Enter The Euro

This month, the euro begins its trek across 11 European countries in hopes of further cementing the market economy of the European Union (EU) into a more solid, competitive and easily traded marketplace. That could have an effect on U.S. agriculture - some of it good, some bad and much of it too early to tell.East German cattleman Tino Schossler thinks the whole idea of a single European currency

This month, the euro begins its trek across 11 European countries in hopes of further cementing the market economy of the European Union (EU) into a more solid, competitive and easily traded marketplace. That could have an effect on U.S. agriculture - some of it good, some bad and much of it too early to tell.

East German cattleman Tino Schossler thinks the whole idea of a single European currency - the euro - makes sense. In fact, money masters claim that once the new currency is in place, EU countries will be better able to compete in a global market. But, Schossler is nervous about what it means to him in the short run.

After 10 years of rebuilding since the fall of the GDR (German Democratic Republic - formerly East Germany), Schossler has faced endless barriers to keep his 200-head cattle operation afloat. Now, instead of trying to figure out how to buy the land he farms, he's faced with another change and potential obstacle - the euro.

The advent of the euro means that Schossler and other European farmers will move away from the heavy government subsidy assistance that has allowed many of them to survive.

"For me, I'm not much for it (euro). What will the money be worth?" asks Schossler, who farms in northeastern Germany near Poland.

Impact On Europe Introducing the euro will be another step toward a more market-oriented economy for the EU. But farmers across Europe are wondering what the new single currency will mean for them.

This month, the euro enters the second of three phases where 11 of 15 participating EU countries start using it for non-cash transactions. Euro coins and bank notes officially go into circulation Jan. 1, 2002, during the third and final implementation phase. Six months later, the euro replaces the national currencies of the participating countries and becomes their only valid currency.

When final, there will be seven euro notes and eight coins. Notes will be worth 5, 10, 20, 50, 100, 200 and 500 euros. The coins will be worth 0.01, 0.02, 0.05, 0.10, 0.20, 0.50, 1 and 2 euros. Like the U.S. monetary system, the subdivision of the euro is the cent; thus 0.14 euro is 14 cents.

"In three years, all the money I have in my pocket will be out of value," says Martin Schneidereit, executive director of BfT, the Association of Animal Health Industry in Germany. "Instead of having 600 marks, I'll have 300 euros."

Schneidereit is accustomed to working and traveling in European countries. He believes economic benefits will come with the euro by saving costs and enhancing international trade. And from a political standpoint, he agrees with former German Chancellor Helmut Kohl who supported a unified currency in hopes that a strong Europe would be able to keep peace.

Uncertainty Over Euro's Impact U.S. economists, like G. Edward Schuh, aren't at all optimistic about the euro. Schuh specializes in international economic policy at the University of Minnesota's Humphrey Institute of Public Affairs in Minneapolis,

"I think the euro will have a destabilizing influence. The reason: There's a lot of diversity in the economies of Europe and in their productivity," Schuh says. "They really should have different exchange rates so they can float against each other to take into account the differentials."

For the U.S., it's going to create a lot of uncertainty in trading all kinds of goods and services. And that's never trade promoting, Schuh says. In addition, he expects a long period of adjustment to get the economies on a common base.

Clamoring For Protection Countries whose currencies are overvalued will be clamoring for protection because an overvalued currency is equivalent to an import subsidy and a tax on exports, Schuh says. "You'll find that when countries really get protectionist is when their currency is overvalued relative to trading partners," he explains.

The Canada-U.S. border trade offers an example, Schuh says. If the Canadian dollar is weak and the American dollar is strong, it's equivalent to subsidizing imports from Canada. When that happens, Schuh says, "our ag people want more protection from Canada."

Jim Robb, ag economist at the Livestock Marketing Information Center in Denver, questions whether the euro will have a big impact on U.S. cattle producers at all. However, he points out that European banks are merging into larger banks, much like the pattern of the American acquisition fever.

"That means not as many small rural banks (in Europe), so producers will have to deal with big conglomerate banks. And that's usually more difficult," he says. "In general, European agriculture will have a harder time getting capital."

In addition, Robb says that going to a common currency will "take some of the monetary control from individual countries."

