Enter the Euro

There has never been a venture like it. On Jan. 1, 11 European countries will give up their own currencies to create a new common money that may one day rival the dollar and the yen.

They call it the euro, and its historic debut on the world financial stage marks a giant leap on the road to unity that European nations have been traveling for the past half century.

If it works, the single European currency will bind participating nations into a world-class economic power that will add up to much more than the sum of its parts, and be capable of challenging the United States and wielding real political clout.

The euro will transform world trade and revolutionize world capital markets. And it will mean radical changes for companies that do business in or with Europe.

But the experiment is not without its critics. Some say it simply is not workable - that 11 very different countries, with different sorts of governments and different economies, cannot share a currency. Others fear that they are giving up tried and true - and universally respected - currencies for an unknown quantity. Still others resent surrendering a key element of national sovereignty, the coin of the realm, to an independent European Central Bank, based in Germany's financial center, Frankfurt.

Nonetheless, the euro is coming. Starting next year, the 11 participating currencies will cease to exist - on paper, if not in practice. Their exchange rate with the euro will be irrevocably fixed on the last day of 1998. From then on, they will simply be denominations of the euro, although nobody will actually have euro coins or bank notes in their wallets for another three years.

Who's in - who's not

The participating countries (known collectively as "Euroland") are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

Together, these countries are home to 300 million people, account for 19.4 percent of the world's gross domestic product (GDP), and 18.6 percent of world trade. In comparison, the US accounts for 19.6 percent of world GDP and 16.6 percent of world trade.

Four members of the 15-strong European Union are not joining the Economic and Monetary Union (EMU) in the first wave. Greece has been refused entry because its budget deficit and inflation levels were too high. Sweden, Denmark, and Britain have chosen to stay out for the time being.

In London, Tony Blair's Labour government is clearly anxious to join the euro, but is highly sensitive to deep-seated opposition among the general public to the idea of giving up the pound sterling. Mr. Blair has promised a referendum on the subject, widely expected after the next elections in 2002. Such a referendum, if held tomorrow, would certainly go against membership. But officials hope that if the euro works on the Continent, the British public will lose its fears.

But for now, Britain's European rivals will have an advantage. A French firm selling goods in Germany will have no currency transaction costs and will not worry about exchange rate fluctuations. "I'm not sure that UK companies are so competitive that they can stand such disadvantages," says Grant Baird, head of Scottish Financial Enterprise, a lobbying group for the financial services sector.

The euro and the dollar

The euro will impact Americans, and the companies they work for, in a wide range of ways.

At the most basic level, Americans visiting Europe will no longer have to worry about changing their dollars into a multitude of different currencies and paying commission charges each time.

That won't be the case for another three years, however, as existing national currencies will remain in circulation until July 2002. The euro will begin life as a "virtual currency," with no physical form as coins or bank notes. But tourists will be able to pay hotel and other bills in euro-denominated traveler's checks, which Visa and American Express will be issuing in the new year.

American companies doing business in Euroland will certainly feel the difference: They will no longer have to pay transaction costs on currency conversions in Europe. For a company such as Illinois-based Motorola, that will mean savings of about $16 million a year.

On the trade front, though, things could get awkward for Europe and America. If the euro turns out to be a very strong currency, which would make European exports expensive, the export sectors of the European economy would suffer, and the politically sensitive unemployment monster would rear its head.

But if the euro is weak, which would make European exports to America cheap, a flood of European goods would worsen Washington's trade deficit.

Over the long term, if the euro is strong, international businesses and national central banks will likely turn some of their dollar reserves into euros. Any fall in demand for dollars would mean US authorities would have to increase interest rates, which would hurt economic growth prospects.

The creation of the euro means that Europe will speak with one voice in world financial bodies such as the International Monetary Fund. When it comes to dealing with future crises like this year's financial turmoil in Asia, Europe's opinions will carry a good deal more weight.

"The euro will give Europe a voice that corresponds to our weight in economic and commercial affairs," says Patrick Child, spokesman for European Commissioner Yves Thibault de Silguy.

Why join forces?

Ever since Western European nations began, half a century ago, to build the edifice that is now the European Union (EU), the venture has been as much a political project as an economic system.

The first-ever building block, the 1952 Coal and Steel Community, was a bid by a war-shattered Continent to put those sinews of war under supranational control. Subsequent steps to create a customs union, then a single market, and now a common currency, have all headed in the same direction: a "united states" of Europe.

