Magazine

One Currency--but 15 Economies


Europeans will celebrate the birth of a new era 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, 300 million people from the Canary Islands to the Finnish tundra will use the same money. Economic and monetary union--10 controversial years in the making--will be officially complete.

The physical euro will bring many benefits, including greater price transparency from one country to another and more cross-border trade and mergers. But 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 single economy. With the mammoth currency project out of the way, executives say they plan to pressure national and European-level politicians to eliminate the overt and tacit barriers that still prevent the EU from being a true, single market. "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 financial system is a priority. When large banks in one country try to make acquisitions in another, national regulators, in flagrant breach of EU rules, quietly veto them. Securities market regulations still are not harmonized. With the notable exception of Euronext, the merged Belgian, French, and Dutch bourses, most stock markets are national affairs. A German company buying or floating shares in Milan and London, for example, encounters a snarl of rules. "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 often lobby vigorously in Brussels against harmonization when their local advantages are at stake. That's why cross-border payments in the euro zone take longer--and cost as much as 10 times more--than domestic transactions. 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.

There are also myriad differences in 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. Small wonder, then, that there's still no single market for electric power. France has resisted opening its market, while state-owned Electricite de France aggressively expands abroad. Governments retain "golden shares" in privatized utilities to keep foreigners from buying them.

Business leaders also chafe at the variations in accounting standards, tax regimes, and social security laws. "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. Consumers in high-tax areas increasingly shun local dealers for those in countries that offer a better deal.

Moving people around is no less complicated. Elie Vannier, group managing director of Paris eyewear retailer Grandvision, who recently sent French employees to Italy, says the red tape is "so complicated that you wonder if it's worth the hassle."

European Commission officials calculate that without such impediments, the euro-zone economy could grow by an additional 1% each year. Yet more often than not, efforts to knit together national economies fall victim to obstructionism. In 2001, German intransigence scuttled a proposal for a common law on mergers and acquisitions that took 12 years to bring to a vote in the European Parliament. The EC's Financial Services Action Plan, unveiled in 1999, has made little headway.

Given its record, it's astounding that Europe managed to create a single currency in just 10 years. That accomplishment, at least, raises hopes for more harmonization. Who knows? By the time today's children are old, there may be one plug that works in every electrical outlet in Europe. By David Fairlamb, with Christine Tierney in Frankfurt and bureau reports


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