Profound changes await savers in euroland

The arrival of the euro in January is going to change life for most of us in one way or another. For some the change will be beneficial, but inevitably there will be some losers. Most affected groups are probably aware at this stage what the broad implications will be, but little attention has been focused on the personal saver. The implications for the personal saver in Ireland are quite profound and, without careful management, this group could become one of the casualties of the new currency regime.

First and foremost, Ireland will enjoy a level of interest rates in euroland significantly lower than it has ever been accustomed to. At the moment, money market rates here are standing at around 6.2 per cent, while the equivalent rates in the core countries like France and Germany are hovering around 3.5 per cent, with the remainder somewhere in between.

By January 1st, these differentials will have disappeared and total convergence will have occurred. The only question from Ireland's perspective is the level at which rates will converge and how the Central Bank will engineer the convergence. The answer to the first question is quite straightforward; high unemployment, well behaved inflation and modest, albeit improving, economic growth will limit the ability of either the Bank of France or the Bundesbank to tighten rates by anything more than 0.25 per cent this year.

This means that Irish rates will have to fall by anything up to 2.5 per cent. The timing will be determined by the Central Bank, but all the indications suggest that it will happen later rather than sooner. Looking at the interest rate environment thereafter, euroland is likely to remain a low interest rate environment as far forward as one can reasonably predict. From an Irish savers perspective, this sort of interest rate prognosis is not good news and will further undermine the already meagre returns from traditional deposit instruments.

Furthermore, with inflation now trending upwards and likely to go a bit higher before it stabilises, the real returns from savings could well go into negative territory.

This suggests that savers themselves and the providers of savings products will have to become a lot more innovative in the new environment, simply because interest bearing products will not be as attractive. If the precedent in other countries is anything to go by, tailored and more sophisticated products will become the order of the day. The remarkable growth of the mutual funds industry in the United States has introduced a very substantial equity-owning culture to that country and there has been a concomitant increase in the interest shown by normal punters in the equity market. This is evidenced clearly by the growth in market newsletters, while the New York Times' best seller list permanently contains at least one book on how to beat the market, if indeed such a thing is possible.

Ireland in contrast, has a relatively unsophisticated share owning public, with the majority of the few who actually dabble, tending to concentrate on a limited number of stocks.

This is not too surprising because there is a dearth of excitement in the market and certainly it is surprising that many more companies are not coming to the market in this vibrant economic climate. Small investors need not fret however, because if the entrepreneurial spirit lacking in the Irish market does not improve, EMU will present many more opportunities. There are numerous reasons why small Irish investors have not traditionally invested in European equity markets - the exchange rate risk involved, the lack of research and the absence of a real wealth base being just three.

After January, the definition of the domestic stock market will change from the Irish market to the euroland market, as we will all then be exposed to the same currency.

The elimination of currency risk should encourage Irish investors to look at other markets in euroland, but this will necessitate the provision of decent research. This research function could become a lucrative occupation for those in the financial sector who will become the victims of EMU.

Furthermore, the much vaunted "Celtic Tiger" has created considerable wealth in the country over the past five years, so there will certainly be more money around to invest. This investment in overseas stocks and decent domestic stocks will be facilitated by the evolution of new mediums for buying and selling, with the growth of the Internet being the most obvious method.

The euroland equity market is also likely to be a very exciting one in the early years of EMU, because increased competition will force a dramatic change in the European corporate landscape. Takeovers, mergers and cross-border alliances will become the order of the day and the range of relatively safe equity investments will become much greater.

For risk averse individuals there will still be little appetite for equity exposure, but it is probable that a greater and more innovative range of interest bearing products will satisfy that market.

It remains to be seen if tax recognised savings schemes such as 401k in the United States become more commonplace in order to facilitate the management of one's own pension. However, one thing is sure, the providers of savings products and savers themselves will face considerable challenges in order to exploit the opportunities which EMU may present.

Jim Power is chief economist at Bank of Ireland group treasury. The views expressed here are personal.