Ever since the French and the Dutch rejected the proposed European Constitution (See IJ Web site May 30 and June 2), the common currency, the euro, shared by 12 EU member nations, has been having difficulties. It has declined by about 3 cents since the election results were announced.
Rumors surfaced first in Germany and then in Italy that the euro, which replaced the franc, the mark, the lira and other national currencies on January 1, 2002, might be scrapped in favor of a return to national money. In addition to posing huge and costly reconversions, such a change really makes little sense, and the rumors were quickly denied.
Nevertheless, the euro, despite being a good deal stronger than the dollar (the current exchange rate is around $1.23 to 1 euro), is in trouble. It’s introduction, especially in the Netherlands, where it replaced the guilder at what most Dutch citizens consider an inadequate rate, was one of the main reasons cited for the rejection of the Constitution. The euro, with its “one size fits all” structure, is viewed as too rigid for setting monetary policies in 12 different countries.
All of this doesn’t seem to have bothered AEGON, the Dutch financial services and insurance giant. The company just announced that it has entered into an agreement with Nationwide Insurance Company to purchase 100 percent of the shares of Nationwide Towarzystwo Ubezpieczen na Zycie S.A. (Nationwide Poland) for an undisclosed amount. It expects to complete the acquisition in the second half of 2005, subject to approval from the Polish insurance regulator and from the anti-trust authorities. After the acquisition, the company will be renamed AEGON Poland.
The acquisition gives AEGON a strong market position in the Polish life insurance industry. Nationwide Poland ranks number one in the Polish market for single premium unit-linked products, with a leading position in the upper-income segment. Based on gross written premiums, the company ranks fifth in the Polish life insurance market. It holds 237 million euros in assets and generated gross premiums of 157 million euros at the end of 2004.
“AEGON’s entry into Poland continues our strategy of expanding further in Central and Eastern Europe,” stated Chairman Donald J. Shepard. “We now look forward to leveraging our proven expertise in providing life protection and savings products to serve the needs of Polish citizens.”
So much for euro weakness. It took over 10 years and a massive logistical effort to launch the new currency. The rejection of the Constitution, while putting Europe’s future momentum in question, really doesn’t alter the fact that there’s no going back on that decision. Certainly the EU’s financial services and insurance companies, such as AEGON, have long been comfortable with using one monetary unit rather than a dozen. As Michel Beaucourt, head of a private accounting firm in Paris, observed when the euro replaced local currencies in 2002: “In effect large and medium sized businesses will see little change from the introduction of the Euro. The large enterprises, especially banks and insurance companies, have been using the Euro for over a year now. It’s the smaller shops, like bakeries, tabacs and newsstands, who may have some problems.”
While they may still be having problems, the main challenge to the European Central Bank (ECB), which manages the currency somewhat like the Federal Reserve banks in the U.S., is to find a way to do it better. The system is too inflexible. Controls on national debts were essentially scrapped last November, when both France and Germany simply stopped observing them.
The ECB, however, cannot be as effective as the Federal Reserve in formulating economic policy, as Europe isn’t a unified entity like the U.S. It can’t control the money supply as effectively, and its interest rates are hamstrung by the need to raise them in some countries to counter inflation and to lower them in others to stimulate growth. The Constitution did contain provisions to strengthen the ECB, but they are now on hold along with the rest of the pact.
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