Euro on top
The euro is number one on the world's bond markets
Europe's financial markets have made up their mind: the
new single currency, the euro, is a success. Just one
month old, it has firmly established itself and most of the
potential pitfalls have been avoided.
The euro's biggest achievement has been on the bond
market, used by governments, banks and companies to
raise money. During January a huge number of euro
bond issues were snapped up by the markets, pushing
dollar issues out of the number one spot.
These statistics show that
the euro is more than the
sum of its parts, says Dr
Werner Becker, Senior
Economist for European
Monetary Research at
Deutsche Bank Research.
In 1998 bond issues
denominated in currencies
that later joined the single
currency had around 35% of
the market. During the first
month of this year, 50% of all
bond issues were
denominated in euros.
Benevolent weakness
The success in the bond market is one large piece in the
mosaic showing a trouble-free euro start. Launching the
single currency has been "the biggest change to
international money markets in the past 30 years" and it
has "passed incredibly smoothly", says Paul Meggyesi,
senior currency economist at Deutsche Bank in London.
The most important factor
has been the euro's stability.
After a strong start and quick
gains against the dollar and
the pound, the new currency
has settled down in a narrow
trading range.
There had been fears of 'hot
money' rushing into the euro,
boosting its value. In reality,
though, the currency has
actually weakened slightly,
providing a boost for
exporters in the 11-country
eurozone.
Nic Parsons, chief currency strategist at Paribas
London, points to the strong growth of the US economy
and Dr Becker at Deutsche Bank agrees. It's not a euro
weakness, he says, but the dollar's strength.
Watching Frankfurt
Another reason for the euro's slide - down 3.5 cents
against the dollar and 1.5 pence against the pound - are
market expectations about monetary policy in the
eurozone.
The guardian of the euro, the European Central Bank
(ECB), is expected to lower interest rates further during
the next few months. Rates are already low, at just
3.0%, but flagging economic growth across Euroland
and historically low inflation could persuade the ECB to
cut even further.
Nonetheless, analysts
believe that the euro will soon
regain its strength. Graham
Bishop, adviser of investment
bank Salomon Smith Barney,
says many central banks will
soon begin to switch some of
their reserves from dollars to
euros. "I don't expect a wall
of money, but more a steady
build-up", he says and other
analysts agree.
Deutsche Bank economists
predict a euro rate of $1.22 in twelve months time.
Jeremy Hawkings, Bank of America's chief economist for
Europe, is even more bullish. He says the euro could
rise to $1.25 by the end of the year.
Market mover
On the financial markets, meanwhile, the euro has
become just another trading currency. The predictions
that its launch would cause computer crashes and that
millions of euros could go missing have not come true.
The markets are moving in euros now and investors are
acting accordingly.
Euro bonds are a case in point. They are traded on a
large 11-country market. That makes them attractive to
investors who savour the prospect that they are now
more likely to find buyers should they need to sell.
Stock markets are transformed too. Investors have
begun comparing share prices across the eurozone,
looking at companies not country by country but sector
by sector. Renault shares, for example, are priced not
only in comparison to Peugeot but Fiat and Volkswagen
as well.
Companies, meanwhile, are spreading their wings too.
During the first weeks of the single currency, Euroland
has seen a string of company mergers and takeovers. Dr
Becker of Deutsche Bank says the deals have two aims:
Companies try to make themselves fit for both monetary
union and economic globalisation.
Consumer 'non-event'
Europe's citizens, however,
have not displayed much
europhoria. The reason is
obvious. Under current plans,
euro bank notes and coins
will not be introduced before
January 2002, and the
opportunity to use cheques
and credit cards to pay in
euros has not been taken up
by many.
Michel-Edouard Leclerc,
co-chairman of France's
pace-setting Leclerc
supermarket chain, says that his company's 500 shops
registered only 7,500 euro payments during the first
three weeks of January.
Across Europe, shops and banks report the same. Only
a few euro enthusiasts have opted for the euro. Dr
Becker says: "For consumers the euro is a non-event."
Early euro?
Some politicians are worried about this. They fear that
the early enthusiasm for the euro could evaporate if
Euroland's citizens can't put the single currency in their
pockets soon.
But an early introduction of
the euro is unlikely. Central
bankers say it will take three
years to mint and print all the
euro cash needed for 291m
people.
And Europe's businesses
would not be able to cope
either, especially small and
medium-sized companies
who are concentrating all
their efforts to fight the
millennium bug. They cannot
afford to get ready for the
euro at the same time.
Euro politics
Sweden and Denmark, meanwhile, are rethinking their
opposition to the euro. Opinion polls taken since the
launch of the single currency suggest that a majority in
both countries is now in favour of joining monetary union.
However, both fans and skeptics of the euro warn that it
is far to early to predict the euro's future. Some analysts
worry that economic turmoil in Asia and the Americas
soon could dramatically change the economic
environment. Only then will the euro prove its true value.
news.bbc.co.uk
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