Businessmen are often bewildered when faced with the European scene and find it difficult to form their own views about the rapid changes taking place in Europe. This is mainly because they do not have the essential facts and information needed to enable them to realise the full potential of their business. The changes taking place in Europe will have such a great impact on businesses that its importance should not be overlooked, nor should it be taken lightly.

The following provides some essential facts and data for those who are not conversant with the institutions of the European Community and who need answers to a range of questions related to Europe.

Q & A

So how and when was the EC created?

The second World War manifested the ever growing need to unify the people of Europe in a way that there would never again be a repeat of the two World Wars, the cause of which was blamed on the blind national patriotism.

European politicians like Winston Churchill and Ropert Schuman leaned towards a European Economic integration, as they believed that economicintegration between the European states would inevitably lead to political integration.

Hence the decision to set up the European Coal and Steel Community in 1951(ECSE) which concerned the pooling of production and consumption of coal and steel signed by the six European countries, Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. The success of ECSE led to thecreation of a European Defence Community and the Formation of the WesternEuropean Union (WEU) and finally the North Atlantic Treaty Organisation (NATO).

In 1957, the same six countries signed the Treaty of Rome, establishing the ECC (European Economic Community), otherwise known as the Common Market and the EURATOM Treaty, (European Atomic Energy Community) aimed to supervise the development for peaceful use of unclear and atomic energy. The UK did not join the original six countries of the ECC until 1973 along with Denmark and Ireland, followed by Greece in (1981) and then by Spain and Portugal in (1986). The reunion of East and West Germany was achieved in 1990 adding another state to the Community. The last to join the European Community of 15 members, were Austria, Finland and Sweden on 1st January 1995. The main aim of the Treaty of Rome was to achieve a single integrated market that would provide:

1. Free movement between Members States of goods, free of customs duties and quantitative restrictions.

2. Free movement of labour, services, capital.

The Treaty of Rome was further amended by the Single European Act (SEA) in 1986 and the Treaty on European Union, better known as the Maastricht Treaty in 1991. The SEA which entered into force in 1987, introduced environmental protection as the main aim of the Community as well as the strengthening of the scientific and technological base of European industry in order to promote international competitiveness. As for the Treaty on European Union or the Marastricht Treaty which came into force in November 1993, this Treaty bought in the area s of justice and home affairs, and security and defence, extended the powers of the European Parliament and set out provisions relating to Economic and Monetary Union (EMU)

What are the main institutions of the EC?

1. The Council of Ministers, which is made up of representatives of governments of the 15 Members States, based in Brussels.

2. The European Commission whose function it is to plan polices and promotes Community Legislation and so on.

3. The European Parliament which has supervisory powers, has the right to be on Commission proposals in many areas, giving its opinion and making amendments where necessary, and finally

4. The Court of Justice based in Luxembourg was set up under the Treaty of Rome carrying out judicial supervision of the treaties and Community Legislation.

Which are the current 15 Member States and their individual populations in millions?

Austria 7.9, Belgium 10, Denmark 5.2, Finland 5, France 57.2, Germany 81.2, Greece 10.2, Ireland 3.5, Italy 57.8, Luxembourg 0.39, The Nether. 15.1, Portugal 9.8, Spain 39.1, Sweden 8.8, UK 57.9.

What is the difference between the EC and the EU?

Some people may wonder why at times member states are referred to as the countries of the European Community (EC) and at other times they are referred to as the countries of the European Union (EU)? Basically when the Maastricht Treaty was signed, the term European Union (EU) replaced terms European Economic Community (EEC) and the Common Market. In actual fact, when Member States are discussing matters relating to trade, within the Treaty of Rome, the term EC should be used. On the other hand, when discussing matters relating to foreign and security policy or any other issues within the Union Treaty, then the term EU will be used.


Mojdeh Marashi

The Impact of the Single Currency.

On 1 January 1999, the single currency was launched called the Euro. This was part of the Economic and Monetary Union (EMU) aiming to create a single market. The Euro replaced each of the national currencies of the eleven European countries. These are Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal and Spain.

Although the Euro was launched this year, there will be no Euro notes and coins until 2002. Until then all cash transactions will be in the local currencies, such as German Deutschmarks or French Francs. However there will be denominations of the Euro. From 1999 to the end of 2001 purchases can only be made in Euro using debit and credit cards or travellers cheques, as there is no Euro cash. The UK has decided not to join the EMU at this stage. Sterling will remain the national currency in the UK and the Euro will be aforeign currency just like the German Mark and the French Franc.

What happens after 2002?

