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NOVEMBER 28, 2001  SPECIAL REPORT: THE AGE OF THE EURO By Peter Luxton, S&P MMS From D-Day to E-Day The Continent's long and complex path to a single currency is reflected in the complicated preparations for the launch of the euro Europe has been preparing for this event since EMU's birth in 1999. Back then, the respective currencies (and for Greece, when it joined the EMU in 2001) were irrevocably locked to each other and the euro. Those legacy currencies became, in effect, local demoninations of the euro -- but they remained legal tender only in their respective countries. It is the last phase of the transformation that will be starting on Jan. 1, 2002. By the end of February (sooner in some cases), the legacy currencies will have ceased to be legal tender for the purchase of goods, services, and assets. Thus, from being a virtual currency "circulating" only in financial and foreign-exchange markets, the euro will have a real and tangible presence. TIGHT-FISTED. As the currency changeover approaches, the process of preparing the single-currency zone's 300 million-plus inhabitants has intensified. Some 14 billion bank notes and 50 billion coins have had to be printed and distributed. Security, in particular the need to stymie counterfeiters, has dictated a very short distribution period ahead of the official launch. The new money has been been arriving at banks since September, and, in some countries, to retailers as well. The logistics, along with the tight timetable the switch demands, has given rise to Y2K-type horror stories -- fears, for example, that there will not be enough money around at the start of next year or that ATMs will run out. Like the Y2K panic, however, S&P MMS sees these potential difficulties as vastly overblown. There will still be some public bewilderment, not least because all 12 members of the eurozone will pursue their own, individual timetables. Local currency units will be used in parallel with euro notes and coins in most member countries for the first two months of 2002, although the period in which domestic cash can be exchanged at commercial banks for their euro equivalents will be longer. Moreover, conversion rates from the legacy currency to the euro are not always simple, ranging from the relatively easy -- roughly 2 German marks to the euro and almost 200 Portugese escudos -- to the tricky 6.55975 for the French franc, or 13.7603 for the Austrian schilling (see table below). To help prevent consumer confusion, retailers in the eurozone have been displaying dual prices (in both the local currency and the euro) since July, 2001. But because no laws require merchants to do that, implementation has been patchy. Adding a Gallic twist to all this, French bank workers are threatening to go on strike on Jan. 2 -- the day after euro notes and coins are launched. DIFFICULT EVOLUTION. The unification of the Continent's top economies has traveled an equally long and convoluted road from the ashes of World War II. In 1952, the European Coal & Steel Community became the first manifestation of the desire for a more integrated Europe. This evolved into the European Economic Community (later renamed the European Community), which was founded with the Treaty of Rome. The 1957 pact set up a European common market in the trade of goods among member countries (a customs union). The European Union (EU) became a reality in 1992 and led to the creation of a single market by abolishing all restrictions and barriers to trade and financial flows. Although the idea of monetary union first surfaced in the 1960s, it was the Delors Plan two decades later (Jacques Delors was the President of the European Commission in the late '80s and early '90s) that crystallized it. In 1992, the Maastricht Treaty laid out the nuts and bolts of monetary union, including the financial and institutional criteria that an EU country would have to meet before it could join the club, as well as the dates when the EMU was to start. The early '90s witnessed a seesawing period of economic boom and bust that threw the carefully laid timetable into chaos. Indeed, the countries that comprise the current members of EMU only made the second target date of January, 1999. The governments achieved this after a great deal of angst that was associated with reining in their budget deficits and taming inflation in order to meet membership requirements. HOLD OUTS. At the same time, the political will in certain EU member countries to give up their monetary independence was lacking. This sentiment, most obvious in "euro-skeptical" Britain, also made its presence felt in Denmark, where a 1992 referendum rejected the Maastricht Treaty. The two negotiated opt-outs to the pact. Thus, while still members of the European Union, they are not part of the single monetary arrangement. The same applies to Sweden, Finland, and Austria. This is not to say that any or all of these countries will not join EMU in the future -- indeed, in all these nations, the pro- and anti-EMU debate rages on. For the other twelve EU members of EMU -- Germany, France, Italy, Spain, Austria, Belgium, Finland, Greece, Ireland, Luxembourg, the Netherlands, and Portugal -- currencies that have been in circulation for centuries will disappear, to be replaced by the newfangled euro and its subdivision of cents. Conversion Rates of Legacy Currencies to the Euro ( 1 euro = ) German mark 1.95583 French franc 6.55957 Italian lira 1,936.27 Spanish peseta 166.386 Portuguese escudo 200.482 Belgium franc 40.3399 Luxembourg franc 40.3399 Netherlands guilder 2.20371 Irish punt 0.787564 Austrian schilling 13.7603 Finnish markka 5.94573 Greek drachma 340.75  Luxton is S&P MMS' global economic adviser Standard & Poor's MMS real time analysis of the global fixed income, forex and emerging markets is available on the Web at www.GLOBALMARKETS.COM Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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