Following on from our series of articles about the Euro’s perspectives as seen by leading business sectors of the Community, this October issue offers a « market-eye view » of the impact of the new currency as perceived by key financial players.
The trend towards globalization and integration already well under way in financial markets may very probably culminate in « virtual trade ». The Euro will not bring about any immediate major changes here but act rather as a catalyst for development pushing vigorously towards a powerful integrated pan-European financial market. To do this it requires the 32 Stock Exchanges and the 23 Derivatives Markets of the European Community to establish solid co-operation structures.
Ideal conditions are necessary to introduce a free-flowing market for the Euro, and wherever fragmentation in the member states exist such as conventions, standards and regulations currently in force, measures must be taken to lift them. Because public authorities and the markets themselves understand the importance of this matter, a consultative group was formed, under the aegis of the European Commission. Chaired by Mr Alberto Giovannini, the group set out identifying the technical problems associated with the introduction of the Euro and suggests ways of solving them. Its findings are to be found in a report published in July. The group proposes a common set of regulations applicable throughout in countries switching over to the new currency.
We know from market observation that the impact of the Euro will vary widely from sector to sector.
As individual currencies are replaced by one the foreign exchange sector stands to lose close to half of its scope. However off-set opportunities exist for operators acting in international markets as the reach and liquidity of financial activity in the change over zone are likely to offer much greater possibilities than do individual currencies.
Fixed income markets are ready to convert to the Euro at once on January 1 1999. Government bonds will be issued in Euro from January 4th and a greater part of this public debt issued in the individual currencies will be redenominated in Euro shortly afterwards. As for the international market, some bond issuers, amongst them Austrian and Spanish governments, have already launched linked issues in selected specific currencies of the future Euro zone to enable them to be redenominated in Euro as soon as the time comes. Agreement to establish EURIBOR, the Euro 3-month index interest rates was reached at the end of July. This index will replace national currency B.OR.s and will guarantee contract continuity. Markets especially asset managers rely on such benchmarks to be able to evaluate currencies in which they trade.
Inter market alliances occur in derivatives markets, and in some cases, beyond the Euro zone with « out out » countries. Meanwhile new Euro denominated contracts are being designed for launch as soon as the list of Euro « in » countries is announced. This kind of activity, now well under way in most derivatives markets, points to where -- on or before January 1 1999 -- the sharpest edge of competitive forces unleashed by the introduction of the Euro are already being felt.
National equity markets will be the least affected, protected as they are in each country by a banking network and the existing preference for domestic transactions. Though naturally, here too, the tendency is to a wider European domestic playing field. Large corporate entities functioning in a variety of countries and quoted in as many currencies will seek to reduce expenses and rationalise systems. Spurred on by such goings on anyone in the banking sector seeking to develop his activity beyond domestic borders will be faced with no choice but to search for new opportunities in neighbour states.