Community bankers are asking me what they should tell customers who are worried about what the euro, the European currency that went into effect Jan. 1, means for them.
First, an explanation.
The euro is a common currency instituted by 11 European countries. All prices will be quoted in both local currencies and euros until 2002, when the local currencies will be scrapped and replaced by the euro.
It is the same approach as the United States took in 1789 when we gave up state currencies and switched to the dollar.
This means that anyone buying goods from any of these 11 nations will have a standard of comparison. Since all goods will be priced in euros, prices for the same products from different countries will have to become close-or people will shop elsewhere.
These nations have had the political courage to coordinate their monetary and fiscal policies to keep their currencies' exchange rates uniform. It means that each nation is giving up economic sovereignty for a common good, just as the individual U.S. states gave up sovereignty when the Articles of Confederation were replaced by the Constitution and a common currency was instituted.
What does Europe expect to gain from this?
First, with domestic economic borders disappearing and more and more business being conducted in a common language-probably English-the hope is that the wars that ravaged Europe for centuries will become history.
Second, these 11 nations hope the euro, as a reserve currency, will provide the sort of clout the United States gets from the dollar's playing that role.
We sometimes forget the advantages of having the world's basic currency. When other nations have payment deficits, they must pay with reserves of gold or other nations' currency. We just print more dollars.
This new competition means the United States must offer somewhat higher interest rates to compete for the world's liquid funds against the euro. But that is about the only way it can affect the U.S. Treasury, the Federal Reserve, or those institutions that worry about the dollar's value. As for community banks, there is a decided advantage.
Until now, community banks have often turned to regionals and money- center institutions for foreign currency when they wanted to engage in international trade. Community banks have simply not found it worthwhile to hold balances in a dozen or so different currencies.
Now many community banks may decide to hold foreign balances-because they can do so in one currency, not 11. This would let them serve customers doing business in all those nations at no downside cost except the maintenance of the one account. Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management.