Europe remains a collection of nations rather than a homogenous entity

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Indy Lifestyle Online
2004: THERE IS a date to conjure with. Write it in your diary. It promises to be an eventful year in the UK. According to Prime Minister Tony Blair, 2004 is the first year in which we might reasonably be expected to join the Single European Currency.

There are a lot of hurdles to cross before we sign up to the euro, but the coded message is that we are going in. However the referendum is worded, it sounds as though it will be begging the answer yes to linking the pound to the currency of our continental cousins. For all I know, "our Tone" is right. But it does strike me that two months is not a very long time in which to make a judgement.

Most predicted that the euro would become a true reserve currency, offering strength and stability and maybe even sitting alongside the dollar as a fortress of rectitude in an uncertain financial world. It may achieve that status, but it weakened against sterling and the dollar after its introduction.

I know you could put it the other way round and say that America and Britain have strong currencies, but it only goes to show that you should not believe financial forecasters.

The investment case for Europe is undeniably strong. More people live in the European Union than in the USA, yet the combined stockmarket value of member states (excluding the UK) is less than one-third of the US. Europe is hardly poor, but total GDP trails that of the US, which demonstrates that Europe remains a collection of nations, not a homogenous entity.

One of the most compelling arguments for investing in Europe is the case for rationalisation. I am not talking about just the type of M&A activity characterised by Olivetti's audacious bid for Italia Telecom. There is still enormous scope for European industry to consolidate and build businesses capable of competing with the best that America can produce. To some extent this is already happening. European drugs companies are world class, for example. But there are 50 tractor manufacturers throughout Europe. In the US, there are four! The same is true elsewhere. Forty battery manufacturers in Europe, five in the US; 10 turbine makers this side of the Atlantic, two the other. So expect the ingredients for a sustained bull market.

Provided the economies hold together, of course. The Chairman of the Federal Reserve, Alan Greenspan, is worried that European governments are not doing enough to stimulate economic activity. Perhaps we need to look at America and realise they have got something very right over recent years.

One final tip. I have not been a fan of trackers - index-matching funds that are cheap to run and pull in a great deal of money. Yet there is a body of opinion that says our own FTSE 100 index may not survive outside the wider context of an index of top European companies.

In any case, it seems inevitable that there will be a flow of money into funds that invest in Europe's largest companies. A true European tracker should do well. Until someone invents a better type of mousetrap, that is.

Brian Tora is chairman of the Greig Middleton investment strategy committee

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