The sceptics said it would never happen. But in May 1998 Europe’s heads of government will select as many as 11 countries to adopt the euro, which will become an official currency in 1999 and be phased in over three years (Exhibit 1). Although a last-minute crisis scuppering the plans cannot be ruled out, it would seem wise to assume that European economic and monetary union (EMU) is about to become a reality.
Astonishingly, many banks remain ill prepared. Although they have tackled the IT and operational challenges raised by a single European currency, they have failed to address the more difficult strategic issues. Put bluntly, they have not considered how they will prosper once a single currency wipes out great chunks of profit in their traditional wholesale businesses of foreign exchange, corporate banking, and government bond trading.
Today, these businesses account for between 40 and 80 percent of a European bank’s revenue. To European banks as a whole, that revenue is worth approximately $100 billion; in less than a decade, it could be slashed to $77 billion.1 Unless the banks can restructure their cost base, the overall decline in profits could be even steeper.
EMU will, of...