Increasingly, European businesses are asking U.S. companies to list their price sheets in euros, the single European currency, and to use the currency for all transactions. Fulfilling this request may give you a competitive edge. However, the recent instability of the euro could increase your risks.

Currency Stability Has Become an Issue

Introduced on January 1, 1999, with a value of approximately $1.17, the euro dropped to a low of about $0.84 the week beginning September 18th. During September, European officials repeatedly insisted that the euro was undervalued in proportion to European economic performance. As a result, calls for intervention were made from inside the euro area, referred to as Euroland, as well as from international organizations.

In response, on September 22nd, U.S., Canadian, Japanese, and the European central banks cooperated in a purchase of euros. The result was a success: the value of the euro increased. From September 25th through the 28th, the value of the euro rose about 4% against the U.S. dollar. It is estimated that together, the cooperating countries purchased $5 billion in euros.

Multiple Factors at Work

The recent decline of the euro is due to a combination of factors. Anticipation of slower European growth due to rising inflation and a sharp increase in oil prices (which at a 10-year high has hindered industrial production), has weakened the euro. And, rising fuel prices have led to protests in France and the United Kingdom that have disrupted commerce and tourism.

Higher U.S. economic growth, as compared with Europe, and a more flexible labor market have made the United States very attractive to European investors — who often prefer assets valued in the stronger U.S. dollar. As a result, Europeans have increased their investment in the U.S. — further contributing to the ailing euro.

However, the Europeans are not the only foreign investors seeking higher returns in the United States. Investors from around the world have been selling euros and other currencies to buy U.S. dollars — and investing much of it in the United States.

Impact on U.S. Businesses

The decline in value of the euro has many implications for U.S. businesses. For example, a weakened euro increases the price of U.S. exports to Europe. If a euro slide continues, the cost of U.S. goods and services will further rise — reducing European demand. On the other hand, European exports to the U.S. and elsewhere will become less expensive and more competitive compared with U.S. goods and services.

On the investment side, U.S. companies interested in purchasing European assets will get more for their money. However, U.S. firms already invested in Europe will generate smaller profits when converting their euros into dollars.

Denmark Votes “No” in Euro Referendum

Public support toward joining the euro has waned in response to recent devaluations. Denmark has not been exempt. In a nationwide referendum on September 28, 2000, Denmark voted 53% to 47% against becoming the 13th member of Euroland. Current participants include: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Greece will became the 12th member effective January 1, 2001.

Although Denmark’s rejection could send shockwaves through the European political establishment, further affecting confidence in the single currency, its small economy of 5 million people is unlikely to have a significant long-term impact on the value of the euro.

Euroland Will Continue to Expand

Including Greece, Euroland now comprises a market of approximately 305 million consumers. As the euro area expands (the U.K. and Sweden are the next countries predicted to join), this region’s influence may rival that of the United States.

Currently, the euro is used for non-cash transactions. However, beginning on January 1, 2002, euro coins and notes will become available. On this date, Euroland members will begin phasing out their national currencies — a process that should be completed by July 2002.

European Fundamentals Are Strong

Even if inflation rises and the EU economy slows, participating members are not likely to seek divergent strategies to remedy financial woes. And, a return to eurosclerosis, the period of poor economic growth that struck Europe just after the 1973 oil shock, is improbable.

According to the OECD’s Economic Outlook No. 67 released in June 2000, real GDP growth for the euro area is projected to increase 3.5% this year (up from 2.3% in 1999) and 3.3% in 2001.

Despite recent currency concerns, industrial confidence remains strong. And, if wages and employment continue to show moderate increases — as they have for the past several years — consumer confidence likely will remain high. Additionally, since the financial infrastructure is strong, recent currency fluctuations are likely to be temporary.

Although further privatization will be necessary to facilitate greater competition, European businesses are generally more competitive than they have been in the past. Plus, the European workforce is well educated and productive.

Euro Difficulties Anticipated

The conversion of several different currencies into one fluid system is a complicated process, bound to be met with some difficulties along the way. Fluctuations in the value of the euro should be expected during this period of transition. Thus, U.S. companies should anticipate several years of adjustment and prepare for the expansion of Euroland.

Next Step for U.S. Exporters, Importers and Investors

To successfully compete in the continually evolving European market, American companies must have the capacity to adopt the new currency and adjust accordingly. This, however, will involve different steps for different businesses.

At the very least, you might consider printing your price lists in euros, and adjusting your ledgers, receivables, and other financial systems to deal with the new currency. Expansion of the euro will further simplify doing business in Europe. However, dealing with any currency involves a level of risk — and the euro is no exception.

Need More Information?

To convert euros into dollars, click on CNN’s currency converter, (cnnfn.cnn.com/markets/currencies), the Universal Currency Converter (www.xe.net/ucc), or www.oanda.com.

For answers to business and legal questions, visit the European Central Bank (www.ecb.int), the International Chamber of Commerce (www.iccwbo.org), and the European Union’s website (www.europa.eu.int).

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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