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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

After the Euro: Corporate Responses to Changes in the European Business Environment

After the Euro: Corporate Responses to Changes in the European Business Environment

KIM Deuk-Kab

Apr. 13, 2007

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This study is aimed at analyzing and evaluating the influence of the euro on the European economy and its companies eight years after its introduction. It also closely examines management and strategy changes adopted at multinational corporations to adjust to the euro's impact.

The stability of the European economy improved after European Union nations formed a monetary union in 1999, giving birth to the euro. Union states who were outside the central euro zone or who were beset with a weak national currency (e.g., Spain, Portugal, and Greece) benefited particularly. The euro helped shelter their fragile economic fundamentals.

Nevertheless, sluggish performance by Germany, France and Italy held back overall growth in Europe. The world economic growth in 1999-2005 was higher by 0.6 percentage point than in 1992-1998, but Europe's growth rate remained unchanged at 1.9% during the same period.

Economies throughout Europe began to recover in late 2004 on the back of an economic rebound in the central euro zone e.g., Germany and France.

As use of the euro has expanded, it has become the second international currency after the US dollar. Although the gap still remains wide in foreign exchange transactions, international trade, and foreign currency reserves, international usage of the euro is steadily rising.

In late 2005, 45% of new international bonds were issued in euros overtaking those in US dollars for the first time. Meanwhile, 37.9% of international bank loans were in euros, compared to 44% in US dollars.

As for intra-Europe commerce, both have exhibited an upward trend since the birth of the euro. Thanks to the removal of currency-related transaction costs and risks, intra-European trade and foreign direct investment registered a robust growth rate of 40% and 17%, respectively, between 1999 and 2004.

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