now in effect - they're thinking about the fact that the wars of this century make it worthwhile to give up whatever sovereignty Germany had to?
HORST UNGERER: I think so. I think so. I mean, it's known that the German population is fairly skeptical about the euro on purely monetary grounds for a number of reasons, which I don't want to discuss in detail, but at the same time, the German population accepts fully heartedly European integration and accepts as result the fact that there will be a European currency because they realize we have to give if you want to get something. The European population, according to surveys, when you seize the advantage of European integration in the future as a promise for the future and in peace, and that is the overriding consideration for them -- then look at the thing not just in monetary terms but in a political context.
ELIZABETH FARNSWORTH: Mr. Overturf, will the other countries that have stayed out come in, say Sweden, Denmark, Greece? I know that Greece didn't meet certain economic criteria that it's trying to meet, and what about Eastern European countries?
STEPHEN OVERTURF: Yes. This is particularly interesting to me. I agree with this notion that Britain will eventually come in because they have had this tradition, unfortunately, of standing out until the new institutions have proved themselves, and then they've come in a little bit late to influence things. The Danes are a very interesting country because they've always been a little bit skeptical. They're members of the European Union, but they actually voted against the Maastrict Treaty before then changing their mind and going in and voting for it, but they voted for it only with an opt out, that they wouldn't necessarily have to come in. The Fins decided to come in and the Swedes decided to stay out. There are many, many reasons for that; possibly one of the largest is to not be influenced by Brussels. They're also concerned - these countries, which tend to be high welfare states, that they not necessarily sacrifice that, which is something that they've appreciated well over the years. The Eastern Europeans want to come in and they want to come in right now. The only problem, of course, is entry, in general, will involve an enormous number of questions and problems, and the currency will only be the very last of those.
ELIZABETH FARNSWORTH: Mr. Martin, what are the key risks now?
JUREK MARTIN: Oh, I think there are considerable risks, mostly they will have to be defined in economic terms. What's happening in Europe is that the European Central Bank becomes likes the United States Fed. The Bank of France becomes rather like the Kansas City Fed. And when did you last sort of read a headline about the Kansas City Fed? So, consequently, a large part of economic policy, that is monetary policy, which is very important, is now vested in one central authority in Brussels. Now if that authority handles its job well, if the world economy stays in reasonably good shape, if there are no horrible shocks knocking it off course, that's fine; it's possible to manage the monetary affairs of Portugal, as it the monetary affairs of Germany, even though Portugal and Germany are rather like Mississippi and California in that sense.
But the Fed manages Mississippi and California at the same time. So if it all goes well, there is no reason why it shouldn't work. What if it goes wrong? What if there are localized, adverse economic conditions in Mediterranean countries, for example? Can the central bank, the European Central Bank in Frankfurt, necessarily be sensitive to those local conditions, unemployment, whatever it happens to be, in Southern Europe, and if it's not, is there social and political unrest in the countries of say Southern Europe? So these are the tests which are still to come.
ELIZABETH FARNSWORTH: What do you think the risks are?
PHILIPPE SCHMITTER: Well, I think he's put his finger on the major problem. Ironically, it is precisely those countries where the population is most in favor of giving up national currency and accepting the euro, countries like Italy and Spain, who are going to have the most trouble adjusting to this -- and this is for essentially two reasons: One, these are countries themselves characterized by normal internal disparities between regions, so the problem is not so much disparities between Portugal and Germany, which are not quite Mississippi and California, but the analogy works, more or less. It's within Italy, within France, perhaps even with Portugal, inside these countries that this uniform rate then is going to have more dramatic effects.
ELIZABETH FARNSWORTH: Because if there's a weakness in the economy of Southern Italy and the interest rates favor Northern Italy, they say, why aren't you helping us.
PHILIPPE SCHMITTER: For example, Northern Italy has been living on the European scale and with European interest rates for a long time; Southern Italy, which depends very much, incidentally, on subsidies, those subsidies are jeopardized because under the new rules the Italian government is not going to be able to run as consistent budget deficits in order to redistribute income to the South. Same for the Spaniards. In those cases, particularly in France and Italy, where they have strong regional governments, the main tension is going to be, so to speak, between parts of the regions, if you wish, of Spain. It's really in the other European countries.
ELIZABETH FARNSWORTH: Mr. Overturf, what will be the effect on the American economy and on Americans?
STEPHEN OVERTURF: Well, that's an interesting one. We're creating a very new, very large financial market that is potentially very large, indeed, and we're already looking at new bond issues and new stock issues coming out in euros. I think that will be interesting for the average person who has, let's say, a pension fund or mutual funds as a nice way to spread that risk. Right now you might not think about buying an Italian bond or a French stock, but certainly if these are issued in euros, where there's very little worry about fluctuations in the exchange rate, I think you're much more likely to set that happen, so I suspect that will happen. Actually, part of the success, if that does occur, is that it could actually cause interest rates to rise a little bit for the United States. They no longer will be drawing all these funds in. And so that might have an impact on the average American.
ELIZABETH FARNSWORTH: Well, that's all the time we have for now. Thank you very much.