Embracing change


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The most important event in modern financial history is upon us. In the afternoon of December 31 the official euro conversion rate will be announced. At that moment, 11 national currencies will effectively cease to exist and core Europe will have a single currency.

Along with the major European and US financial institutions, Euromoney believes that this new market will come to rival the dollar market in size, diversity, depth and sophistication. We also believe that the creation of the euro will hasten the demise of the old-fashioned regulatory environment and corporate ownership structures that have hindered the development of efficient capital markets in continental Europe.

To emphasize the importance of the euro capital markets and to illustrate the scale of the transformation ahead we have once again devoted most of our issue to the new currency. We have invited experts from a variety of institutions to contribute their views - both positive and negative - on the details of monetary union.

The vast opportunities for the leading banks and investment management firms are highlighted by our story on asset re-allocation. As much as $1.5 trillion dollars will flow through Europe's domestic equity markets alone as investors rebalance portfolios.

In fixed-income, we will seee the creation of huge new corporate and municipal markets as the forces of disintermediation are unleashed upon complacent house banks.

And the removal of currency barriers will let investors easily compare companies across countries forcing notions of shareholder value on managements too long protected from true competition.

However, we also highlight the dangers of the new system. There will be difficult problems in the derivatives markets. Technology issues have not yet been solved. The details of recalculation are still not fixed.

More worrying, Europe's finance ministers have extraordinary powers that could be used to reinforce the interventionist tendencies of France and Germany rather than mitigate them. Through Ecofin these minsters can override the provisions of the Maastricht Treaty, impose exchange controls and prevent the free flow of capital not just inside the euro zone but outside it too.

Long term success is based on the ability to profit from change. As another of our pieces points out, the single currency reduces the importance of countries and raises that of cities and regions. It encourages capital movement and highlights the inflexibility of labour. It is a threat to systems that seek to preserve the status quo, particularly those that favour government control and intervention.

If Europe is to benefit from the euro, governments must embrace the changes it will bring about. If instead they see this as a chance to impose discredited and unsustainable policies, they will end up with moribund economies and waning influence on the world stage.