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NOVEMBER 28, 2001 SPECIAL REPORT: THE AGE OF THE EURO By David Fairlamb Euro Conversion: Much More Than Small Change From consumers to criminals intent on laundering money, all of Europe will face some major adjustments after Jan. 1, when the euro's notes and coins are launched Retailers and banks will bear the brunt of the two-month changeover, which stands to be the biggest logistical exercise ever undertaken in peacetime. Stores and banks will accept the old money (the "legacy" currencies) but make change and pay out with the new. "We estimate there'll be seven times as much cash as usual in our cash desks and that each transaction will take almost twice as long," says Ursula Wagner, finance director for Kaufhof. "We're having to take on dozens of temporary sales and security staff to cope." VALUE-ADDED. The introduction of 14.5 billion new euro notes and 50 billion new coins is more than a matter of logistics. The potential consequences -- both good and bad -- for the eurozone economy are enormous. On the plus side, the new notes and coins will give intrinsic value to the single euro currency, which has existed only in electronic form since Jan. 1, 1999. "That could...help strengthen it against the dollar," says David Gilmore, a partner with Foreign Exchange Analytics, a forecasting firm based in Essex, Conn. More important, the new currency will change the attitudes and behavior of European consumers, business folk, regulators, and policymakers. Trade between eurozone nations is expected to increase significantly, giving the region's slowing economy a much-needed boost. And the notes and coins could spur a wave of cross-border mergers and acquisitions that will help fuse the eurozone countries' national economies into a whole. "The physical euro will help knit the parts of Europe together," says Anton van Rossum, chief executive of Fortis, a Belgian-Dutch financial-services group. On the minus side, the changeover could lead to higher inflation as retailers use the opportunity to "round up" prices in the new currency. And it could provide a field day for counterfeiters, who will be able to take advantage of the confusion that will reign as consumers struggle with unfamiliar money. "It will make life easier for criminals," says Frank Spicka, head of the antiterrorism unit at Interpol, the international police agency. "They'll be able to commit crimes in one country and launder the money in another while living in a third." ELECTRONIC. The switch will also affect countries far beyond the eurozone's borders. Up to $50 billion of different eurozone currencies circulate outside the region. Montenegro and Kosovo are just two of the territories that use eurozone currencies as their official money. They'll have to make the switch, too. And exchange bureaus around the world will need supplies of the new currency by the end of the year. The arrival of the new euro notes and coins will mark the completion of European Monetary Union, the process set in motion by the Maastricht Treaty of 1993. EMU began in earnest on Jan. 1, 1999, when the electronic euro was launched and rates between it and the legacy currencies were irrevocably fixed. But the euro has remained an abstraction only used in corporate accounts, stock and bond markets, and European Union budgets. The switch to the real euro is hoped -- and expected -- to unify eurozone commerce in ways never before possible. There will be much greater transparency of prices, wages, taxes, and other costs in the various countries, which will force manufacturers and retailers to change their pricing policies. It's not widely known that the average cost of a car is 10% higher in Austria than in Italy. Because prices are denominated in schilling and lira respectively, the differential isn't always apparent to a consumer. That will change on Jan. 1. Consumers will only have to compare the price in plain euros. That could lead, for example, to a dramatic rise in the number of Austrians who cross the border to buy new autos -- and a dropping of prices in Austria. Economists say that increased transparency will feed through to increased efficiency, spurring trade and growth. It will also change the way many people think. Private investors will be increasingly tempted to invest in stocks from European countries other than their own. Financial regulators will find it harder to justify blocking cross-border acquisitions -- something they have done regularly to date in a bid to protect their domestic banks and insurers. "It will definitely give the economy a long-term boost," says Johannes Reich, chief equity strategist at Bank Metzler, the Frankfurt-based private bank. SHORTAGES. There could be some problems in the near term as the eurozone's 300 million inhabitants struggle with what is essentially a foreign currency. Long lines are expected in banks and stores as staff and customers fumble with the unfamiliar money. There are worries that not all the new notes and coins -- which are already being distributed from mints and safe storage facilities to banks and retailers -- will be in place, which could mean currency shortages. Many of the region's 3.2 million vending machines may not be converted on time. More worrying is that ATMs won't be. But such problems will be temporary and short-term, and well worth the hassle, given the amount of good the euro is expected to do.  Fairlamb covers European finance from Frankfurt Edited by Doug Harbrecht 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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