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iii
PREFACE
On May 18, 2005, the RAND Corporation and the Delegation of the European Commission to
the United States held a conference in Pittsburgh, Pennsylvania, on “Doing Business with the
Euro.” The purpose of the event was to promote discussion between senior policymakers and
corporate executives on the young currency’s expanding role in the global economy. The
conference focused on the strategic and operational ways in which several leading U.S.
corporations have successfully adjusted their accounting, financial management, and European
operations to adapt to the post-euro economy, and to counsel corporations and financial
institutions in the Pittsburgh region and beyond on ways to boost exports and profits by taking
advantage of the emergence of the euro.
This research project was conducted under the auspices of International Programs at the RAND
Corporation. International Programs conducts research on regionally and internationally focused
topics for a wide range of U.S. as well as international clients, including governments,
foundations, and corpor ations. For more information on RAND's International Programs, contact
the Director, Susan Everingham. She can be reached by e-mail at ;
by phone at 310-393-0411, extension 7654; or by mail at the RAND Corporation, 1776 Main
Street, Santa Monica, California 90407-2138. More information about RAND is available at
www.rand.org.

v

Figure 2: Declines in Inflation in Central Europe, Source: International Financial Statistics,
International Monetary Fund 29
vii
ACKNOWLEDGMENTS
We would like to express our deep gratitude to the Delegation of the European Commission to
the United States for sponsoring this conference, particular Mr. Hervé Carré, Mr. Moreno
Bertoldi, Ambassador John Bruton, and Ms. Amy Medearis.
We would also like to thank the conference participants for their valuable contributions: Dr. J.
Onno de Beaufort Wijnholds, Dr. Norbert Walter, Dr. William Overholt, Professor Alberta
Sbragia, Mr. James Rohr, Mr. L. Patrick Hassey, Dr. James Thomson, Mr. Paul H. O’Neill, Dr.
Attila M olnar, Mr. David Richards, Ambassador James Dobbins, Mr. Gary Litman, Mr. Barry
Balmat,andMr.TedSmyth.
Finally, we are grateful to Ms. Lynn Helbling Sirinek, Ms. Michelle McMullen, Ms. Vicki
Wiedrich, and Ms. Paige Parham for their assistance in coordinating the details of this
conference.

1 INTRODUCTION
I. INTRODUCTION
On May 18, 2005, the RAND Corporation, with the support of the Delegation of the
European Commission to the United States, organized a conference in Pittsburgh, Pennsylvania,
on “Doing Business with the Euro: Risks and Opportunities.” The conference brought together
over 90 executives of major corporations, senior policymakers, and academic specialists from
throughout the United States and Europe. Its purpose was to better inform leaders of the
American business and financial communities about the economic effects and implications of the
euro for U.S. business operations, and to share the experiences of U.S. and European chief
executive officers (CEOs) in reorganizing their operations in response to the introduction of the
new currency in 1999. The day’s discussions were highlighted by a keynote address by Paul H.
O’Neill, former Secretary of the United States Treasury and former CEO of Alcoa. This report
summarizes the discussions of the conference.
James Thomson, President and CEO of RAND, and Hervé Carré, Minister for Economic,

activities, and has served as the yard stick by which the public measures the progress of the last
half-century toward integration.
Slightly more than a year ago, the European Union completed the largest enlargement in
its history. This accession of 10 new states raised the total number of members from 15 to 25 and
increased the EU population by 20 percent (to over 450 million people). Significantly, however,
the EU’s t otal GDP rose only 5 percent with the addition of these 10 nations. Though the new
member states have enjoyed rapid economic growth in recent years, their great economic
potential has yet to be exploited fully. T he enlargement process offers unprecedented future
economic opportunities for both old and new members, as well as business interests in the United
States and elsewhere abroad. This most r ecent enlargement, along with others to come, will
promote competition and will favor a more efficient allocation of resources within the European
Single Market. This reality has been well understood by both European and American investors,
who have significantly increased their presence in these countries in anticipation of enlargement.
By j oining the European Union, the acceding countries have also become members of
Economic and Monetary Union. Though they have all committed to the eventual adoption of the
euro, before doing so, they must meet a number of criteria, as laid out in the Maastricht Treaty.
The new members will continue on a path of economic restructuring and economic and policy
convergence as part of the process of getting in shape for the euro—a process that is guided and
encouraged by the Commission and the European Central Bank. By the end of the decade, a
number of these new Member States will have successfully replaced their national currencies
with the euro.
In the six years the euro has been in place, it has established itself as a key currency on
the international scene and as an alternative to the dollar. The share of the euro in global foreign
exchange reserves, in foreign debt securities, and in international cross-border liabilities of
international banks, has risen rapidly. Over 50 countries now operate managed exchange-rate
3 INTRODUCTION
arrangements that include the euro as a reference currency, either alone or with other reserve
currencies. These figures reflect the i ncreasing attractiveness of the euro as an international
currency.
The introduction of the single currency has also had a revolutionary effect on the

