Peter Martin: Emu's new horizons

The euro changes everything. Its introduction in January 1999 will be a watershed for European business, as this week's wave of pan-European bids and mergers confirms.

Until now, most of the discussion about the single currency has been conducted in national terms. Which countries will qualify? Which economies will gain or lose from a one-size-fits-all monetary policy? Which nations' politicians will have most influence on the board of the new European Central Bank?

But to think of the single-currency project in those terms is to miss the point. The essence of the project is to erase the national boundaries that still govern most people's thinking.

In many countries, the debate over the euro has focused on its suitability as a replacement national currency. A slightly more sophisticated level of discussion has seen the single currency as merely another variant of fixed exchange rates.

To the business people who must cope with its consequences, however, monetary union is something far more significant. It removes a crucial - arguably the most crucial - barrier to the creation of a fully integrated European economy, operating on a continental scale like the US.

What are the reasons for the sweeping nature of this change? And what are the consequences for business?

The answers to the first question are not, at first, obvious. After all, there have been currency unions before - between Britain and Ireland, or Belgium and Luxembourg, or the Latin monetary union of the mid-19th century. Few of these justify such portentous language. And though the Bretton Woods system, which governed international monetary relations for the quarter-century after the second world war, was not a currency union, it did impose fixed exchange rates on the whole of the developed world. So why should European business be transformed now by a reversion to such rates?

The reasons for seeing the euro as a watershed are three. First, the creation of the single currency will mark the climax of a sustained effort to create a genuinely single market in Europe, dating back at least to the Treaty of Rome in 1957. A great deal of progress has been made, but the single market still awaits the final, symbolic step: the setting of all prices in a single currency. Overnight - in 2002 when euro notes and coins replace national denominations rather than in 1999 - prices in one country will be instantly comparable with those in its neighbour. Goods and services which have increasingly become homogeneous in packaging and content will now be subject to a common set of pricing disciplines.

Second, monetary policy in the euro region will be set with reference to economic conditions in the whole of the area. Though "core Europe" - today's D-Mark bloc plus France - will strongly influence the decisions of the new central bank, monetary policy will still be less attuned to any country's domestic economic conditions than is currently the case. The nation will be even less relevant as a unit of economic activity. This, of course, is what opponents of the single currency, both economists and politicians, object to.

Third, the introduction of the new currency is taking place at a time when technology and globalisation of markets are freeing companies from their historic national roots. Individual European governments have much less ability to force companies into line. Again, a national frame of reference becomes less relevant.

So what will the consequences be for business? Some will be practical, others more sweeping and distant. In the short-term, companies will need to cope with the consequences of greater cross-border price transparency. They will almost certainly need to move towards a common European price-list, with some regional variation. This will be a big shift from the current pattern of separate national prices, influenced heavily by custom and much more lightly by the desire for Euro-consistency.

Similar nagging practical matters - already widely recognised - will arise over handling the new notes and coins, switching to euros for accounting, issuing new share certificates in euros and so on.

Though these issues will consume millions of hours of work, they are not the central ones. As the merger wave indicates, companies are already trying to scale themselves up to cope with a number of bigger, longer-term trends.

The most obvious of these is that physically transportable products, especially ones where there is little difference in national tastes, will become commodities traded in Europe-wide markets by a relatively small number of companies operating on a continental scale.

Money is the most easily transportable product of all, transmissible at the touch of a switch. So it is not surprising that many cross-border mergers are taking place in financial services. When all banks and insurance companies are providing services in a single currency, the biggest remaining national barriers in this industry will have fallen.

There will still be barriers of information, of course. Consumers will be ignorant about non-local suppliers of financial services. Banks will be ignorant about unfamiliar credit risks; insurers about local patterns of health and behaviour. And, despite the EU's single passport for financial firms, there will be local regulatory barriers to foreign firms.

But it will be only a matter of time before all these obstacles fall away.

In financial services, as in other highly transportable businesses, the winners will be those competitors that most rapidly - and most cost-effectively - develop trusted Europe-wide brands. These may not, of course, be European-owned.

A second big theme affecting companies is the impact of changes in the capital markets. In most European countries, interest rates will fall to historically low levels.

They may also - though this is a more controversial point - be more stable, as they shift from following the vagaries of national economic cycles to tracking the larger and more diffuse European one. Certainly, a huge, liquid pan-European bond market will emerge, providing a cheaper, more plentiful source of long-term borrowing.

This will change the competitive picture in capital-intensive businesses, and in those industries where mid-sized competitors have previously had limited access to long-term money.

Similar changes may also make equity finance more widely available, as investors react to the absence of currency risk by diversifying their portfolios across national borders.

Across Europe, entrepreneurs will rush to use these new financial opportunities in order to assemble hasty, ambitious business empires. As is usually the case in eras of financial innovation, many of these "first flush" empires will not survive in their initial form. But from their ashes a smaller number of well-run pan-European businesses will arise - companies that would not have come into being without the excesses of their founders.

A third theme of the euro era has already been foreshadowed. Governments will lose influence, and the national frame of reference will become less useful. Companies will think increasingly of non-national target markets: regions, linguistic groups, demographic cohorts, cross-border pools of people with similar aspirations and tastes.

As they do so, and as they become larger, pan-European entities, they will come to realise that individual national governments influence them in only a handful of ways - and each of these can be avoided. National governments set tax rates; they establish labour regulations; and they influence the framework for corporate governance.

Increasingly, however, companies have discretion in the extent to which they are subject to these influences. They can shift production abroad; they can move their tax burden round the world; and they can transfer their corporate entities to other stock exchanges and other legal jurisdictions. An integrated European economy will make it ever easier for companies to circumvent national European jurisdictions, undermining the power of governments further.

Paradoxically, companies' ability to escape will make governments keener to exact tribute from those that do not, or cannot, threaten to make use of their greater mobility. As the levers of monetary control slip out of governments' hands, and as the fiscal autonomy of euro member states becomes limited both by the "stability pact" governing members' fiscal policy and by the limits of public tolerance for taxation, the battleground shifts.

The 35-hour week promises in France and Italy are a reflection of this trend. In the long-run, companies can escape them by moving operations abroad; in the short-run, they reflect a lingering desire on the part of governments and voters to re-establish the national frameworks that are crumbling everywhere.

Such developments indicate the severe political tests that the single currency will have to undergo in the early years of the next century. It may not survive. But if it does, European business people will have to adjust to a completely different environment.

The question of whether monetary union is a good thing for Germany or a bad thing for Britain will come to seem obsolete. Some companies in every country will prosper from its consequences; others will suffer. The members of each group will have more in common with fellow beneficiaries - or sufferers - across Europe's vanishing borders than they will with compatriots in the other camp.

National identity will remain relevant in some areas - culture, law, education, infrastructure. In other areas of life, especially those that influence purchasing decisions, other identities will prevail: local, linguistic, group, or Europe-wide. For 21st century European business, this second category will be the crucial one.

The introduction of Europe's single currency is only one of the forces which are bringing about this shift. But in years to come, we shall see it as the moment at which the balance tipped. 


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