It is easy, in this eurosceptic isle, to imagine that the single currency has been an abject failure...
It is easy, in this eurosceptic isle, to imagine that the single currency has been an abject failure. The main reasons given for this tend to revolve around the 14% depreciation of the euro against the dollar during 1999, the sluggish growth of the major economies in the eurozone, and the sharp differentials in the growth between some of the economies.
In fact, the weakness of the euro, while not deliberate, has been the right policy for the sluggish growth environment at the beginning of the year. As it weakened, European exports began to surge. In particular, Germany and Italy, which had the weakest economies going into 1999, benefited most.
Was the euro responsible for the slow growth in the eurozone early in 1999? In part, reduced government spending to meet the Maastricht criteria slowed European economies but the sharp collapse in exports to Asia in the summer of 1998 was probably more important. Certainly having a one size fits all monetary policy has exacerbated growth differentials between the regions in Europe. However, this is not a weakness of the euro: the differentials in growth rates between the south east of England and the north are rarely blamed on sterling.
In fact, the euro has been a spectacular success in creating a single bond market. Corporate bonds issued in euros rose four-fold last year (compared to the levels issued in legacy currencies in 1998). Why is this an important sign of success? Because it seems to be emulating the vibrant corporate bond market that sprung up in the US in the 1980s.
Early in 1999, Italy's telecoms group Olivetti launched a hostile bid for Telecom Italia (three times its size). The funding was through the newly formed, highly liquid euro corporate bond market. This opened the floodgates, playing an important part in the unprecedented $1.2 trillion of M&A activity in Europe in 1999.
The real significance of this is that the euro is creating new ways of funding that will allow whole industries to be restructured. Thus, the euro has accelerated the pace of European restructuring, in the face of deregulation, globalisation and new technologies.
So far, many of the largest mergers since the introduction of the euro have been intra-national. The next step is cross border restructuring, along industry lines. The European leveraged buy-out industry is growing rapidly and this would provide yet another source of funding for management teams that are looking for under-managed and undervalued assets. This would mean large swathes of corporate Europe that operate in mature industries, generate lots of cashflow and have not historically been managed aggressively, will suddenly find themselves under pressure. For investors in Europe this is good news as companies become more profitable.
Raj Shant is director at Credit Suisse European Equities
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