Consequences of Euro-Currency Disintegration for Foreign Exchange Risk of National Industrial Sectors
Christine P. Ries
Professor of Economics
Georgia Institute of Technology
One of the most positive consequences of the currency unification that created the Euro was the dramatic increase in cross border M & A activity. The cache of being ‘European’ replaced nationalism, business activity was freed to move to the country and location with comparative advantage best suited to particular industry requirements. Value was created and efficiency increased as companies and industries gravitated to locations dictated by locational comparative advantage. Previously unexploited economics of scale were realized as national industrial structures dissolved into a European industrial space.
By definition, the adoption of a common currency eliminated any cross-national differences in foreign exchange exposure. Differences in exposure between companies or industries were due solely to operational and financial characteristics of those entities.
Disintegration of the common currency into two or more new currencies can be expected to ease the political and financial tensions that roil global financial markets almost weekly. However, disintegration will also reintroduce a national/currency component into the foreign exchange exposure of companies and industries. This paper will describe the predictable change in national industrial foreign exchange exposure that will result as a single currency is replaced with two or more new currencies.
We would expect the final constellation of currency arrangements to re-sort countries and currencies relative to historic, national proclivities for fiscal responsibility, social welfare spending, taxation, and public/private sector balance. Whether we replace the Euro with two currencies, three currencies, or more, we can expect the final set to differ according to these national characteristics.
Nations that conduct relatively more of their economic activity in the government sector and those with lower levels of productivity tend to exhibit higher levels of inflation and greater and more frequent currency depreciation. Currencies of more productive countries with relatively larger private sector economies, experience less inflation and their currencies tend to appreciate.
Under the Euro regime, member nations shared the Euro’s inflation and foreign exchange rate performance. After disintegration, some currency areas will exhibit behavior that is weaker (more inflation and more rapid currency depreciation) than would have been the case if the single Euro currency area had been maintained. Other areas will exhibit relatively stronger currency behavior.
The economic/market values of companies in each respective area will change in directions and by magnitudes that are predictable based on basic characteristics of production economics and corporate financial characteristics.
The paper will describe the characteristics of corporate and industrial economies and financial strategies that will benefit relatively more or less in the weaker currency areas. Likewise, company and industrial characteristics that will be enhanced in stronger currency areas will also be described.