Sean Park freely concedes that he had a vested interest when he was enthusiastically talking up the prospects for the single European currency in the late 1990s. As head of European syndicate at Paribas in London, which had probably done more than any other bank to champion the European Currency Unit, or Ecu, market in the 1980s, he would have more to gain than most of his competitors from the successful launch of the new currency. As Park recalls, in the weakest days of the Ecu market it was supported on a consistent basis by no more than about three banks, with Swiss Bank DominicCorporation and Kredietbank the only players to share the enthusiasm of Paribas.
Ten years later, the extent of the euros success remains a surprise even to Park, who moved to Dresdner Kleinwort Benson in 2000, which he left in 2006 to pursue interests outside investment banking. "I would hope that even the most churlish cynic 10 years ago would have to accept, at least begrudgingly, that most of the impact of the euro has been positive," he says.
The euros positive effect can be measured at a number of levels. At a macroeconomic level, the uncertain start of its performance versus the dollar has generally been interpreted as reflecting the strength of the dollar in 1999 and 2000, rather than any inherent weakness in the new single currency. Its performance since then has raised concerns not about its weakness but its strength. In the meantime, the euros enhanced credibility has been reflected in its growing prominence as a reserve currency. Between 1999 and 2007, while the dollars share in global foreign exchange reserves fell from 71% to 63.9%, the share of euro denominated FX reserves has climbed from 17.9% to 26.5%.
At another level, the success of monetary union can be gauged from its effect on investment into and within the eurozone. According to the European Central Bank, empirical studies on the effect of the single currency on investment flows have concluded that "the positive average effect of the euro on aggregate FDI flows within the euro area is about 15%". Its impact on FDI flows from outside the euro area, meanwhile, is around 7%.
New currency, new investors
The advent of the single European currency has also had a highly beneficial effect on the capital market. Very soon after the euros official launch in January 1999, it had become clear that the new currencys sum was worth much more than its legacy parts. By April 1999, the European Commission was acknowledging its success in the first of a new series of monthly and quarterly notes on the evolution of the euro denominated market. "After its excellent start," this noted, "the euro continues to consolidate its role in the international capital markets and is establishing itself as a close competitor to the US dollar."
Today, bankers say that the euro has continued to strengthen its credentials as a competitor to the dollar in terms of the size, volume and diversity of the deals it is able to absorb. "The euro has significantly closed the gap on the dollar market," says John Winter, head of European investment banking and debt capital markets at Barclays Capital in London, whose first job in banking in London was on the syndicate desk at Merrill Lynch, which he joined in 1985. "I recall the time early in 1986 when 17 bond issues were priced in the US market in one day, which was a level of activity that seemed unlikely ever to be reached again in the US, let alone in Europe," he says. "Such dealflow eventually became the norm in the US, while over the past 10 years such high levels of new issue have become fairly commonplace in Europe as well."
Rising liquidity in the new currency twinned with the elimination of currency risk was especially important in helping borrowers to cultivate an entirely new investor base. "In the days of the lira it would have been almost unthinkable for us to have sold Italian debt to central banks," recalls Domenico Nardelli, who until 2005 was head of international funding and liability management at the Italian Treasury. "Public sector or semi-public sector investors perceived the devaluation risk in the lira as too high."
For other borrowers with less debt to manage, quantifying the benefits of the new currency is perhaps less straightforward than it was for Italy. Federico Ferrer, now an advisor to the Spanish Treasury, was deputy director general of foreign finance at the Tesoro from 1991 to 1998. He points out that the early days of the euro coincided with lower rates, the expansion of the fixed income market and important changes to syndicate practices. Although some of that expansion was driven by the euro itself, he says that as the currencys launch also coincided with lower rates in the US and Japan, the improved climate in the euro capital market could not be entirely ascribed to the arrival of the single currency.
If the euro has revolutionised the cost and efficiency of funding programmes for some borrowers, it has also transformed the business models of investment banks and prized open a wide range of new opportunities for the leading intermediaries.
None had stood to gain more in the run-up to monetary union than French bank Paribas. It had stood by the Ecu market through thick and thin, but as one banker recalls, by the late 1990s the market was "on the wane" as competition in the new euro market intensified. "On its own, Paribas did not have a strong client base because its balance sheet was so weak," says one banker. "That is why its merger in May 2000 with Banque Nationale de Paris was so important in supporting its growth after the launch of the single currency."
Non-Europeans profit too
While Paribas had thrown its hat into the Ecu/euro ring early in the process of monetary union, others made decisive bets on the prospects for the new currency towards the end of the 1990s, with many of the euros most enthusiastic supporters coming from outside the eurozone. Foremost among those was Barclays Capital, still very much a sterling house when it rebranded itself following the dismemberment of BZW in 1998, but by now becoming a prominent player across all asset classes in the European debt capital market.
"Although the UK is outside the eurozone, the single currency has been very beneficial for London as a financial centre and vice versa," says Aldo Romani, deputy head of euro funding at the European Investment Bank in Luxembourg. "Barclays Capital, for example, has played a key role in a number of our Earn transactions, especially at the very long end of the maturity curve with our 2037 issue."
More broadly, Romani says that the single European currency and consolidation in the banking sector in Europe has created opportunities for a larger number of banks, with new players emerging as an increasingly important force in the eurozones bond market. "Since 2001, weve mandated 21 or 22 different banks to lead bonds in our Earns programme, which is much more than is typical in the US dollar market," says Romani.
The arrival of the euro also played into the hands of the US banks.
Many had channelled resources into expanding their footprint across Europe in the 1980s and 1990s, and the leading US players were eager to leverage their credit skills and their geographical neutrality within the unified market. "Houses such as ours, which were traditionally able to combine good equity coverage with a strong M&A franchise and a broad trading platform were clear beneficiaries of the introduction of the euro," says Dominique Jooris, managing director, financial institutions at Goldman Sachs in London. "We were able to ramp up our operations in Europe very quickly to straddle borders and to link issuers and investors in different jurisdictions."
Quickly, banks like Goldman Sachs, Morgan Stanley and several others were able to establish their credentials as good European citizens, scooping a number of showcase mandates in the fixed income and IPO markets. More surprising, perhaps, was that some were able to penetrate markets previously regarded as fortresses that were jealously protected against outsiders. Eyebrows were raised, for example, when in September 2000 JP Morgan and Merrill Lynch won a mandate to lead a Eu250m five year bond for the German bakery, Kamps. Although a small deal, it was a big statement about how the single currency had levelled the playing field in Europe.
US banks have, of course, been important sources of innovation in the eurozones capital market innovation which up until 12-18 months ago may have been regarded as highly beneficial for the European capital market. It was, after all, mainly US firms that introduced Europe to high yield bonds, asset backed securities, CDOs and a range of other instruments designed to deliver enhanced performance for issuers and investors alike. While those products may be under a cloud today, the general consensus is that they will rebound in time, and that when they do they will further enrich the eurozone capital market.
But the process of innovation and product design in the context of the single European currency has not been an entirely one-way street. "In the early stages of the euro, the preference was to import US technology in a number of areas, but from 2001 onwards Europe started to develop products of its own," says Jooris at Goldman Sachs. "In the area of hybrid capital, for example, there has been as much innovation in Europe as in the US, if not more."