When the walls come down
B E R L I N
A common European currency promises lower prices and more competition. Many local businesses do not want that; many more are unprepared for it
GERMAN holidaymakers are energetic souvenir-hunters. When they visit Spain or Italy, however, their bargains are often of a home-grown variety: German cars in Italy, for example, can cost up to 30% less than at home; in Spain, a pack of 20 aspirins made by Bayer, a German chemicals conglomerate, costs the equivalent of 20 pfennigs (11 cents), compared with 34 pfennigs in Germany.
Although some of these price differences sound trivial, they are beginning to pose a fundamental question for European business. Will European firms be able to maintain the cosy segmentation of the continent into different national markets, in which prices are set according to what the locals will pay, or will a single market on the American model develop, where inter-state trade creates some of the lowest prices and fiercest competition in the world?
No one doubts the general direction. The European Unions single market, now nearly five years old, has already encouraged companies and individuals to shop across borders. British drinkers stock up on booze in France or Belgium; French drivers buy their petrol in Luxembourg; Austrian shoppers find almost everything is cheaper in Germany.
The single currency assuming, as most European businesses do, that it goes aheadwill make the single market work much more transparently. The 12 likely participating countries exclude Britain but include continental Europes three biggest economies: Germany, France and Italy. In this new euro zone, customers of all kinds will be able to pick from the prices and products on offer, without worrying that a foreign suppliers advantage will be wiped out by a change in the exchange rate.
For many European businesses, the real significance of this has yet to sink in. A survey of the preparations for the single currency by 105 European companies* by the Economist Intelligence Unit (EIU), a sister company of The Economist, suggests that the immediate concerns of executives are about the savings which a single currency will bring, relative to the costs of implementing it.
These are certainly important. At present, a company active across the European Union may run several different sets of accounts, trying to keep its cashflow in all of them as predictable as possible, for example by buying the currency it needs in advance. In future, this will be largely unnecessary: when the single currency comes in, most big companies will cut the number of people they employ to manage their foreign exchange by up to half.
The costs of foreign-exchange transactions have already been dwindling (see chart). But they are still a burden, especially for smaller companies which lack the financial muscle to handle foreign transactions cheaply. In Germany foreign-exchange costs account for almost 1% of GDP, or DM35 billion, according to a study by investment bankers at Salomon Brothers. Of this, around DM25 billion is borne by business and the rest by the banks. But the net effect of these cost savings will be balanced, or even outweighed, by the mechanical costs of the transition to the euro, such as reorganising accountancy practices and computer systems.
The really important effect of the single currency will be price transparencyand the tussles it will cause between buyers and sellers of goods and services. It is the single biggest issue for us in preparing for the single currency, says one senior executive at Sony, a Japanese electronics firm. Manufacturers will try to keep their prices up; retailers to haggle them down. If, for example, the German price for a radio is 20% higher than for the same product in Portugal, German retailers will be tempted to order from Portuguese distributors (or their customers may find Portuguese mail-order houses offering cheap radios to them directly).
Currently, such parallel imports, as they are termed, are discouraged. In future, manufacturers may still be able to exert pressure on small shops or the distributors which supply them. With big retailers, however, this will be harder. Eventually, it will be almost as difficult for one company to sell at widely different prices in two European countries as in two American states. The markets that will remain segmented will probably be only those for goods and services which are hard to move across national borders (such as perishable food) or those subject to special national norms (such as televisions in France, which run on a different standard from those in the rest of Europe).
For most products, most companies look likely to move towards a single price for Europe, expressed in euros. Some do this already: Hewlett-Packard, for example, has already abolished national prices for office supplies such as printer cartridges; the same policy is likely to apply to office equipment when the single currency comes in. Schering, a German pharmaceutical company, recently introduced a new drug for multiple sclerosis at a single pan-European price.
Some prices, mainly of luxuries in poorer countries, may rise. But overall, prices will fall in the more expensive European countries, and so will average prices for goods and services across Europe. We have signals that the price differences will sink dramatically, says Gregor Schoess, an executive at Continental, Germanys largest tyre manufacturer. One senior German car manufacturer has been suggesting that, if car prices are currently in a notional range of 80 to 100, they will average 85 in future.
The pain will be shared. German car companies are already warning their suppliers (a much-squeezed industry these days) to be ready for further price cuts and efficiency drives. Continental, which is busily building up production in low-cost countries, such as Portugal, announced further cuts in Germany this week.
The second big effect of the single currency will be to open the European market for those small and medium-sized companies which have so far concentrated on their domestic customers. Salomon Brothers estimates that currency fluctuations, and the costs of dealing with them, have deterred fully a third of small and medium-sized German companies from venturing abroad. Many that do export have concentrated exclusively on countries where currencies are informally linked to the D-mark, such as Austria and the Netherlands. In France, a study of small companies in the Paris region by Andersen Consulting found that nearly half expected to start selling in new markets as a result of the single currencys introduction.
Which industries will win and which lose from the euro? Among the significant losers will be the banks, which will lose their business of buying and selling European currencies and carry most of the costs of the transition. The biggest difference, however, will be not between industries but between efficient, flexible companies and those that stick to their old national ways.
Smaller companies which have concentrated on their national markets will be particularly vulnerable to takeover, or extinction, at the hands of their more far-sighted European competitors. Those businesses already used to competing internationally will have a strong advantage. The EIU study argues that, as sources of supply widen, specialisations based on national talents will develop further. French and German companies, for example, are already running call-centres from Dublin, where multilingual Irish operators (or continental expatriates who prefer life in Ireland) provide advice or take orders over the telephone more cheaply and flexibly than would be possible in the companies home countries.
All this suggests that workers in the higher-cost regions of Europe, already grumpy about the demands of globalisation, will soon have a great deal more to complain about. Those cheaper aspirins may find some ready buyers.
*Corporate Strategies for the Euro. EIU. To be published in September 1997
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