Central Bank in Washington, D.C., opened the session by explicating the euro’s growing
international role. Over the course of the six years since its introduction, the euro has established
itself as the second most important reserve currency and an alternative to the dollar in some
financial markets. Despite its recent birth, the euro is already extensively used as a unit of
account and as a store of value. In international trade, in foreign exchange markets, and in capital
markets, the euro is now the second most widely used currency internationally, and in several
areas, its role is increasing steadily. T he share of the euro in global foreign exchange reserves
increased from less t han 15 percent in 1999 to almost 20 percent in 2003—still substantially less
than the dollar’s share, but growing. In international financial markets, the euro has firmly
established its status as the second international currency. In mid-2003, it accounted for more
than 30 percent of debt securities (bonds, notes, and money market instruments) issued in a
currency different from t hat of the borrower’s country (versus 22 percent in 1999), and
accounted for about one-quarter of international cross-border liabilities of i nternational banks
(outstanding cross-border liabilities of credit institutions and their domestic liabilities in foreign
currencies).
5 PORTFOLIO SHIFTS AND CAPITAL ACCOUNT BALANCES
The euro is not yet challenging the dollar. The dollar is today, and will remain tomorrow,
the world’s most important currency. Much of the i ncrease in the role of the euro is driven by
regional factors. The increased use of the euro has been greatest among residents of countries
neighboring the Euro area or with historic ties to European nations. This is also true for the
outstanding stock of euro-denominated international debt securities, particularly bonds. Since its
introduction, the euro’s share of international debt securities outstanding, excluding home
issuances, has risen significantly, from approximately 20 percent of the international stock in
1999 to over 30 percent in 2004. Over the same period, the Japanese yen has lost significant
ground; in 2004, it constituted only 9.3 percent of international debt securities, a decline of
nearly 50 percent. The share of the U.S. dollar has also fallen slightly over this five-year period,
though it continues to account for the greatest share of international debt securities—more than
44 percent worldwide in 2004.
Again, it is the European countries nearest the Euro area that account for the largest share
of issuances of these securities. Broken down regionally, during this period there was a

zone, make up the majority of the nations using the euro as an anchor or reference currency.
There is still substantial room for growth in this area. Further expansion will depend on decisions
to be taken by a number of European governments, such as the United Kingdom, Russia, and
other former Soviet republics.
Despite these signs of growth, the euro’s share in global f oreign exchange reserves is
still much smaller than that of the dollar, according to the latest data available from t he
International Monetary Fund (IMF). Some economists believe that a number of economically
important countries, especially in Asia, will be shifting reserves into the euro. In any event, if
reserves of Asian countries continue to grow rapidly, the value of euro holdings will rise
sharply—even if the euro’s share remains around its current share of 20 percent of Asian
reserves.
-10
0
10
20
30
40
Total New
Member
States
U.S. "Pre-
ins"
Japan Offshore
Centers
Latin
America
Middle
East
7 PORTFOLIO SHIFTS AND CAPITAL ACCOUNT BALANCES
GLOBAL CURRENT ACCOUNT IMBALANCES

