The euro, of course, has been tumbling since its inception. No matter how hard the Europeans have worked to bring their growth rate up–it will be around 3 percent this year–they just can’t compete with the returns that 6 percent growth in the United States offers to people holding dollar-based investments. Political leaders are increasingly dismayed. Still, EU president Romano Prodi says that, after waiting “40 or 50 years to have a single currency… we will give it time to strengthen and find its rightful place.”
He has a point. As the stock-exchange merger shows, far-reaching financial transformations take time. When Werner Seifert, a Swiss management consultant, took charge of the Deutsche Borse in 1993, trading lasted only three hours a day. First he pummeled it into a modern, high-tech operation by investing in systems and absorbing smaller German exhanges. Then, with big investors demanding to trade in European stocks as easily as in American ones, he negotiated with counterparts across Europe. Power struggles thwarted a planned merger with London in 1998, and Paris stole some thunder by joining with the Amsterdam and Brussels exchanges in March. But Seifert persisted. Now, as designated chairman of the new exchange–dubbed iX, for International Exchange– he is walking proof that Europe can change. The merger, says Ulrich Schroder, senior economist with Deutsche Bank, “shows that Europe is alive and well, and that restructuring is building up steam.”
Still, the iX locomotive won’t be ready to roll for some time; there are still a number of details to be worked out. Headquarters will be in London, where the blue chips will trade, yet Frankfurt’s more efficient trading system will be adopted. Thanks to its wildly successful Neuer Markt, Frankfurt will also host trading in high-tech growth stocks, and will link up with America’s Nasdaq. The merger will give Europe a core market comprising 53 percent of equity trading, and already Madrid and Milan are interested in joining up. Initially trades will take place in both the pound and the euro, but eventually even British companies may trade in euros. Never mind that Britain hasn’t joined the new currency, or even said whether it will.
Greece, on the other hand, is about to join the euro–and the contrast with economically vibrant Britain is telling. For while the European Commission easily approved Greece’s application last week, the European Central Bank did so reluctantly, with a warning about long-term inflation control in the only EU member rejected at the currency’s launch. That news helped batter the euro further, even though Greece will make up only about 2 percent of the Euroland economy. Analysts scouring old dollar/mark charts now see the euro falling to 85 cents.
In fact, investors have been burned so often by the euro that they’ll demand some pretty clear evidence of a turnaround before they’ll jump back in. What will eventually drive the euro up, most analysts still insist, is an acceleration of the very trends it set in motion. European M&A outpaced that of the United States in 1999, for example. Germany is rewriting its stifling corporate tax code. “Structural reform will attract the real investors,” says Thomas Mayer, senior economist for Goldman Sachs in Frankfurt.
Now that nearly everyone is gloomy on the euro, is the bottom in sight? If the Federal Reserve hikes rates enough so that the United States really does start to slow down, the euro could even be up to $1.05 by year-end, says Paribas strategist Sonja Hellemann. But it won’t last unless Europe is serious about tackling some of its most rigid roadblocks to competition, such as an inflexible labor market. “A strong euro,” says Goldman’s Mayer, “requires patience and hard work”–the same qualities needed in the Frankfurt-London deal. Only then will the signals come in loud and clear.
