Personal finance: Sneaky Germans

The trouble with going on holiday is the problems that mount up for you to deal with on your return. Just imagine. The Bundesbank sneakily put up interest rates - well, as sneakily as you can when every other aspiring entrant to EMU follows suit. Talk about an orchestrated knee- jerk reaction. And it added to the cost of my holiday!

The central banks of those countries deemed likely to be the first entrants to a single European currency reacted in a similar way. Expect more of the same over the next six months.

It was rather appropriate that my first task on returning to London was to address a convention of German bankers. From the perspective of Frankfurt and Hamburg, the prospect of a single European currency does not look in doubt. It is not just the political will that is there - the belief is that the economic convergence can be achieved.

It really is the topic of the moment. The Motor Show opened this week amid a flurry of statements from motor company chief executives saying Britain must be part of EMU. Already a number of car manufacturers with plants across Europe and in Britain are invoicing in euros. It was not just the continental car makers that wanted Britain in the single currency. General Motors has indicated it might move manufacturing on to the Continent if Britain stays out.

To some extent, this is posturing. The rise in sterling has undoubtedly hit the profits of some of the car manufacturers, but we retain a more flexible labour system which the manufacturing industry will be loath to surrender. It is hard to see a mass migration across the Channel post- January 1999. Nevertheless, the battle lines are being firmly drawn.

One British chief executive cast doubt on whether a single European currency was achievable in the absence of harmonious tax regimes. I have much sympathy with that. The booze cruise has become part of the British way of life.

It will become even more attractive if the costs of converting sterling into francs is removed as well.

In practice, some degree of local taxation differential is inevitable. It already exists in the sense that local authorities charge for their services at different rates. A more federal system would probably not create too many problems. But the big imbalances would have to be ironed out.

If this is a detail, then convergence remains the important aspect of the move to a single European currency. It has been the belief in convergence that has driven bond markets higher. Indeed, this has not just been a European phenomena. Third World debt has been accelerating in value, reducing the risk premium to the point where many commentators consider dangers are now being built into the system.

Even Alan Greenspan indicated he was concerned at the extent of possible over-heating in the bond market.

His comments, and the rise in continental rates, have brought to a close the bull market running bonds that have delivered handsome profits over recent months. What we now have to determine is if the retrenchment will have far to go or if this will simply be a mild correction in what is otherwise a readjustment in the cost of money to reflect the realities of a low-inflation environment.

Time will tell, but writing this as I am, on the anniversary of the great storm that preceded the stock market crash, I am a little cautious.

Brian Tora is chairman of the investment strategy committee at Greig Middleton and may be contacted on 0171-655 4000.