That may still be a distant prospect. But the launch of the euro marks the biggest surrender of national sovereignty that any of the EU states has made since their founding Treaty of Rome in 1957 set the goal of "ever closer union" between their peoples.

To those peoples - generally somewhat skeptical about EU rules set by "Eurocrats" in Brussels - the euro has been sold as just a question of money.

In that sense, on a day-to-day business level, Euroland will look like the United States in many ways. Aside from the question of language (and English is rapidly becoming the Continent's lingua franca), doing business between Finland and Italy will be as straightforward as making deals between Illinois and Texas.

The euro will also mean that for the first time, companies and consumers will be able to compare prices across Euroland, just as Americans can compare prices across the United States.

When German car buyers discover, for example, that the same Volkswagen model costs $5,000 less in Italy than it does at home, they are likely to start crossing the Alps when they need a new car. Even more likely, Volkswagen Germany may bring its sticker price down as the single currency encourages competition and lowers prices across the Continent.

The drive for economic efficiency, though, is not a quest that moves a citizen's spirit. With the creation of the euro, the EU's architects may have finally sealed their goal of making a continental war inconceivable. But they have yet to convince the European populace that a federal future is a bright one.

Life in Euroland

When Europeans wake up to a brand new currency on Jan. 1, 1999, for most it won't make a bit of difference. The only people concerned will be a few thousand bank staff members in London and Frankfurt, working over the holiday to prepare for the resumption of market trading Jan. 4.

Financial markets will be the most clearly affected. All share prices on Euroland stock markets will be quoted in euros, all new government bonds will be issued in euros, bank transfers will be carried out in euros - all electronic transactions will be denominated in euros.

Elsewhere, in accounting departments, down supermarket aisles, and on advertising billboards, the watchword is "no prohibitions and no compulsion." In other words, companies can choose how fast they make the changeover. In France, banks are already sending their customers monthly statements calculated in both francs and euros, and many stores across Europe have started to display prices in the local currency and in euros.

Some of the larger European corporations, such as the German firm Siemens, have warned suppliers and customers that they should be ready to cope with invoices in euros from the beginning of the year.

The changes in accounting and billing computer software will be enormous. New York-based IBM, which hopes to profit by helping companies get "euro-ready," estimates that firms in Europe alone will spend as much as $160 billion over the next six years to make the changeover.

Meanwhile, national mints have begun to make the euro coins they will issue on Jan. 1, 2002. They have to start early because they will be replacing 70 billion coins currently in circulation in Europe. Euro bank notes will take the place of the 21 billion bank notes that exist now.

Rather than see all that cash go up in smoke, a small firm in Austria would like to put it to constructive use. It has patented a process that turns bank notes into garden compost.

Will it work?

To abandon such a tried and trusted currency as the German mark in favor of a new and unknown quantity might seem foolhardy. But most of the signs suggest that the euro will turn out to be a strong and successful currency.

This is partly because the guardian of the euro's purity, the European Central Bank, enjoys a level of independence in setting monetary policy that is unmatched anywhere in the world. The ECB chairman and other board members serve an eight-year term and cannot be reappointed. And unlike the US Federal Reserve, which is mandated to pursue the twin goals of low inflation and economic growth, the ECB's charter gives it only one priority: price stability.

At the same time, participating countries had to meet a series of tests to join, to show that their economies were similar enough to sustain a common currency. They also have pledged to keep their economic fundamentals in good enough shape to maintain the euro's strength. That means government budget deficits may not exceed 3 percent of GDP, and inflation and interest rates must be under strict control.

In a sense, the euro has already proved its worth. Since governments last May announced the exchange rates at which they plan to create the euro, all the participating currencies have weathered the worldwide financial turmoil with no loss of value, and no need to raise interest rates. For traditionally weak currencies such as the Italian lira and the Spanish peseta, this was nothing short of miraculous. (The US dollar, by comparison, lost 10 percent of its value against the German mark over the summer.)

But keeping the euro strong, and prices under an iron grip, may exact a heavy political price, critics warn. "Trying to shoehorn us all into the same conditions will create discord, not harmony, and that is dangerous," says David Heathecote-Amory, a senior British Conservative Party figure.

With economic growth slowing down, and unemployment in the EU running at more than 11 percent, national governments are anxious to see interest rates drop to stimulate growth and create jobs. Some of them - notably the new Social Democratic government in Germany - have already clashed with the ECB's determination to keep interest rates high enough to uphold the euro.

There is no going back on the euro - countries that join are not allowed to pull out - but it could be a bumpy ride.