Business Matters Understanding the euro, and its implications for personal finance
February 16, 2011
By Kevin FitzGerald
I’ve been reading and hearing a great deal about the new European currency, the euro, but I don’t understand how this might influence my investments or how I might benefit financially. Could you give me some pointers?
K.O., Oyster Bay
The euro took its first steps from concept to reality during the first day of trading in the currency on Jan. 4, 1999.
The euro is the currency of European economic and monetary union and includes eleven member countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
While the price of the euro itself fluctuates with other world currencies, the exchange rate between the EMU member nations and the euro is irrevocably fixed. For example (as reported in the Irish Echo last week), one euro equals 0.787564 Irish punts which is fixed.
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Individual EMU nations still continue to use their individual currencies (bills and coins) until Jan. 1, 2002 when the euro currency will be introduced.
The euro as a currency doesn’t exist yet. But beginning on Jan. 4 of this year, the security exchanges in all member countries will use the euro to settle their trades. In addition all interbank transactions, even those that are within the same country, will be completed in euros. Individuals, however, will be allowed to keep their bank accounts in either their national currency or in euros.
With national currencies still available, it appears that the potential impact of the euro will start with business transactions. One potentially large cost saving for business is in currency conversions. One European Commissions study estimates that European businesses now spend about $12.8 billion a year on currency conversions which equates to approximately 0.4 percent of the European Union’s gross domestic product. A number of the larger industrial companies are in the process of converting rapidly on the assumption that the foreign exchange cost savings will offset the expense of the conversion. Also, DamlerChrysler and Siemens plan to convert all their systems early in the year and are also pressing suppliers to bill them in euros.
Consumers should also benefit from the use of the euro. Within Euroland, consumer prices for the same goods can vary widely; the price of a Volkswagen Golf or a bottle of Chanel perfume can be 25 percent higher in Paris than Madrid. The euro strips away the price anomalies for goods that were previously hidden by currency differences. The euro, therefore, is helping unmask profit potential and forcing the overall price level down.
Some of the potential impacts of the euro, therefore, seem to initially focus on cost savings, and therefore, potentially higher profits. A common currency will also help businesses finance their needs. In the Jan. 18 edition of Business Week, it was reported that the euro has instantly created a $2 trillion government bond market which is 20 percent larger than that in the United States. In addition, the report went on to say that the euro would also, in time, expand the smaller stock markets of Europe to nearly the size of the U.S. market. This type of potential is part of the euro investment opportunity Although a number of individual European stocks do also trade in the U.S., for most investors, the best approach may be to select an appropriate mutual fund. One element to be aware of is that any fund that holds itself out as an exclusively "euro fund," might miss good opportunity in Britain, Switzerland and Sweden (BusinessWeek Nov. 9, ’98).
With all these changes, it may seem hard to keep track of how your investments are actually doing. Help should come through using the Wall Street Journal interactive edition which will provide a euro-conversion-calculation feature to help you pin down foreign exchange and stock price ratios (Wall Street Journal Dec. 28, ’98).
As exciting as the potential benefits of the euro might be, it is important to remember that there are additional risks inherent in international investing which include the foreign exchange factor. Remember that while the euro wipes out the exchange differences between say Irish punts and German marks, the euro still trades against the U.S. dollar as well as other world currencies. If you’re not sure if international investing is appropriate for you, seek the help of a trusted advisor.
This information contained herein has been obtained from sources believed to be reliable but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting and the lesser degree of accurate public information available.
Kevin FitzGerald is First Vice President Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1-800-654-6162, ext. 448.