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Resources Getting Started The Wise Investor Online Investing Glossary Book Centre globefund.com Alert Table of Contents Put your financial adviser on a leash February 11, 2000 100% Foreign content for your RSP December 22, 1999 Tax Loss Selling or Dealing With Your Mistakes November 26, 1999 Life Stages of your RRSPs November 12, 1999 Just give me boring (but great) rates of return November 3, 1999 De-mystifying Demutualization - part Two October 25, 1999 De-mystifying Demutualization - part One October 19, 1999 Seg funds for the simple minded September 14, 1999 The interest rate game Part 2 August 12, 1999 The interest rate game Part 1 July 30, 1999 Choosing funds: Five for the long run July 14, 1999 New Funds: To buy or not to buy July 2, 1999 Making sense of momentum investing June 18, 1999 Rating the fund managers June 4, 1999 Resource recovery hinges on supply and demand April 30, 1999 Tech funds draw strength from favourable trends March 24, 1999 Withdrawing from your RRSP March 9, 1999 The economic implications of the euro - An interview with Ranga Chand February 12, 1999 Underperforming small-cap funds have strong upside potential January 29, 1999 How to pick a winning equity fund portfolio January 15, 1999 View the Weekly Insight archive

The economic implications of the euro - An interview with Ranga Chand Friday, February 12, 1999 GLOBEfund.com: Europe’s new currency, the euro, was introduced on January 1st of this year. Before we get into how it has fared so far and what it means for Canada, let’s cover some of the basics. First of all, what exactly is the euro? Ranga Chand: The euro is the new single currency adopted by 11 countries of the 15-member European Union (EU). These initial members of Euroland are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Only three countries, Denmark, Sweden and the United Kingdom, have opted out at this point, but they may join at some later date. And Greece has been unable to meet the necessary fiscal and economic standards as laid out in the Maastricht Treaty. GF: Why did the majority of EU countries decide to abandon their national currencies? RC: The origins go back to the end of WW II when the integration of Europe both politically and economically was regarded as a way to ensure lasting peace. This currency union is viewed as a giant step towards this greater integration in Europe. With 290-million residents and a 19.5% share of world GDP, Euroland will provide a stable economic and business environment. GF: What are some of the advantages of the euro currency? RC: There are a number of them. Not having to deal with multiple currencies will dramatically reduce transaction costs, exchange rate fluctuations will be removed, interest rates will be standardized, price comparisons will be easier and, consequently, long-term planning will be much easier. It will also without doubt lead to corporate mergers within Euroland that will enable it to compete effectively on a global scale. Over time Europe will emerge as a formidable competitor on the world scene. GF: What’s the downside of having a common currency? RC: The biggest disadvantages are that the member countries can no longer follow an independent monetary policy and won’t have their own national currency to use as a cushion in times of economic turbulence. For example, they can no longer lower interest rates in order to stimulate their economies during periods of high unemployment or recession nor can they raise rates to cool their economies during boom times. GF: What about fiscal policy? Can’t governments use taxes and public spending as tools to achieve their objectives? RC: They certainly can, but even here they will also have less room to maneuver. Don’t forget that the fiscal pact, agreed to at the Amsterdam summit of EU leaders in June of last year, levies a ceiling on members’ budget deficits of 3% of GDP. GF: What are the greatest risks to the success of the European Monetary Union (EMU)? RC: Well, unlike North America, many countries within Euroland have strict regulations, such as for firing workers, and they tend to have an inflexible workforce. There is also little labour mobility among the different economies primarily because of cultural and linguistic reasons. These factors, combined with the tight monetary and fiscal controls of the European monetary union, will make it very difficult for them to react to economic downturns that may affect one country but not the others. GF: Is there a chance that EMU could fall apart? RC: It’s highly unlikely. Apart from the fact that there are no provisions within the treaty for such an eventuality, the consequences, both politically and economically, would be very serious. While it’s a given that there will be rough patches, it is clearly in the self-interest of all member countries to do their utmost to avoid such an outcome. GF: Now that the euro is an official currency, does this mean no more French francs and Deutschmarks? RC: Eventually, yes. But euro notes and coins won’t be available until January 1st, 2002. In the meantime, and into mid-2002, the various national currencies will continue to circulate and bank customers can keep accounts in euros alongside their own currencies. However, financial market transactions must now be carried out in euros, but for all other transactions the use of the euro will remain optional over the next three years. GF: How has the euro been doing since its inception and what is the outlook for it this year? RC: Well, in the short-term, we definitely expect some volatility on foreign exchange markets. Economic growth in the United States is surging — it was up 5.6% in the fourth quarter of last year — whereas it is slowing in Europe. This divergence in growth rates is putting downward pressure on the Euro. Indeed, since the currency’s introduction at the beginning of the year, the Euro has fallen by about 5% against the U.S. dollar. With the U.S. Federal Reserve Board holding interest rates steady and pressure building on the European Central Bank (ECB) to lower interest rates, the euro might weaken further in the coming months. GF: What about the future? Will the euro emerge as a strong currency and challenge the U.S. dollar as a reserve currency? RC: Over the longer-term, I certainly think so. And there are a number of reasons for this. First of all, a strong and independent ECB will clearly underpin the euro. Remember, unlike the Federal Reserve Board in the United States, the ECB has only one mandate and that is to keep prices stable. Secondly, given the size of the euro-zone, the creation, over time, of a pan-European stock and bond market will result in substantial portfolio shifts into euros. And finally, Euroland has a large current account surplus. In other words, its exports of goods and services exceed that of its imports by a wide margin. The U.S., on the other hand, is running a very large current account deficit. All these factors suggest a strong rise in the euro over the medium- to long-term. GF: How will the euro affect Canada? RC: Considering Euroland accounts for only 4% of Canadian exports and about 6% of our imports, the effects will be minimal. However, the lower operating costs, reduced exchange rate risk and a market of 290-million people — compared with 267-million residents in the U.S. — should benefit and increase opportunities for Canadian businesses. Looking over the longer term, if the euro successfully challenges the dominance of the U.S. dollar, the ramifications for Canada could be significant. GF: Is this a good time to invest in Europe? RC: I certainly think so. A single currency will benefit both the bond and stock markets in Europe. Bonds will benefit because of a low inflation environment. Stocks will gain because of corporate restructuring as companies start to organize themselves on a continental basis rather than nationally. In particular, I think there will be a lot of consolidations in the banking, insurance and telecommunications sectors. But remember prices never move up in a straight line. For investors with a longer-time horizon, Europe offers a lot of rewards GF: And finally, are there any Heavy Hitter European mutual funds that investors could consider adding to their portfolios? RC: Yes, there certainly are. Based on our research and tracking of more than 60 European funds, Fidelity’s European Growth Fund, Talvest’s European Fund and the Vision Europe Fund are all consistent top performers. Ranga Chand is a leading independent economist and mutual fund analyst and is President of the research firm Chand Carmichael & Company Limited. He is also the author of the national bestseller Chand's World of Mutual Funds 1999 Edition and Ranga Chand's Getting Started with Mutual Funds, both available through the GLOBEfund Bookstore. You can now visit Ranga Chand's new web site located at www.worldoffunds.com.

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