Giving the euro the benefit of the doubt
he euro is still here. What is different perhaps is the attitude towards it. When it was launched in 1999 there was optimism. Polls in Denmark, the country which almost wrecked European Monetary Union when it voted against the Maastricht treaty in a referendum, suggested that most people wanted to join the euro. Sweden was just as enthusiastic, with the pros outnumbering the antis.
Today the mood is very different. Countries that chose to sit out the dance are still seated. What appears to have happened is that ideas about the euro have become entrenched. Those who believe in it continue to believe in it. Those who were doubtful remain doubtful.
Yet has the euro failed? Euro-sceptics warned that the European Central Bank (ECB) would not be able to cope with the slowdown of the French and German economies and that a single interest rate would cause economies to slump and inflation to rise. This has not happened. So has the euro succeeded?
This month's Off the Record revisits the topic of the euro after a gap of five years. On 1 January 2002, 12 members of the EU joined the Euro-zone and adopted the euro as their only currency. To mark the event, IPE asked pension fund managers and administrators and trustees about their hopes and fears for the new single currency.
Their responses at the time revealed a strong sense of optimism about the euro. Most of the managers who replied to our survey said they were positive about the future of the euro as a major world currency.
They also expected that the success of the euro would persuade countries that had elected to stay out of the Euro-zone to join. Most thought that Denmark, Sweden and the UK would have joined by 2006.
Yet this has not happened. Moreover, there have even been suggestions that one of the original 12 - Italy - might withdraw from the euro. In 2005 Robert Maroni, Silvio Berlusconi's social security minister and a joint acting leader of the Northern League, called for a referendum on a return to the lira.
So what, if anything, has gone wrong? Initially, there were worries that the euro would be inflationary, and over the longer term there have been worries about the lack of economic and political discipline required to underpin a single currency. In particular, there are fears that breaches of the Stability and Growth Pact will undermine confidence in the currency.
So has the euro been a success or a failure? Have countries that joined benefited or have those that have decided not to join been proved right? Is the euro a major global currency or will it always be dwarfed by the dollar? Finally, has the euro had an impact on the way European pension funds manage their assets?
We wanted your views. The evidence is that, five years after the euro came into play, pension fund managers, administrators and trustees are solidly behind it. The initial optimism may have dissipated somewhat, but there is a feeling that the euro has done the job it was created to do, and is here to stay.
The unanimous view of the people who responded to our survey is that the euro has generally been a success. There is some qualification, however. The manager of a Dutch pension fund, for example, points out that the euro has been a success financially, but has been less successful for the citizens of countries within the Euro-zone.
There is also a nearly unanimous view from pension fund managers from countries in the Euro-zone, that membership of the single European currency has benefited their countries.
One of the initial concerns about the euro is that it would be inflationary. There were worries that when retailers re-priced their goods in euros they would round prices up rather than down. More generally, there was a feeling that a ‘new start' currency would lock in existing inflationary pressures.
Yet a majority of the pension fund manager who responded to our survey (58%) do not think that the overall effect of the euro has been inflationary, although some say that price increases because of rounding up were inevitable.
In 2002, euro fans hoped that, nurtured by the ECB, the euro would develop into a world currency to rival the dollar and the yen. Euroseptics, however, argued that no currency could rival the dollar. Today, most of our respondents (88%) agree that euro has proved to be a major global currency. The dissenting 12% are, unsurprisingly, drawn exclusively from European countries that have yet to join the euro.
An even larger majority think that the euro will rival the dollar as a global currency, although a number warn that this may take some time, and that the euro is unlikely to ever supplant the dollar as the world's number one currency.
Nearer home, the euro has changed the way pension funds run their money in the sense that it has broadened their base of domestic equities. Most managers (77%) agree with the proposition that the introduction of the euro has transformed the way European pension funds and their investment managers manage their assets, although some say the changes have been only partial or marginal.
Most managers (83%) feel that generally the introduction of the euro has been a positive development for European pension funds, although managers who disagree are drawn from both non-member countries like the UK and member countries like Spain.
Five years ago, there was a feeling about the euro that ‘you can't win unless you're in' and that countries that refused to join would come to regret it. Today, there is more understanding about why a country might want to stay out. A slight majority (52%) of our respondents think that European countries that have decided to remain outside the euro are right to do so.
Naturally, many of these are fund managers based in countries that have stayed out, such as the UK, Denmark, Sweden and Switzerland. "It is for each country to decide," the manager of a multinational pension fund observes. "It's a political question not an economic one," a UK pension fund manager adds.
Will expansion of the EU weaken the euro? Opinion is fairly evenly divided on this, with a slight majority (54%) thinking that it will. One Swedish pension find manager suggests that "this would be a good thing".
Bearing in mind the threat by Italy's social security minister to pull out of the euro, we wondered whether pension fund managers expected at least one member of the Euro-zone to pull out within the next three years. Most pension fund managers think this is highly unlikely. One manager says simply: "There is no going back."
Similarly, a large majority (97%) of managers do not think that the euro ‘refuseniks' - Sweden, Denmark and the UK - will join the euro within the next three years. "Sweden is happy as it is," a Swedish pension fund manager explains.
Perhaps the lack of a European constitution has weakened the case for European monetary union? Some have argued that unless there is stronger political and economic union in Europe the euro will fail. This proposition draws very little support. The feeling is that the euro can survive quite happily without strong political and economic union within Europe.
These things take time, a Swedish pension fund manager points out, adding: "It would of course help if Europe was better aligned in markets like labour, finance, insurance and services, but this will come over time.
"The true political understanding of what an open market is limited among politicians and more so among people in general. Sadly the voters vote for a package that protects them so we end up with the deaf being led by the blind, with unions playing local politics on the side. Over time, a long time, this will sort itself out."