clear that the renminbi is overvalued. He queried whether it is fair to press hard on China to
revalue the renminbi if China’s inflation rate is barely 3 percent and if the Chinese government
needs to generate 50 million new jobs per year. He speculated that China might very well avoid
revaluing the renminbi for years to come. Invoking the powers of arithmetic, another participant
DOING BUSINESS WITH THE EURO 8
forecast even greater asymmetries in future current account balances. He noted that U.S. foreign
liabilities are on course to rise by at least $2 trillion during the second term of the Bush
administration. He calculated that the additional interest payments paid by the United States to
foreign bondholders would increase by $100 billion per year. Thus, the United States’ current
account will either increase annually by this $100 billion, or the United States will need to
reduce its trade balance by the same amount—simply for the current account deficit to remain at
current levels.
What, then, might r ealistically reduce global current account imbalances? One panelist
called on the United States to continue to raise interest r ates and reduce fiscal imbalances by
imposing consumption taxes ranging from a value-added tax, excise taxes on refined oil
products, or possibly an environmental tax, like a carbon tax. He argued that if passed, such
measures would contribute to creating an environment for more sustainable global growth,
reduce U.S. energy consumption and energy imports, contribute to limiting global warming, and
would partially correct the United States’ current account deficit.
Another panelist estimated that among the G-3, t he country most interested in true
international cooperation is Japan. Europe at this juncture, with all its domestic problems, is as
inward looking as is the United States. Because of the lack of interest in global economic policy
coordination by the G-3, movement towards smaller imbalances will be driven by market forces
rather than by discretionary policy actions. Market forces will eventually reduce the U.S. current
account deficit through a combination of higher U.S. interest rates, exchange rates adjustments,
and slower U.S. growth.
OUTLOOK FOR THE INTERNATIONAL ROLE OF THE EURO
Greater international use of any currency, the euro included, is a gradual process
characterized by considerable inertia. Though growth i n the use of the euro has been rapid, the
euro is still a very young currency. Conference participants agreed that rhetoric concerning use

Panelists concurred that the Stability and Growth Pact’s strictures on budget deficits (3 percent
of GDP or less) should apply to cyclically adjusted budgets. However, European finance
ministers have not publicly stated that this should be the case, as they are concerned about
credibility. To date, no country has paid a penalty for violating the pact because all the member
states understand the cyclical argument. As a consequence, Germany is getting away with its
fourth year of a deficit above 3 percent. Nevertheless, the Pact has played a role in guaranteeing
that the euro would be a strong currency, and in swaying Germany t o adopt the euro. The
German public believes it made a sacrifice in abandoning the Deutsche mark for the euro—
perhaps for the good of all of Europe. Prior to the euro, the Deutsche mark was the dominant
currency in Europe, and was used by international businesses to protect against exchange rate
fluctuations. Now, of course, the euro has supplanted the Deutsche mark, providing the same
assurance against inflation risks as did the Deutsche mark before it, and has eliminated European
exchange rate fluctuations.
DOING BUSINESS WITH THE EURO 10
The long-term stability of the euro—in terms of inflation and exchange rates—will
depend upon the credibility of the ECB more than on the fulfillment of the 3 percent deficit
target of the Pact. T o date, the ECB has performed well; no one in Europe is seriously concerned
about a dramatic acceleration of inflation or a weakening of the euro’s external value. T he
primary concern is the implications of budget deficits and high rates of taxation, demographic
decline, and over-regulated goods and labor markets for economic growth. Indeed, there is a
great opportunity to make better use of the economic potential of Europe; on average, Europeans
work 1600 hours per year compared to 2000 by Americans. If Europe is serious about
accelerating growth, this number must rise.
ASIA
Asia’s future role in the international economy was a recurring subject of the conference,
with views differing greatly. During the morning’s first session, one expert on Asia presented a
comprehensive treatment of the Asian perspective he had gathered from extensive interviews
with experts from the Asian financial sector. He argued that Asian governments would be slow to
change current policies.
Inertia behind the current system. Current conventional wisdom is that because of the

Third, Asian economists and commercial bankers do not expect the dollar to be weak
over the long term. Even though American trade deficits will not soon disappear, the U.S.
economy is viewed as more dynamic than that of Europe. Asian speculators expect large capital
inflows into the United States, keeping the dollar from falling sharply. In contrast, the euro is
encumbered with uncertainties over the Stability Pact, economic growth, and the failure to adopt
the EU constitution.
Fourth, Asian central banks have great confidence in the liquidity of the U.S. dollar. With
hundreds of billions of dollars in holdings, this peace of mind is very important. During the
Asian crisis, Taiwan lost more than $30 billion in reserves overnight.
Finally, he stated that Asia’s top central bankers emphasize the significance of political
trust and their long experience working with the Federal Reserve. For half a century, the Fed has
proven that when a problem arises, and these major Asian banks need to sell dollar assets to
restore liquidity quickly, the Fed is capable of forestalling substantial moves in the market.
Historically, the Fed has always stepped in as a counterpart, when necessary. Of course, this in
no way means that the ECB would be incapable or unwilling to do the same; the ECB’s response
during t he events of September 11, 2001, for example, was exemplary. In the wake of the
terrorist attacks on the United State’s financial center, the ECB reacted and the world payment
system was safe. However, the major central banks in Asia have more than 50 years of
experience and confidence in working with the Fed, a degree of experience that they do not yet
have with the ECB.
The long-term desire of the Asian central banks is to create an Asian bond market. At
present, they are working hard to create common bond standards in order to allow the central
banks of Asia to buy large volumes of each other’s bonds.
DOING BUSINESS WITH THE EURO 12
The same Asian expert noted that though these views are strongly held at the moment
and are unlikely to change in the foreseeable future, they are certainly not eternal. There is a
considerable amount of inertia behind the current system. However, the global market is a fragile
organism, very vulnerable to event risk. At some point, the calculations of Asian central bankers
may change.
Another participant argued that should a major Asian central bank someday diversify its

