e-mail Paul Lewis on paul@deadline.demon.co.uk
Forget the year 2000. There is a much more momentous change a year earlier. Two months from now, on January 1, 1999, the euro arrives. From that day eleven members of the European Union will merge their money and their economies into one. Although Britain isn't joining - yet - we will be able to save, spend, and borrow in the new European single currency right from the start. Some people may even be paid in euros. Most British banks, many financial companies and even some shops will be as happy to deal in euros as they are in pounds. Some companies will do their accounts and trade their shares in euros. For individuals, the euro could mean cheaper loans and better returns on investments. You will even be able to pay your income tax in euros if you want. Whether we like it or not, the euro is coming.
HISTORIC
Economic and Monetary Union or EMU is possibly the biggest change ever in the way major countries run their economies. It is not just the money which is being merged, it is also the heart of the economies.
Never before have eleven sovereign states handed over control of key parts of their economy to an international institution. The European Central Bank will set one interest rate which will apply throughout the eleven countries. Its president, a dutchman called Wim Duisenberg, will become one of the most familiar (and mispronounced) names in international affairs. The national banks - and the national governments - will not play a part.
Never before have eleven countries voluntarily got rid of their national currencies and substituted a universal currency without a national base. Over the next few years all those familiar European currencies will go - the franc, mark, peseta, lire, escudo, guilder, schilling, and punt will vanish into history. Instead there will be the euro, each one probably worth around 70p and divided into 100 cents, though in France they may still call them centimes because 'cents' sounds the same as 'sans' meaning 'without' and that seems a bit negative!
Euroland - as the 11 countries are being called - will be vast. It will contain more people than the USA - 289 million against 267 million. And it will produce goods and services worth nearly £4 trillion (that's £4,000,000,000,000) each year. The USA produces about £4.4 trillion. When Britain and the other nations join - as they surely will - Euroland will overtake the USA to become the biggest single currency market in the world. Eventually, the euro may even eclipse the mighty dollar as the key international currency.
The United Kingdom will be surrounded by Euroland. Germany and Holland to the east, France and Spain to the south, Ireland to the west. Ulster will even have a land border with it.
THE CHANGE
From January 1 1999 the eleven countries will move to the euro as their official currency. There will be no notes and coins at first - that will happen three years later in 2002. So the familiar currencies will still circulate. But technically they will represent euros and the exchange rates between them and the euro will be fixed at the value they reached on December 31 1998. In Euroland shops will start pricing their goods in euros as well as the old currencies. Companies will start paying their staff in euros. People will open euro bank accounts and take out euro credit cards. Initially the rule will be 'No prohibition, no compulsion'. In other words companies and individuals will be able to use the euro or the old currencies. But that will only last for three years. On January 1 2002 the rule will will change to 'No exceptions'. Everything will be in euros.
Although Britain is not joining at the start, the same rule of 'No prohibition, no compulsion' will apply here. All our institutions are assuming we will eventually sign up and are preparing themselves for it. From next year shops will be able to price goods in euros. Those at ports, airports, and in tourist centres such as Oxford Street in London may do so very early on. As the use of the euro spreads so will what is being called 'price transparency'. Because a car, or a CD, or a television will be priced in the same currency throughout Europe it will be possible to compare prices without worrying about exchange rates or the cost of currency conversion. So prices for the same goods will tend to move to similar levels throughout Europe. That will particularly help us in Britain as goods here are often much more expensive than they are elsewhere in the European Union.
BANKS AND SAVINGS
From January most major banks will be offering current accounts in euros. That means that you can have euros paid in, write cheques in euros, and, once the notes and coins are issued, take out euros in cash. At no point will the money be converted into sterling. That could be useful for people who have a euro income and a euro expenditure. For example, if you have shares in European companies or a European savings account the money could be paid straight into your euro account. And if you have a home in France or Spain you could use that account to pay local bills with a cheque in euros. As long as you have income and expenditure in euros you avoid any charges for changing currency. You could also take out a credit card in euros. Mastercard, Visa, and American Express will all offer euro credit cards. That would be useful if you have euro income and travel extensively in Europe or have euro expenditure on a house or boat.
But there is one aspect of the euro that could present an opportunity for everyone with savings. The massive new affect Euroland economy - second only to the USA - is a prime area for investors to put their cash for a good return. At the moment many investors simply buy into funds that track the FTSE 100 index of shares in the biggest hundred companies in the UK. In future they may do better tracking the market in the biggest Euroland companies. Your financial adviser will be able to suggest if this is a good idea for you or not.
BORROWING
Although bank interest rates in Europe are much lower than they are in the UK that does not mean that it is cheaper to borrow money there. In Britain we have a very competitive mortgage market and it can cost more to borrow money to buy a home in Germany and France than it does here - even though the official rate of interest is nearly twice as high in Britain.
At least one bank, Abbey National, will be offering a euro-mortgage from January 1 - but it will charge British interest rates. Take up is expected to be very low and it will really only suit people who have an income in euros to support it. Otherwise there is a danger that the pound will weaken against the euro and your repayments will rise as you have to convert more pounds to euros to meet them. So the only people they will suit are those who live in the UK but are paid in euros. At the moment they will be relatively few. Some companies such as Ford, British Steel and Siemens will be using the euro for their accounts from the start and expecting their suppliers to bill them in euros. At the moment none of them is planning to pay its staff in euros. But it could come, especially for senior people who travel a lot. Abbey National has said it wants to develop the capability so that it is ready if demand picks up. And that is the attitude of many financial institutions. No-one knows how much demand there will be for euros. But they all want to make sure they are not taken by surprise. And for people in business, access to loans at European rates of interest could be attractive if they euro income to support the repayments.
WILL BRITAIN JOIN?
The problem with Britain joining EMU is making our economy work like those of the other eleven countries. At the moment they have much lower interest rates and lower inflation than we do, but higher unemployment. If we join our interest rates will have to fall - and in future would be se by the European Central Bank - and our inflation will have to be lower. Economists are divided on whether unemployment will rise.
The Government has said it believes it is right for Britain to join the single currency but only when it is in Britain's economic interest to do so. The Government has also said it will not join until after the next General Election - which must be held before June 2002 and could be earlier. It has also promised to consult the people in a referendum before we join. It is possible that the referendum will be combined with the next general election.
November 1998
EUROLAND
IN from 1 January 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.
OUT (at the moment): Denmark, Greece, Sweden, United Kingdom
e-mail Paul Lewis on paul@deadline.demon.co.uk