A year after its launch the Euro has disappointed more people than it has pleased. It has fallen in value against major currencies the pound, the dollar, and the yen. There has been a distinct lack of interest in Euro investments and Euro mortgages and even in 11 countries which have signed up to it, few deals –only one in 50 on some counts – are done in the new European single currency. Ignorance about the Euro is also rife. Which country has the Euro for its currency? Limboland comes the reply.

When it was launched a year ago the Euro was expected to become one of the major currencies of the world. In many ways it has - more business was done in Eurobonds in 1999 than in dollar bonds. But it has not affected the life of people or businesses in the UK as was anticipated. Partly that is because it is still not certain THAT we will join never mind WHEN – despite Government support for the principle. But many companies which set up bank accounts and invoicing in Euro are feeling it was a waste of time and money. But in Europe it is little better. One reason is that the currency is still theoretical - the Euro notes and coins will not come into use even in Europe until January 2002. Until then everyone in the eleven countries in the Eurozone (see box) still pay in francs, marks, pesetas etc – even if the receipt does have the price in Euro as well. So the euro IS in limbo at the moment. But will its day come?

With interest rates in the Euro zone around half what they are in the UK many people thought that borrowing money to buy a house or flat would be cheaper from European banks. But it has not turned out to be so. Interest rates in the UK are now 5.75% compared with 3% in Europe. But that difference is not reflected in the cost of borrowing on the continent. Ian Darby is Managing Director of mortgage consultants John Charcol and he has not been surprised by the lack of demand for Euro loans.

"The margin charged by lenders is much higher in most of Europe than it is here – 2.5 to 2.75% - so even with the base rate at around 3% the deals you get are not much better than they are here. The UK has a seriously sophisticated mortgage industry. And you can get loans at 6.24% with no currency risk. So why go to Europe?"

But that may change if Britain joins. The one country where loans are very cheap is Ireland. Its cosy mortgage arrangements – reminiscent of those in the UK twenty years ago – were turned on their head last year when Bank of Scotland moved in and slashed the price of borrowing to buy a home. It is currently offering mortgages at 3.69%. Before it entered the market Irish financial institutions were charging more than 5%. Bank of Scotland only offers these rates to Irish residents for Irish property – not to people in the UK.

The danger with borrowing in a foreign currency is that the debt is owned in that currency and the repayments have to be made in it too. So people who earn in sterling (and despite the predictions of a year ago hardly anyone in the UK is paid in Euro) run the risk that if the pound falls in value their debt will rise.

In fact, over the first twelve months of the Euro the opposite has happened. The Euro began life worth 71.1p. A year later, as 1999 ended, it was worth 62.4p – a fall of 12.2pc. Someone who took out a euro mortgage in January 1999 to cover a £50,000 loan would have needed to borrow €70,323. But by the end of the year that debt would be worth less than £44,000. And of course the money invested in the flat would be worth a lot more – more than £56,500 as house prices rose 13% on average in the UK in 1999. So over the year the currency ‘risk’ has worked in favour of borrowers. But no-one could have predicted that for certain a year ago. With hindsight you can always win a horse race. So as the has fallen, does it mean it is a ‘weak’ currency? Alison Cottrell, chief international economist at US investment bank Paine Webber, says not.

"The Euro has become a reserve currency – it is widely held and too important to ignore with most of western Europe and tagged onto eastern Europe. Greece is applying in March, Sweden is holding a referendum in 2001/02 and could join with Denmark in 2003 or 4, some of the eastern countries could be in in the latter half of the decade. The Euro is a currency that is not strong but it is not a weak currency, it’s an important difference. And of course its low level has helped boost the economy of Eurozone countries as exports become easier."

Joining in that growing economy is also subject to the problem of the strong pound, and the ‘not strong’ Euro. Jeremy Batstone of NatWest Stockbrokers, who advised waiting and seeing a year ago, has been proved right.

"It’s been disappointing for Sterling based investors who have put money into Euroland investments. They have had reasonably good returns in local currency but they have been turned into poor returns after conversion to Sterling. But for the future things look better. European companies are embracing the idea of running themselves for the benefit of shareholders rather than the staff or the customers. And stockbrokers there are bringing down the cost of buying and selling European equities."

Of course, people who want to invest in European shares can do so more easily through brokers here. But there are problems. It is harder to get information about European companies – not only is the language different but the disclosure rules, the company structure, and the basic availability of facts are all different. Also many European countries issue what are called ‘bearer’shares. In other words the person who holds the certificate is legally the owner of the shares. That makes them riskier and it can be expensive to pay a company to look after your shares and waive its rights to ownership. Smaller investors who want some money in Europe would do better to go for one of the European unit trust funds which exist here.