entrepreneur may then invest the foreign currency anywhere in the world, including back into
China. Participants also argued that China could free up its currency without removing existing
capital controls, including those on individual small accounts.
Other participants argued that currently money is allowed to flow into China, but is then
blocked from flowing out. So what would happen to the market value of the currency i f all of the
blocks were taken off? China has about $3 trillion worth of short-term deposits in insolvent
banks paying less than 1 percent interest. If even a tiny percentage of these savings were allowed
to flow out, the currency would depreciate. The Chinese strategy of preparing for a floating rate
has involved gradually opening the capital account in order to have, after quite a few years, a
relatively free market. Meanwhile, the Chinese government is focused on fixing the state-owned
banks.
The disparity between U.S. and European positions, on the one hand, and Chinese
positions, on the other, stems from differing points of view. The United States and Europe are
focused on trade imbalances, while China is focused on the stability of its banking system. For
the Chinese government, this is a life or death issue. Were China’s banking system to collapse,
the economic and political consequences would be unimaginable. On this point, the Japanese
agree; Japanese policymakers recognize the devastating consequences such an event would
wreak on their own economy. Here, the politics become complicated. If the United States, Japan,
and Europe were to jointly apply pressure on the Chinese, the Chinese government would l ikely
feel it must revalue. However, the Japanese can be extremely difficult to read. The Japanese
Vice-Minister of Finance, a politician, gives speeches saying that China needs to revalue, but
when pushed, it appears the real Japanese policy is to favor the continued use of a pegged
exchange rate at the current rate. The Japanese government is cognizant of the importance of
Chinese demand for Japanese products for Japanese growth: Demand for Japanese exports from
China is the difference between Japanese growth and Japanese recession. Demand from China
for Japanese exports depends on the health of China’s economy, which is t hreatened by the
stability of China’s banking system, which in turn may depend on the continued use of capital
controls and a pegged exchange rate.
DOING BUSINESS WITH THE EURO 14
III. THE EURO AND GLOBAL FINANCE: IMPLICATIONS FOR EUROPEAN AND

15 IMPLICATIONS FOR EUROPEAN AND NORTH AMERICAN BUSINESS
than the United States. However, in the absence of a single currency and a single market,
European businesses have not been able to take full advantage of Europe’s larger market.
CORPORATE TRANSACTION FINANCING SINCE THE EURO
Since the creation of the euro, the nature of doing business across the Atlantic and within
Europe has changed dramatically. One conference participant caught the young currency’s
biggest impact quite simply: “We now have literally thousands of new and old customers—small
businesses—that are doing business in Europe and doing business very easily because of the
euro.” For these small businesses, the single currency has greatly reduced transaction costs and
exchange rate risk, resulting in increased exports. No longer do these companies need to set up
different accounting structures for every country in which they do business in Europe, reducing
costs. Of course, this does not imply that conducting business across the Atlantic is simple, but
the euro has eliminated one of the most costly and complex impediments to the process.
The euro has reduced the complexities of doing business in Europe for large corporations
as well. The euro has simplified the foreign exchange business for banks as the number of major
currencies has declined with the advent of the euro. One participant noted that his corporation’s
mutual fund processing business in Europe has been growing roughly 40 percent per year since
the introduction of the euro, a market where individual investment accounts have not
traditionally been common. Online banking has also become much easier for customers due to
the single currency. The euro now allows people to manage risk by hedging in a different and
more efficient way than they could previously. Although labor laws and taxation continue to
differ within the Euro zone, financially speaking, the euro has facilitated a much more integrated
market.