When Euro cash arrives after January 2002, there will be both Euro notes and coins in all those countries, which have joined the EMU. By the end of June 2002, it is planned that all national notes and coins in those countries will be withdrawn, allowing for the Euro to become the single currency.

What is the value of the Euro?

The value of one Euro is approximately 70p (December 2000).

What about the future of the UK?

As already stated above, the UK has not joined the first phase of the EMU, and although it agrees in principal with joining the EMU, any future decision is unlikely until the next parliament. The UK government has said that it would hold a referendum if it considers it in the national economic interest to join and that there would also be a vote in parliament.

Will UK shops accept the Euro from 2002?

Some shops have decided that irrespective of the UK joining the EMU, the will accept the Euro as Sterling once Euro notes and coins are introduced, so that customers may spend their Euro cash in those shops.

How will other businesses be affected?

Businesses in the eleven countries, which have joined the EMU and are within the Euro zone, will no longer be exposed to exchange rate risk. They arealso likely to benefit from cheaper transaction and financing costs.

However, foreign businesses exporting into the Euro zone may be at a distinct disadvantage against the competitors within the Euro zone, which will no longer be exposed to exchange risks.

The 71st BIBA business meeting was held as usual at the Institute of Directors in Pall Mall on the 13th October 1999, and the theme of the meeting was "Finance". The meeting was sponsored by Mohsen Sadoughi of Baboli Trading and chaired by Kamran Hashemi of Soloman Smith Barney, who spoke alongside Cyrus Ardalan and Mehdi Shalforoushan of Paribas and Bank of America respectively. Here, we will highlight the speeches of the latter two. Mr Ardalan spoke first on the creation of a single currency in Europe, and the effects of the Euro on global markets.

Single Currency and European Bank Consolidations
By Cyrus Ardalan, Paribas

"At the beginning of this year a single currency was created for the first time between a group of countries in Europe. This had been the subject of debate for many years, during which time a set of criteria were set. This criteria included key aspects, such as the amount of debt that a country would have in relation to its GDP, inflation rates, etc. Based on these criteria, 11 countries decided to create a single currency group at the beginning of this year. This currency is called the Euro, and in time it will completely substitute the currencies that are currently in circulation. It will be invested in the equity markets and the fixed income markets. This will be a revolution in Europe itself, in terms of the depths of the markets. One important effect that it will have will be on the stock markets in Europe. If you look at the stock markets in Europe, capitalisation of stock markets is around 60 or 70% GDP. In the US they are 170%. So the size of the stock markets in the US are multiples of the size in Europe. That is good news for stocks in Europe. The second reason that I believe European markets are going to grow very fast is because of consolidation. In the US there has been bracket consolidation in banking. Banks have been eating other banks up continuously. In Europe this has not happened. The reason is very simple. There has been very little synergy in an Italian bank merging with a Spanish bank or a French bank etc. Today, with the advent of the single currency, the consolidation rate is going to be very rapid. Initially it is going to be within countries. We have seen this in France, Spain and Germany. Once the consolidation occurs within countries, then we are going to see cross-border consolidation. This is going to create major changes in the financial markets as we see them throughout Europe. Furthermore, within Europe, banking has been very traditional in nature. When corporations have wanted money, they have gone to banks. In the US, corporations do not actually borrow that much money from banks, except on special occasions. Most of the money that they borrow comes from the capital markets. They issue bonds, security. In Europe that has not been the case. In fact, more than 50% of the funding for corporations in Europe comes from banks, compared with less than 20% in the US. But that will now change because banks are increasingly worried about returns on equity, profitability and so on. Banks will be less inclined to lend money cheaply to corporations, and corporations will increasingly find it attractive and cheaper to borrow through the financial markets. We will see a rapid growth in the regions of equities, securities, bonds, convertibles, etc. Focusing more specifically on the fixed income area, in Europe until the beginning of this year, there were 11 different currencies, 11 different capital markets, 11 different bond markets, 11 different equity markets, etc. As a result we had relatively inefficient and unsophisticated markets. For example, the Italian investors were only buying Italian bonds, as that was their designated currency, so they were not looking across the border to see what there was on offer. Over the last eight or nine months, the markets have gone through a rapid transformation. Investors are becoming far more sophisticated. They are looking at different types of products, which are likely to earn them higher returns. What we have seen in Europe is a complete change in the type of securities that are being issued in the market. 2 years ago, the bulk of securities issued in the market, particularly on the bond side were issued by the governments, or very well known institutions, AAA institutions such as General Motors and so on. Over the last year what we have seen is the dramatic growth of issuance of debt by small corporations, because people are now interested in buying these securities and it is a very attractive way for them to raise money. As a result, we have seen a tremendous broadening of the market in Europe, and it is increasingly looking like the US in its sophistication, the breadth and variety of different things that are available to investors."