Investco and Gartmore have both run successful European investment funds taking more than £100 million of investors’ money. But UK based European funds still fall as Sterling rises and the drop in the value of the Euro has undone much good performance. Even though the Paris stock market index rose 50% in 1999 and the Frankfurt index by 33%, Graham Hooper investment director of independent financial advisers Chase de Vere advises a cautious approach to Europe.

"If your portfolio is all in the UK then Europe is a good place to put some money. There is an inevitability that we will join at some point. But most investors are ignorant of currency movements and it is vital to pick the right fund. Most are geographical – that is Europe – but some allow investment in sectors within Europe such as telecoms. But it does mean two risks – stock markets and currency movements."

European investments can now be put into an ISA – the restrictions on investing outside the UK that applied to Peps do not affect them – and a pension fund or personal pension can invest in Europe or any other country. But although these funds have some tax advantages, they do not have any more protection from the currency risk. And some advisers say that if you want to invest abroad, spread the risk by putting some in the United States of America and the Far East as well as Europe. And there are managers who advise some higher risk money should go into strongly developing economies such as India or Turkey rather than into more familiar countries.

But there is no sign that European rules are beginning to affect pension laws. In any case, they are independent of joining the single currency. If any new rules do apply it will be because were in the EU rather than in EMU. For the time being, the Government seems quite able to confuse us all with its myriad pension alternatives without any help – or interference – from Europe!

A year ago most High Street banks were offering bank accounts in Euro for people who wanted them. Mainly aimed at better off customers, who had either significant income or expenditure in Euro, the accounts were part of the Euro-enthusiasm which gripped financial institutions in late 1998. But now the situation is different. Citibank, which promoted the accounts very heavily a year ago, was reluctant even to talk to Moneywise about them. A similar picture began to emerge at other banks. Finally, Barclays did tell us that out of a total of around 7.4 million currency account holders it had opened just "a couple of thousand" Euro current accounts. A spokesman stressed that was "not disappointing". These accounts are aimed at people who live in the UK and have an income in Euro, which is still a small group. People with income or expenditure in Euro – perhaps from a second home that is rented out for part of the year – may find a Euro current account useful. But the banks are not falling over themselves to offer them.

· 1 January 1999 - Eleven European countries fix the exchange rate of their currencies and link them together permanently. In future, their currency is the Euro and local money is just an expression of that.

o IN - Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain

o PRE-IN - failed to reach economic criteria: Greece, Sweden,

o OUT - by choice: Denmark, UK. UK will join when it is in the national economic interest AND the public vote to join in a referendum.

· 1 January 2002 - Euro notes and coins are first used in the Euro zone.

· 1 July 2002 - National currencies disappear - only the Euro is legal tender in the eleven countries.

· 2002/2003 – Greece, Denmark, and Sweden will probably join – leaving the UK the only EU member outside the Euro.

 

SHORTEST POSSIBLE TIMETABLE FOR UK ENTRY

· May 2001 General Election which Labour wins

· October 2001 Decision by Government that it is in Britain's economic interest to join

· February 2002 Referendum - public votes 'Yes'. Mint starts producing coins and notes

· April 2003 formally joins EMU - exchange rate with Sterling fixed irrevocably. Prices begin to be quoted in Euro and sterling on bills and receipts.

· April 2004 currency is introduced - coin shortage offset by buying Euro cent from other EU countries

· October 2004 Sterling goes

 

NB It is more likely that if the UK joins, it will happen at least one and probably two years after this.

 

 

In the next twelve months the relative values of the Euro and Sterling will probably be more stable. Rising interest rates here may put up the value of the pound initially, but later in the year rates may come down again. In Europe, rates are more stable but if they do change they will probably move in the same direction as in the UK and USA. As the inevitable changeover to the Euro comes closer, more and more business in the Eurozone will be done in the new currency. That process will accelerate in 2001. The economy of the Eurozone has narrowly avoided recession and is headed for strong growth – but there is still a risk of investing in Europe – Sterling may rise again. And for the same reason it would be a brave soul with income in Sterling who tried to save money by taking out a Euro mortgage. Better to re-mortgage on one of the excellent deals around in the UK. The general election in the UK and the conversion to Euro notes and coins in Europe will make 2001/2002 much more exciting for the Euro than 2000 is likely to be.

March 2000

e-mail Paul Lewis on paul@paullewis.co.uk