SPECIAL REPORT	JANUARY 19, 1998 VOL. 151 NO. 3
	Fasten Your Seat Belts As the EMU readies for takeoff, businesses and politicians are preparing for a rough ride By RICHARD HORNIK or the past four years, European monetary union has been just a dot on the horizon. Most people and a surprising number of businesses ignored it, thinking--when they thought of it at all--that it was a distant prospect which might never arrive. Even for those politicians and capitalists who did look to the future, the very vagueness of its outlines engendered a certain comfort level: they could invest it with any attributes they chose without much fear of contradiction. Economic and Monetary Union (EMU), and its offspring the euro, served as an ever accommodating vessel for the hopes of the new Europe. All of that changed in the final weeks of 1997. With the E-day for Economic and Monetary Union set for Jan. 1, 1999, procrastination and wishful thinking became luxuries no one could afford, certainly not the politicians and business executives who will have to mint the euro into a reality. The blue-chip north European members found so many creative ways to fudge the budget and monetary criteria for membership that they stopped trying to lock out the southern tier "Club Med" countries by setting unattainable goals. Only Greece is unlikely to qualify, so visions of a cozy northern European club have vanished. Political leaders must now deal with the harsh political and economic realities that stand between the theory and practice of monetary union. And for the Continent's business leaders, the estimated penalty for poor preparation suddenly surpassed the estimated $50 billion it will cost to change everything from computer systems to price tags--not to mention the countless administrative headaches involved in an upheaval of this magnitude. The political wrangling that surfaced in November between France, Germany and Holland over who will serve as the first Chairman of the European Central Bank has only served to obscure the more pressing challenges facing EMU's charter members. Although the criteria for joining seemed stiff just a year ago--particularly the requirement that budget deficits not exceed 3% of GDP--it is now increasingly clear that the economies of EMU's first 11 members remain far too varied for comfort if they are to have a unified monetary policy while retaining the flexibility to deal with sudden or persistent bouts of high unemployment. According to a report last month from the O.E.C.D., EMU members should bring their average budget deficits down to less than 2% of GDP and maintain austerity policies "for some years." If they don't--or won't--control expenditures while their economies are growing, they will not be able to use government spending to pump up employment in the next downturn. Since governments will not have monetary or budgetary tools, the only way left to create jobs will be for unions and workers to accept pay cuts and changes in work rules in areas like overtime hours. But, says Thomas Mayer, senior economist at Goldman Sachs in Frankfurt, "At present there are no signs that the politicians, especially in the larger continental European countries, understand the need for substantially greater wage flexibility in EMU." In addition, a host of crucial policy issues remain unresolved, ranging from the purely political--how, for example, will the EMU be represented at the annual summits of the world's seven leading economic powers--to devilish details like narrowing the differences between tax rates and in national health, safety and environmental standards. Such political and economic uncertainty does not bode well for Europe's business environment in 1998. Still, the only surefire losers a year from now will be traders of European currencies and the speculators who have made millions out of currency instability in Europe. Foreign exchange traders have already begun to move on. Says Paul Thrush, global head of foreign exchange at Barclays Capital: "The amount of inter-European trading has been dramatically reduced over the past two to three years, and it is the emerging market currencies where we see the highest volumes in the future." The EMU winners will be financial services firms and all companies that do the bulk of their business in the E.U. Banks and insurance companies, says French economist Albert Bressand, are already preparing to use the euro, especially in accounting transactions and movements of money: "It's the currency of the future, so businesses that tend to deal with money in more theoretical terms--on paper--have the greatest interest in being familiar and capable of dealing with the euro when it's the only currency around." For European transnational giants like Siemens and Unilever the cost of shifting to the euro will be great, but the potential for savings is even bigger. So most large firms are all for it, and they are spending lavishly on staff training and computer reprogramming to get ready for it. Says Unilever chairman and CEO Morris Tabaksblat: "The stability of the euro zone, the size of the capital market and the likely growth of the euro as a global reserve currency will all help to reduce the costs of capital for European businesses. Perhaps most importantly of all, the single currency will help to complete and lock in place the benefits of Europe's single market of 370 million consumers--the bedrock of Europe's future competitiveness." The cost-benefit calculation is murkier for small- to medium-sized firms like GyroVend, which has plastic-card "cashless payment" and coin-vending machines in more than 700 locations in Germany. It's a lean operation with just 20 full-time employees supervising an army of subcontractors from its Hanover headquarters. For GyroVend, currency conversion offers opportunities for profits, particularly during the period from Jan. 1, 1999 to July 1, 2002 when national currencies and the euro will exist side by side, with converters raking off a percentage every time a customer swipes a card through a machine. But like many firms in Europe, GyroVend may be late getting to the treasure trove: three of its key German suppliers of currency reading components have not taken the euro deadlines seriously and will not be ready in time. One thing is certain for all European companies: exchange rates will no longer camouflage often sizable price differences between countries and currencies. Customers will be able to make immediate price comparisons on cars, computers or light bulbs in any country of the E.U. Says Bressand, "The euro will mean price transparency across the board and across borders." The conversion of local currency prices into euros will create its own set of challenges, particularly for retailers, who like prices that end in 9. A pair of shoes in Frankfurt priced at 99DM might convert to 192 euros. Rounding the price down to 189 euros cuts the shopowners' profit margins, but rounding up will bring cries of gouging. One study in Spain estimated that euro conversion could add up to one and a half percentage points to the rate of inflation. As 1998 begins, the two extremes of the public debate on monetary union coexist uneasily. On one side of the euro are the skeptics--or catastrophists--who believe that imposing a one-size-fits-all monetary policy is a recipe for disaster. They warn of rising unemployment, inflation and dangerous political battles among the member states. On the flip side, optimists believe a single currency will shine such a bright light on the hidden corners of the European economy that monopoly, inefficiency and price-fixing will become untenable. Result: structural economic reforms which might have taken decades will be accelerated. A more realistic middle view is that economies are more resilient than the pessimists think, but not as responsive as the optimists hope. By 2004--or 2009--the single currency will have wrung many inefficiencies out of Europe's sclerotic markets. The problems will come in the intervening years, when public opinion will have to get used to the idea of EMU. Polls show, at best, modest levels of popular support. But the surveys' troubling side is that the people who know the most about EMU are the ones who like it the least. Says Richard Brucciani, chairman of Pal International, a British maker of clothing for the food industry, specializing in chef's hats, "The single currency is an experiment driven by politicians who don't have any knowledge of business." Even EMU-philes like Unilever's Tabaksblat are quick to point out that without basic reforms--primarily of laws regulating wages, working hours and social benefits--monetary union will only make today's problems worse: "Unless these issues are addressed with urgency, EMU and the enlargement of the European Union will see a continuation of unacceptably high social costs, thereby threatening the European ideal itself." Political leaders who thought that blur on the horizon was a starship which would transport Europe's economy effortlessly into the 21st century will find out in 1998 that Economic and Monetary Union is more like an oncoming train. And business executives who thought it would never come at all will discover that--for better or worse--the euro will be arriving right on time. --Reported by Jordan Bonfante/Bonn, Bruce Crumley/Paris and Helen Gibson/London
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