America wakes up to EMU

A WILD rumour is spreading through the corridors of the New York stock exchange: "The euro is coming!" Wall Street is only now waking up the prospect of a single European currency, perhaps the most profound change to the international financial system since sterling started to lose its influence after the First World War.

"There is real excitement in Wall Street because this is an experiment never before been attempted in history," said Caesar Molinas, an economist at Merrill Lynch. "But this is mixed with a deep disbelief that EMU will fly."

In Europe, attention has focused on a much-hyped battle between the untested euro and the mighty dollar. On Wall Street, no one is predicting that the euro will displace the dollar as the standard against which other currencies are measured. At best, some suggest that if the euro is properly managed, it could establish itself as the undisputed number two currency. In American eyes, it is a big "if".

Hugo Paemen, EU ambassador to the US, has observed changes in the American view of monetary union. "When I arrived here two years ago, the attitude was: 'go away and make a single currency first, then come back to talk to us'. Gradually the Americans saw we were serious."

But a single currency still faces credibility problems. Mr Paemen notes: "The fight about who should be appointed the president of the European Central Bank is extremely bad for the faith that Americans have in our abilities."

Americans acknowledge that a more efficient European economy with sound monetary policy is in the interest of not only Europe but the US. Deputy Treasury Secretary, Lawrence Summers, has stressed: "If EMU works for Europe it will work for the United States.

The stakes are high. The total value of goods, services and investment income exchanged between the EU and the US amounted to $560bn in 1996. In addition, the two regions had a combined $721bn invested in each other's economies last year, A single European currency would make the EU a less expensive market for American companies to sell their products and services.

On Wall Street, there are serious doubts whether the EU can pull off such an ambitious scheme. Dealers point to rigid labour markets in Europe as well as high tax and regulatory burdens. There is concern that during the transition period to EMU financial markets could become volatile. Some fear that the single currency could cause an economic slowdown, damaging American companies and growth rates.

William McDonough, President of the Federal Reserve Bank of New York, takes a more optimistic view. He believes that monetary union will have a broadly positive impact on the US. "Once the euro comes into existence, the simple conversion of the EMU countries' outstanding securities into euros will contribute to the immediate creation of a major integrated market in euro-dominated securities," he said.

The US Securities Industry Association is preparing for the new opportunities provided by a deeper, more liquid securities market in the Europe.

Some Europeans dream of the day when the euro challenges the dollar as the world's leading reserve currency. Mr McDonough gently dismisses the idea: "While some decline in the reserve role of the dollar is certainly plausible over time, I believe that the risk of a dramatic shift in official dollar reserve holdings both in and outside Europe in the wake of EMU has been somewhat exaggerated."

American banks are likely to respond cautiously to the introduction of the euro. They will wait for the European Central Bank to establish a clear policy record before either establishing significant euro holdings or linking their currencies to the euro. Investors will want to see progress toward price stability before making a commitment.

Charles Vincent, vice-president of equity research at PNC Bank, admits that Wall Street has been slow to address the euro issue, even though most companies followed by brokers do have European operations.

"I can't see a euro-dollar battle," he says. "An exchange rate will be fixed, and that is it."

In the short term, the question of the euro's value against the greenback is much more urgent than whether it will eventually usurp the role of the dollar as the premier currency of global commerce. The answer will determine the ability of US companies to defend their markets, and will sway overseas investment strategies.

A weak euro against the dollar would give EU goods a competitive edge, reducing sales by US companies and increasing the current $17bn US trade deficit with the European Union. A strong euro would have the opposite effect.

Larry Summers has already issued warnings against Europe using a weak euro "as a competitive advantage".

US capital markets are built on the foundation of a common currency which has spanned 50 states from Alaska to Hawaii for well over a century. It could be decades before a euro zone stretching from Helsinki to Dublin can challenge the supremacy of the dollar. The birth of the euro has barely ruffled the feathers of the American eagle.