BRUSSELS-The temptation to write again about the new euro is too strong for me. It isn’t every day that a new currency appears, and this is not your usual currency: For one thing it’s not even available in cash yet.
And so it was that on a sunny but chilly morning on New Year’s Eve I found myself wandering down to one of the European headquarters buildings in Brussels with my children to stand on a big euro sign and let off balloons when the great moment arrived and all eleven participating countries had signed and sealed the treaty.
History in the making and great fun for the ministers who watched from the warmth of their enclosed balcony while a cold wind blew and scattered the balloons eastward (was that an omen, I wonder?).
The citizens of Europe now can see the euro price alongside their own currencies in supermarket check-outs, we can buy euro travellers’ cheques, and even make out ordinary checks in euros. But it will not be until Jan. 1, 2002, that we will have the euro coins jiggling in our pockets.
But we shall be able to see much more clearly the difference in prices, comparing a product bought in one country to the same product bought in another country, and this will certainly have an impact on consumer spending, particularly in some parts of Europe and for products which attract higher taxes.
So here are a few predictions for the impact of the euro on the European economy over the next years.
First, there should be an enormous opportunity for direct marketing and mail order to offer products from some countries across frontiers on the basis of price.
Second, some governments will find themselves under great pressure to reduce indirect taxation. But expect pressures from the opposite direction too. Some countries within the European Union have already started to push for “fair” realignment of taxes.
The French and Germans in December started demanding the harmonization of tax breaks and support offered to foreign companies to build factories or establish offices.
This would create particular problems for the UK and the Republic of Ireland, both of which have, for example, attracted call centers over recent years by offering generous benefits.
There has been discussion for many years about the need to harmonize value added tax (VAT) rates in the European Union into various closely defined bands, and this work is now being sped up: A proposal exists to do away with any zero rating.
Newspapers and periodicals, which are zero rated for VAT in a number of countries, are almost sure to lose that advantage.
Third, I believe we can expect pressure to make it difficult for European consumers to buy products at a distance from non-EU countries.
The euro is comparable to the US dollar (the official exchange on New Year’s Day was 1 euro = $1.17). This should make it easier for consumers to compare the price of a product found onEuropean and US Internet sites, for example.
Closer control at the external EU frontiers are already apparent. My prediction is that they will get tougher and will cause increasing disappointment and irritation for Internet users.
This is a hot topic at present, and we can expect a fierce debate in Europe, despite the promise of a moratorium on any new Internet taxes.
Finally, there are four EU countries outside the euro-Sweden, Denmark and the UK by choice; and Greece because it could not achieve the economic requirements to join the “Club”. What will happen to these countries’ currencies?
The financial markets are now dominated by three major currencies-the dollar, the euro, and the yen. If the UK lets its currency free-float, there is a serious risk that it could become a favorite target for speculators and “Ping-Pong” about widely.
Past experience of a European basket of currencies has shown that that is not an ideal solution either. The only sure solution is to peg the UK pound securely to the euro, but there will be a price to pay.
The UK will be in but will have little say within the system. That would be an intolerable solution for politicians in Westminster.
The British argue that joining the euro removes from the bank of England any power on interest rates, which in turn prevents a fiscal solution to future unemployment problems.
A secondary but perhaps more valid argument is that the British economic cycle has always been out of tune with European markets. Thus, as Britain’s economy cools other major European markets heat up and vice versa.
However, it is evident that the real reason the UK has held back has little to do with economic theory and much to do with politics, as Eddy Georges, Governor of the Bank of England, more or less admitted in an uncomfortable BBC interview on New Year’s Day.
The euro, with or without the British, is here to stay. it is undeniably a great leap forward, which was best described by one of my colleagues who said “we have had a common market for over 30 years, and a Single European Market since 1992, but the euro really means that we are all Europeans.”
Like the weather on New Year’s Eve at the launch of the euro, there are many rays of sunshine predicted for the new currency. But there could be some very chilly winds too. The next three years will be interesting times. n