National Cattlemen's Beef Association economist Chuck Lambert doesn't think the switch to the euro will have much impact on U.S. producers. "But, it will ultimately simplify trade within the EU. Trade will be more transparent because they'll only have to worry about one currency, not 15," he says.

Moving toward the euro imposes some discipline on other European countries, Lambert points out, to meet the euro criteria. "It will bring Europe closer to one monetary and fiscal policy so you probably won't have high rates of inflation in any one of the European countries."

Their bigger problem, Lambert claims, centers around phasing out their government subsides under their protectionist Common Agriculture Policy (CAP). CAP subsidizes ag products at prices above the world price.

Euro And The U.S. Dollar "The biggest threat of the euro is that it could become so successful it would start to take away some of the advantages we have with the U.S. dollar being a main world currency," says David Henneberry, ag economist at Oklahoma State University.

"For example, petroleum is generally priced in dollars. But, it could be priced in euros."

He believes the EU will become a stronger marketing force for U.S. agriculture with the euro. He points out that the EU's shift to a common currency moves them to the fourth stage of economic integration as an economic union.

He explains that with the North American Free Trade Agreement (NAFTA), the U.S. is only in the first stage, or free-trade area, with reduced tariffs among the member countries.

"I predict that some of the same advantages the EU has will come to the U.S. from NAFTA if we look far enough into the future. It's guaranteed. We're looking 40-50 years out to integrate like the EU, so it will be a long time before we merge our currencies," he says.

"The European monetary system is pretty good already. So with the euro, they're moving from pretty good to something stronger. Europe is ahead of the curve," Henneberry says.

The euro - the new single currency for the European Union (EU) - will remove the need to change currencies in cross-border trade within the euro zone, economists say. This will reduce, but not remove, the transaction costs and, ultimately, make it cheaper for firms to make payments between countries in the euro zone.

Banks will still charge a handling fee, but they won't take an additional bite by buying the currency at one rate and selling it back at another, like they've traditionally done.

Some U.S. economists believe U.S. businesses also are likely to benefit as the European market evolves. With consumers better able to compare the price of goods and services in different countries, competition will increase across the EU, causing prices to fall.

As Europeans begin their move toward the euro, they'll also share a single interest rate, set by the European Central Bank, and a single foreign exchange rate policy. The euro will likely have a major impact on the business environment within the participating countries, and the rest of the trading nations.

Cattleman Tino Schossler, 33, is grateful for the freedoms he and his East German farmer friends have enjoyed since the fall of communism in 1989, the year known to the locals as the "change."

Before the change, Schossler worked as an accountant on a state-run East German 1,000-cow dairy that employed 80 workers. Now, in his region, only 400 cows and 10 people are needed to work and produce the same amount of milk.

He says his biggest problem in operating the farm today is finding qualified labor, despite a 26% unemployment rate in his area.

Across eastern Germany, employers are finding that they can run their businesses with a mere 10% of the employees once used under communism. "Those 10% are efficient and hard workers," says Schossler. "But, they're hard to find. They're just not used to working," he says.

Acquiring Land Schossler is in the process of buying the land he's leasing from the German government, although it's doubtful he'll ever be able to purchase all of it. Land in his area sells for about $4,000 deutsche marks/acre or about $1,000/acre (U.S.).

The operation has 250 hectares (618 acres) of grassland and 400 hectares (988 acres) of cropland (corn, sunflowers, barley, wheat and rye), 117 beef cows, mostly Charolais, and 150 dairy cows. Since he's taken over, he's moved from primarily dairy to beef.

Like most German farmers, a quota and subsidy program is in place. But after 2006, there are no government guarantees. Schossler believes only larger farms will survive. He's positioning himself by staying diversified. He's also finishing an agricultural engineering degree.

"If the crop subsidy is eliminated, I'll add more cows and stay in beef and dairy," he says. Still, he believes there will be some sort of direct payments for grazing programs, wildlife conservation and projects to help protect the environment.

Schossler says he works much harder now than under communism, but he likes it. "I work more hours but I get to make higher-level decisions. And I get to work with cattle, crops and bankers. Before, I wasn't allowed to think."