Magazine

Commentary: One Currency--but 15 Economies


By David Fairlamb

With John Rossant in Paris, Kate Carlisle in Rome, and Christine Tierney in Frankfurt

Europeans will celebrate the birth of a new era as well as a new year when they crack open the Champagne on Jan. 1. As 2002 dawns, 12 European Union countries will introduce euro coins and notes. By the end of February, their national currencies will have been withdrawn, and 300 million people from the Canary Islands to the Finnish tundra will use the same money. Economic and monetary union--10 complex and controversial years in the making--will be officially complete.

Much has been made of the benefits that the physical euro will bring. With store prices all posted in the same currency, it will become harder to charge more for an appliance, say, in one country than in its neighbor. Euro notes and coins also should loosen the nationalist mentality that many executives and politicians cling to, spurring more cross-border trade and mergers.

So, a toast to those who slogged away all these years to make the euro a reality. But don't kick off your shoes just yet, Eurocrats. The hard part of integration is still unfinished: forging 15 national economies--including the three EU members yet to take up the euro--into a whole that can compete with the U.S.

In other words, the single currency now needs a single economy in which to operate. The lobbying has already started. With the mammoth euro project out of the way, executives say they plan to pressure national and European-level politicians to eliminate the overt and tacit barriers between countries that prevent the EU from being the single market it's supposed to be. "Regulation and supervision, the handling of cross-border payments, how governments award contracts--all need reforming," says Richard Needham, vice-chairman of Dyson Appliances Ltd., the British white-goods manufacturer.

Unifying the fragmented financial system would be a good beginning. Although there have been some cross-border mergers in Scandinavia and the Benelux countries, the banking systems of the biggest economies--Germany, France, Italy, and Spain--remain separate. When large banks in one country try to make acquisitions in another, national regulators, in flagrant breach of EU rules, quietly veto them. That's what happened when Spain's Banco Bilbao Vizcaya Argentaria tried to merge with UniCredito Italiano last year.

There are also institutional barriers holding back the development of a single market for money. Securities-market regulations are still not harmonized. With the notable exception of Euronext, the merged Belgian, French, and Dutch bourses, most stock markets are national affairs. And there's a multiplicity of settlement systems, so a German company buying or floating shares in Milan and London has to contend with a snarl of different rules and schedules. "All this adds to industry's costs and makes it less efficient," says Edzard Reuter, former chief executive of Germany's DaimlerChrysler.

Not that regulators and politicians deserve all the blame. Bankers, who have learned to profit from the inefficiencies of an imperfect union, often lobby vigorously in Brussels against harmonization measures when their short-term interests are at stake: They are in no hurry to see their local advantages disappear. That's why cross-border payments between customers and suppliers in the euro zone take longer and cost more--often 10 times more--than domestic transactions. That adds to the expenses of consumers and smaller companies that want to move beyond their national borders and find new markets. Internal Market Commissioner Frits Bolkestein has pressed banks to cut these charges. The European Parliament will soon debate a law that would prevent banks from discriminating between domestic and cross-border transfers, but the banking lobby is expected to kill it.

Then there are the petty differences in industrial standards and regulations from country to country. After years of trying, European nations have yet to agree on what shape an electrical plug should be and how many prongs it needs. Small wonder, then, that they still have trouble establishing a single market for electric power. France has steadfastly refused to open up its market, although the state-owned power behemoth Electricite de France is aggressively expanding wherever it can. Other countries retain "golden shares" in privatized utilities to keep foreigners from buying them. "It's a scandal," says a Spanish industrialist.

Business leaders say that variations in national accounting standards, tax regimes, and social security laws are also an impediment to a single market. "The fact that consumers pay such different taxes to purchase a car, in addition to value-added tax, is a major issue," says Louis Schweitzer, CEO of Renault, the French carmaker. "In some countries, like Germany and France, there's no additional tax beyond VAT. In other countries, [additional] taxes can range from 0% to 100%. This prevents us from having comparable sticker prices." That irritates consumers in high-tax areas, who increasingly shun local dealers for those in countries that offer a better deal.

Moving goods around Europe is one headache. Moving people around is just as complicated. Elie Vannier, group managing director of Paris eyewear retailer Grandvision, recently decided to send French employees to Italy to help with the company's expansion there. Sounds easy. But when French citizens are employed abroad, they need work permits and still have to pay into the French social security system to fund their retirement plans. In Grandvision's case, the result was lots of cross-border red tape. "These things get so complicated that you wonder if it's worth the hassle," says Vannier.

European Commission officials calculate that if they could sweep away such impediments to a single market, the euro-zone economy could grow by an additional 1% each year. Victories are so slow to come, however, that they feel more like biological evolution than political adjustments. It took 30 years of debate, for example, to pass an EU law letting companies operate throughout the zone as a single legal entity.

More often than not, efforts to knit national economies into one supranational whole fall victim to obstructionism. The results can be absurd. In 2001, German intransigence scuttled a proposal for a common law on merger and acquisition deals even though it had taken 12 years to bring the legislation to a vote in the European Parliament. That, laments Bolkestein, was a shining example of "economic nationalism."

On another front, the commission's Financial Services Action Plan, which was unveiled in 1999 and calls for 42 market-opening measures to be enacted by 2005, has made little headway. Two days before EU leaders convened in Laeken, Belgium, on Dec. 14-15, Commission President Romano Prodi lambasted national governments for slowing the creation of a real single market. "The delays will be very expensive for Europe," he warned.

At Laeken, the 15 EU governments did agree to take steps toward creating a European constitution and coming up with more efficient ways of reaching decisions. Businesses welcome that bit of progress, but they are skeptical. If it takes 30 years to allow the creation of a company with a European identity, imagine the effort it will take to write a European constitution. Given its record, it's astounding that Europe created a single currency in 10 years. The introduction of euro notes raises hopes for even bigger examples of harmonization. Who knows? By the time our children are old, there may be one type of plug that works in every electrical outlet in Europe. Fairlamb covers European finance from Frankfurt.


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