Harvard's Multi-Billion Dollar Endowment Yawns at New Euro

As the impact of European Monetary Union (EMU) begins reverberating through the world's markets, Harvard's top money managers say their investment strategy remains relatively unchanged.

On New Year's Day, 11 of the nations that belong to the 15-nation European Union (EU) took an epochal step toward unifying Western Europe as they officially adopted a new common currency, known simply as the euro. Banks, investment firms and companies spent the holiday weekend making final preparations to begin dealing in the new currency this past Monday.

The market reaction to the euro has been buoyant, with the currency rising from its pre-set value against the U.S dollar.

For now, the new euro is a cashless currency. Euro coins and bills will not enter circulation until 2002.

Meanwhile, the euro is the currency used for all non-cash transactions (such as credit card purchases and bank transfers) and for official bookkeeping in the 11 euro nations--Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

And until 2002 the euro nations will continue using their marks, francs and other currencies, but their rate of exchange with the euro is now fixed and will not change in relation to the euro or each other.

These 11 countries, called Euroland, have already surrendered much of their economic autonomy to the European Central Bank in Frankfurt, an institution established to centralize monetary policy.

The Central Bank will set a single interest rate for Euroland, and a Growth and Stability Pact limits their debts and deficits.

The EMU hardly comes as a surprise. Europe has talked about economic union since the 1951 Treaty of Paris joined six European countries in the first step toward the EU, but the euro is the most tangible move yet toward unification.

The Harvard Management Company (HMC), which invests Harvard's endowment, valued at $13 billion in June, anticipated the monetary union as it developed its bond and equity strategy over the past several years. Now that the day of unification has arrived HMC has few changes to make.

"This is not going to have a major impact on our investment strategy," said Jack R. Meyer, president and CEO of HMC.

Harvard's long-term Policy Portfolio, the base for its year-to-year investment strategy, contains 8.9 percent in euro-based bonds and equities. 6.15 percent of the portfolio is in euro-based equities, shares in companies based in the 11 countries, 2.75 percent is in bonds in the Euroland countries. The University also has a small amount of real estate in the euro-based countries.

In 1997, Harvard held more than 1 million shares in Chrysler, which has since merged with Daimler-Benz and is now a pan-European corporation. Daimler-Chrysler was one of the first companies to convert to operating entirely in the euro and is expected to profit greatly from the new currency.

Many political analysts view the economic union as an important step toward greater stability on the continent and Winston Churchill's vision of a United States of Europe.

"In the long run this is probably a good thing for Europe not because of its monetary implications but because it's part of a broad process of political and economic integration," said Professor ofGovernment Jeffry Frieden. "It makes it much moredifficult for principle countries to move awayfrom political integration."

But the United Kingdom, one of Europe'sstrongest political and economic members, has yetto cast its lot with EMU, raising doubts amongsome about whether full economic integration willhappen.

Many investment strategists predict that theeuro will strengthen large, pan-Europeancorporations, bringing greater prosperity to thecontinent and making Europe attractive forinvestments.

"In final analysis the euro makes Europe astronger investment climate," Frieden said. "BigEuropean corporations will be the principlebeneficiaries."

But others disagree, saying that in the longrun the euro will have little effect on theprofits shareholders accrue from Europeancompanies.

"I'm not sure that I would be any more inclinedto make any long term investments in Europe than Iwas before the euro came into being," said DaniRodrik, who is the Hariri professor ofinternational political economy at the John F.Kennedy School of Government.

EMU remains a risky proposition that, if itfalters, could have negative repercussions aroundthe globe.

Some analysts say there are two major potentialproblems in implementing EMU: the lack of apolitical union to support the economic union ofthese countries and the economic differencesbetween the 11 nations.

"In the United States monetary union isembodied in a political system," Rodrik said. "InEurope we do not have a real political system.Isolation from democratic processes can severelyundermine [EMU]."

Frieden said he anticipates Europe will havedifficulty converting to a common currency,because it does not meet the usual standards for asingle currency. The 11 nations have divergenteconomies, causing many to question the likelihoodof the success of a one-size-fits-all economicpolicy.

As for the new currency's effect on the UnitedStates, it's anyone's guess. Euroland's 292million inhabitants outnumber America's 268million, and the 11-member block produces 18.8percent of the world's exports, compared with the14.1 percent produced by the U.S.

"The euro and the dollar will be the world'sinternational currencies," Frieden said. "The twowill engage in a healthy rivalry."

Currently valued as the most secure investmentfor those speculating in cash, the dollar may loseto the euro as the currency of choice.

These fluctuations, however, will not directlyconcern Harvard. Meyer said the University doesnot engage in much currency speculation and doesnot plan to purchase euros.

In the long run, Frieden said he thinksAmerican firms will not suffer from competitionwith euro-based firms. Institutions, like Harvard,with large amounts of equities in big Americancorporations will not suffer losses due to theeuro, he said

But the United Kingdom, one of Europe'sstrongest political and economic members, has yetto cast its lot with EMU, raising doubts amongsome about whether full economic integration willhappen.

Many investment strategists predict that theeuro will strengthen large, pan-Europeancorporations, bringing greater prosperity to thecontinent and making Europe attractive forinvestments.

"In final analysis the euro makes Europe astronger investment climate," Frieden said. "BigEuropean corporations will be the principlebeneficiaries."

But others disagree, saying that in the longrun the euro will have little effect on theprofits shareholders accrue from Europeancompanies.

"I'm not sure that I would be any more inclinedto make any long term investments in Europe than Iwas before the euro came into being," said DaniRodrik, who is the Hariri professor ofinternational political economy at the John F.Kennedy School of Government.

EMU remains a risky proposition that, if itfalters, could have negative repercussions aroundthe globe.

Some analysts say there are two major potentialproblems in implementing EMU: the lack of apolitical union to support the economic union ofthese countries and the economic differencesbetween the 11 nations.

"In the United States monetary union isembodied in a political system," Rodrik said. "InEurope we do not have a real political system.Isolation from democratic processes can severelyundermine [EMU]."

Frieden said he anticipates Europe will havedifficulty converting to a common currency,because it does not meet the usual standards for asingle currency. The 11 nations have divergenteconomies, causing many to question the likelihoodof the success of a one-size-fits-all economicpolicy.

As for the new currency's effect on the UnitedStates, it's anyone's guess. Euroland's 292million inhabitants outnumber America's 268million, and the 11-member block produces 18.8percent of the world's exports, compared with the14.1 percent produced by the U.S.

"The euro and the dollar will be the world'sinternational currencies," Frieden said. "The twowill engage in a healthy rivalry."

Currently valued as the most secure investmentfor those speculating in cash, the dollar may loseto the euro as the currency of choice.

These fluctuations, however, will not directlyconcern Harvard. Meyer said the University doesnot engage in much currency speculation and doesnot plan to purchase euros.

In the long run, Frieden said he thinksAmerican firms will not suffer from competitionwith euro-based firms. Institutions, like Harvard,with large amounts of equities in big Americancorporations will not suffer losses due to theeuro, he said