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SCMP Reporter

AT LAST, Le Weekend is upon us. On Friday, the 11 members of the European Union participating in the single currency will begin the three-day changeover.

 But why all the fuss? Surely the euro is just another currency?  Well, yes and no.

 To begin with, there is the question of scale. Not only will 11 currencies merge into one on Friday, the ghosts of those currencies will remain.

 Under the no compulsion, no prohibition principle, no one can be forced to use the new currency. Some companies will want to change straight away, others gradually over the three-year transition period.

 The fancy new systems installed to handle the changeover have all been tested, but never tried. The sudden surge in volumes with the hard launch is likely to see some problems.

 There are also some reconciliation issues arising from the calculations required to convert from legacy currencies to the euro.

 Forget these practical matters for a moment. None of these is insurmountable given a bit of application and a large dose of funding.

 Of greater importance, the introduction of the euro will have a dynamic impact that cannot be accurately forecast.

 The 11 countries that make up euroland contain 289 million people, compared with 267 million in the United States. They account for 23.2 per cent of world gross domestic product, or US$6.87 trillion a year, which is comparable to the 25.8 per cent of the US. When it comes to exports, euroland dwarfs the US, taking a 30.8 per cent share of the global total, compared with the 12.6 per cent of the US - although this includes intra-bloc trade.

  So euroland is big, by any yardstick. More significantly for global liquidity, its markets are under-represented. Market capitalisation of stocks in the euro-11 was about 16.5 per cent of the world total as at the end of August. In the US this figure was 48.2 per cent, despite the near-parity of their GDP.

 Market cap as a proportion of GDP was 48.5 per cent in the euro-11 and 118.1 per cent in the US.

 The coming of the euro should see a significant portfolio shift towards euroland exchanges, which will have far-reaching consequences for other markets and for flows of foreign currencies.

 Trade and debt will also see changes.

 The Asian Development Bank points out that Europe accounts for the lion's share of outstanding loans to Asia.

 The euroland 11 account for 35 per cent of loans, or $132.6 billion, with a further 12 per cent coming from the rest of Europe.

 This compares with only 10 per cent from North America.

 In contrast, the US dollar remains the foreign currency reserve of choice for most Asian countries.

 We can expect this to change - if only because the Europeans will require a quid pro quo for their continued exposure to Asia.

 Trade financing and settlement will also drive a shift towards the new currency.

 For companies, the playing field will shift in complex ways - so complex that no one has been able to make a sensible guess of how the dice will fall.

 In the final analysis, however, the future for the euro still hangs in the balance. While the political will remained strong in the run-up to the new currency, there have been important changes.

 For a start, the political climate in Europe has shifted, most significantly in France and Germany.

 While the new administrations remain committed to the euro, they are less enamoured of the economic orthodoxy that reigned at the time of its conception.

 The emphasis has changed: jobs and growth now top an agenda that was dominated for nearly two decades by the war on inflation.

 The jobless rate in the 11 countries joining the euro declined to 10.8 per cent in October from 10.9 per cent the previous month. Comparable figures for September showed unemployment at 4.5 per cent in the US and at 4.3 per cent in Japan. Clearly, centre-left parties will be looking anxiously at their grass-roots support and wondering what can be done now that they have surrendered their control over monetary expansionism.

 For the fledgling European Central Bank (ECB), this is likely to mean political pressure to keep rates low in a bid to stimulate growth.

 When the 11 euroland members made co-ordinated rate cuts on December 4 they went further than many had predicted - shaving an unexpected 30 basis points from Germany's benchmark rate to bring interest charges to 3 per cent in all but Italy.

 While Germany's laggard economy needed the spur of lower rates, this could lead to inflationary pressures in some countries.

 Having surrendered their monetary devices to the ECB, leaders of countries such as Ireland and Portugal must turn to fiscal devices to cool their economies.

 Which would no doubt come as a welcome development to Germany, which has launched a campaign to press for tax harmonisation - claiming that some countries compete unfairly for investment through low tax rates.

 So the groundwork has been laid for political bickering ahead, which may well test the will of governments to stand by their new currency. This will will be the more tested should regional disparities be magnified by unequal growth and unemployment.

 Whether the ECB has the mettle to ride out any political storms is much in doubt. Already the unseemly row over who should head the new bank has cast a pall over what should have been a year of crowning glory.

 The bank was supposed to have taken after the German model, free from political interference and charged with the blind pursuit of low inflation.

 The French, however, appear to have desired greater control over monetary policy, and insisted on installing their own man.

 The unseemly compromise that followed did little good to the reputation of the bank, the French nor the EU at large.

 The Dutch candidate, Wim Duisenberg - who had been the choice of 14 from the 15-member bloc, would become the first head; France's Jean-Claude Trichet would take the helm midway through his term.

 Such political horseplay augurs ill for the new currency.



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