Well, the euro has only been around for five days, and already I’m bored with it. I suppose if the dollar were being introduced for the first time we would have been greeted with a similar flood of articles explaining what it would mean for tourists, currency traders, pets, booksellers, restaurateurs, athletes, business travelers, metalworkers, supermodels, et. al. But that doesn’t make the euro-flood any easier to stay afloat in. Of course, all of this is prelude to another addition to that flood. Sometimes, even when you’re bored you can still find something to say.
Although considerable attention has been paid to the euro’s impact on the macroeconomic environments of the European countries, not as much attention has been given to the effect the new currency will have on European capital markets. In the broadest sense, the euro will help reshape those markets, increasing the flow of investment capital into Europe while diminishing the importance of large banks in directing capital flows. In place of the old-school European model, which featured a large number of cross-holdings between large institutions and patient, long-term investors, the new model will be closer to the American one. Capital should become more fluid, profit pressures on companies should rise, and the penalties for underperformance–at least in terms of a company’s share price–will also increase.
The flip side of that is that the rewards for delivering consistent earnings will presumably also increase, and in this respect among the euro’s biggest beneficiaries will likely be those European companies that have made themselves into true global players. Nokia, DaimlerChrysler, Volkswagen, and Gucci: These are going to be the companies to which new and old capital will flock. That’s especially true because of a little-noticed consequence of the move to the euro, which is that European pension funds that previously had to invest a significant portion of their assets in their home markets are now going to be free to invest anywhere within the euro zone. That bodes ill for companies who have been able to rely on what were essentially captive shareholders. But it bodes very well for the big-name players, which outside investors are more likely to trust and which have already, in important respects, begun the transition to a new capital-market model.
The short-term pressures on companies will inevitably increase as a result of the euro. That should make them more efficient, but it also increases the risk of Al-Dunlap-style excesses, from which Europe has been on the whole thankfully free. In any case, the one unqualified good that will come out of the transformation of many currencies into one is that European corporations will be forced to become more transparent, reporting earnings more clearly and frequently and opening their books to outside investors. Companies like Daimler have already embraced this process, and as more companies see the benefits of doing so–or rather the costs of not doing so–Europe will come to resemble the U.S. more closely than it has before. That’s obviously not a blessing in all ways, but in terms of corporate disclosure, it’s pretty much an indubitably good thing.