What euro dividend?

• Author: Macdonald, Craig
• Position: Part one

Where's the real savings from the European monetary union - and who can expect to get the lion's share?

Don't be misled. The European monetary union has been a movement led by European big business, not a popular movement led by politicians. No politician, American or European, would take on an agenda like the EMU and the stringent social reforms necessary for compliance without strong impetus. European business sees a single currency bringing a "euro dividend," or a tangible savings in business expense, much like the end of the Cold War was supposed to bring America a peace dividend from lowered defense spending.

But our research shows that this euro dividend, like the peace dividend, is more hype than fact. And any dividend that does exist will accrue more to European corporations than to American corporations. Indeed, we calculate that European companies will reap a much healthier return on their investment in euro compliance vis-a-vis American companies. That's why, to maximize their own investment return, American companies must use the EMU to first re-engineer their European financial strategy. Garnering the dividend requires viewing the monetary union as an opportunity for a change in financial management and operational strategy as opposed to simply a compliance issue. Improvement in European competitiveness will not be wholesale, but limited to companies with competent management teams, able to tap the opportunity the EMU presents.

The Direct Benefit - and Stealth Gains

There is really only one direct benefit of the EMU: reduced foreign-exchange transaction charges and reduced currency volatility (which translates into improved valuation). Companies are paying 5 to 10 basis points on European FX trades, depending on the currency and the transaction volume, all of which will be eliminated. Given that 40 percent of the average large European company's business is intra-European, compared to only 15 percent for the average American company, the reduction in FX cost and volatility is three times greater for European companies.

Beyond this one direct effect, there are several second-order effects that will bring tangible savings. First, the EMU allows the creation of an EUwide capital market that will lower price on corporate debt and improve liquidity and valuation for equity. The cost of financing in Europe is expected to decrease by 50 basis points during the transition period (1999-2002). This reduction in overall finance costs will...