Here Comes the Euro: Weary Investors Look to Europe, Where a Brand-New Currency May Bolster Growth
Quinn, Jane Bryant, Newsweek
Starting jan. 1, europe will launch a daring financial experiment, with broad implications for U.S. investors and businesses. Eleven countries--Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain--will get a common currency. (Britain sidelined itself, for now.)
The new legal tender is called the euro. Initially, it will be used only by financial institutions and large companies, for transactions with each other. But in 2002, citizens will have to give up their francs, lire, Deutsche marks and pesetas in favor of euro bills and coins. Prices will be quoted in euros, no matter which of the countries you're in.
New Euroland: Within this new Euroland--an economy roughly the size of the United States'--huge changes are likely to occur. Corporations will be able to move from expensive countries to cheaper ones, without worrying about currency exchange rates. Many prices should fall, as consumers--abetted by mail-order firms--comparison-shop the Continent. Small banks and businesses will find it easier to combine into larger, more efficient units, across country lines. Factories will consolidate. Broader capital markets will encourage new entrepreneurial firms.
On the downside, corporate restructuring will displace large numbers of workers and bury some traditional companies. That's going to be resisted in a region that values safety nets and where unemployment is already running high. Euroland regulates its economies heavily. It objects to harsh capitalism, American style--even though looser rules would grow better businesses and eventually create more jobs.
Corporations are already merging, downsizing and spinning off unprofitable divisions. What we don't know is how long true restructuring will take or how far it will be allowed to go. For the euro to work, the countries in this new European Monetary Union (EMU) have to follow a common economic policy. But what happens if times turn bad and some governments disagree with EMU's course? The Continent would have an expensive mess on its hands if the common currency collapsed.
For now, however, Europe's investment story seems strong--buoyed by the opportunities the euro presents. Before July's global stock-market break, European-region mutual funds were up a blazing 35 percent, compared with 23 percent for Standard & Poor's 500-stock index. Toward the end of last week, they were still ahead 5.2 percent for the year, as against 4.9 percent for the S&P. Looking at Euroland alone, the EMU stock-market index has posted a gain of 15.6 percent, according to Morgan Stanley Capital International.
Stock prices may advance in Europe despite the slowdown in global economic growth. That's because profits can rise in companies that restructure, even if their sales don't. "You could have 10 years of earnings growth, primarily due to cost-cutting," says Diego Espinosa, who runs the Kemper Global Blue Chip Fund--just as we had in the mid-1980s and early 1990s in the United States. …