Further to the main speech, there was a question and answer session at the end, during which some interesting points were raised. The following is an overview of what was concluded from the questions.

Q) "What effect is the Euro having on investment in the dollar"

A) "There has been a dramatic growth in the issuance of bonds in Europe since the introduction of the single currency. This has been in sharp contrast to the dollar, which is going down dramatically. This demonstrates how the Euro is having an adverse effect on the dollar, largely due to the number of people who used to invest in dollars because of uncertainty, but now see the Euro as a good investment."

Q) "Is it a good time to invest in Asian economies?"

A) "The Asian market is so large that it cannot be summed as a whole. Instead, to analyse it correctly, one has to look at different countries separately. The risk factor in Korea, for example, is very different to that in Indonesia. To me, Korea is not really an emerging market economy in many senses, although strictly speaking it is very volatile and has been risky in the past. Hong Kong is another example. Then you have countries such as Thailand and Malaysia which are classic cases of emerging economies. Ultimately, it is a question of risk return. I would not recommend heavy investment in these countries. It may be a better idea to invest gradually, because the chances of heavy loss are great."

Q) "Where do you expect the highest yield in the near future? US government bonds, European Government bonds, US corporate bonds or European corporate bonds?"

A) "If you look at the higher investment grade of the business, which is the DDD's and higher, this is generally where most of the issuance has been occurring. There, the market has been fairly comparable to the US. Europe has been better for certain corporations to invest in because they are better recognised, but the US domestic market has also been quite strong. For many European issuers it has been difficult to issue in the US due to the complicated procedures they need to follow there. Once you get to the high yield side of the market then it becomes much more difficult to draw any conclusions. The market is very thin, very name specific. At the beginning of the high yield market in Europe, most of the selling was done in the US. This suggests that the cost was higher in Europe, because obviously US investors found it very attractive to buy European names. Today, it is a mixed story, and you might get a European name that is very well known in Europe, which is at a much lower interest rate than a comparable one in the US. So for the lower end it is a much more mixed bag, but for the upper end, depending on the day, it is a much more efficient market."

Q) "With the single currency enforced in Europe, to what extent will the process of decision making by the European Union Commissioners be influenced by local politics?"

A) "Obviously there are those who are very cynical about the single European currency and feel that it is only a matter of time before the single European market blows up. I am less cynical for three reasons:

1) If you actually look at Europe for the last 8 years we have, in a way, had a single currency because the currencies within the core 11 countries have barely moved against each other. Now we have the Euro, so the past experiences suggest that there should be no major problems. I think that the major problems would arise if we had significant differences in productivity, technical development and so on. But we are talking about a market that is fairly integrated.

2) If you have a single currency market like the US, then labour mobility is high. For example if someone loses their job in New York, then they can easily relocate to Los Angeles if a job is available there. In Europe we are not going to have that because of language differences, but what we do have is capitall flow mobility. If labour does not move then capitall will, so people will build factories in countries where there is excess labour.

3) Finally, there is the issue of fiscal differences. Obviously if tax is at 75% in Germany and 20% in France, everybody will move to France to work. The answer is that some degree of fiscal difference will exist, but it will not matter. Why not? Well, if you look at the US, the difference in taxes between, for example, New York and Pennsylvania is around 10-15%. Moreover, as foolish as politicians tend to be, they usually have their self interests at heart. They see that by imposing huge differences in taxing systems they are forcing massive movements of the population across the borders, therefore they will not do it. We will ultimately have to have a more harmonised fiscal regime in Europe."

Q) "Why not go all the way and merge the euro with the dollar?"

A) "Ultimately, something like that may happen, but I think that today the differences between the US and Europe are very significant. Firstly there are economic differences between the countries, and secondly, in principle you could have a situation where the currencies become closely aligned. But the problem in having a single currency between Europe and the US is that you have very different systems and cultures, and you would be locking these countries in to having exactly the same economic policies. Therefore the cycles would have to be the same, everything would have to be the same, which is something that nobody is prepared to do. I believe that over time there will be debates over whether the Yen, the dollar, and the euro should trade within a certain range against each other, because some of the volatility we have seen in these currencies clearly cannot be ascribed to fundamental differences. So I think we will move to a regime with a greater degree of stability between them. But it would be inappropriate now to lock these currencies in together."