British industry will struggle to get ahead in the single market

Diane Coyle on BREACHING THE EUROPEAN BOUNDARIES

The odds on Europe's single currency actually going ahead are improving steadily as the weeks go by. If nothing else, this is generating rapid growth in the business of holding conferences about the implications of EMU. Some of these are thought-provoking indeed. For the closer 1 January 1999 gets, the more likely it looks that there will be dramatic changes in Europe's industrial structure.

The trigger for this restructuring will be the creation of a true single market. As the example of the US-Canadian border shows, this is something that does not come into being without a single currency no matter how minuscule the trade barriers or how intertwined the economies.

The switch from being a group of close trading partners to being one big market will open companies' eyes to the possibilities of exploiting bigger economies of scale. This is precisely why EMU has the potential to boost long-term economic growth.

Most economic theory has ignored the possibility of economies of scale - one example of "increasing returns", whereby the amount of output per unit of inputs rises the more is produced, and average costs fall as the scale of production increases. In practise, however, increasing returns are widespread and becoming steadily more pervasive in modern economies.

Some examples are obvious. The research and design costs make building the first aircraft far more expensive than subsequent ones. There is really room for only one commercial aircraft manufacturer in Europe. Research costs in pharmaceuticals make the same true of new drugs.

In fact, there are increasing returns in any industry where a high initial investment is needed for reasons of design or infrastructure, such as telecommunications or cars.

There are also examples that are less obvious but turn out to be widespread across the weightless industries. Take "people" businesses such as consultancy, advertising or the media, all accounting for a growing share of the economy.

Mostly, these can be done on a small scale; it only takes one or two people to write an advertising jingle. But in all these cases people prefer to collect together in agencies, in order to generate ideas, brainstorm, keep an ear to the ground about work prospects and so on. There are additional benefits to be gained from the larger scale.

This is true, as well, wherever ideas and intellectual capital are important, including software or biotechnology. In software, especially, it is important to be big enough to capture "network" gains, the fact that a programme becomes more useful the more lots of other people use it.

One of the consequences of industries characterised by increasing returns is that chance events deliver the bulk of the market share to one company. It is a winner-takes-all world. To become the winner it is often enough just to be first. There are countless examples of one company or one place dominating an entire market, especially when one technology is able to drive out others. The VHS standard for videos or Microsoft's operating system for personal computers are good examples.

But it is not always a question of getting a technological lead. Writers such as Michael Porter, John Kay and Paul Krugman have documented the strong tendency towards agglomeration in business, mainly as a result of accidents of history.

Concentration is the norm rather than the exception. But whereas industry in the US is very concentrated and individual states specialise in only a few products, most European countries produce a wide range of goods and services.

Breaching the boundaries that have divided Europe into separate markets will stimulate a new wave of agglomeration. Economists at City investment bank Dresdner Kleinwort Benson have tried to figure out from past trade patterns which British industries have enough of a comparative advantage to scoop the European pot, and their report makes slightly alarming reading.

The good news is that the UK advantage lies in services (other than tourism) which are taking a growing share of all modern economies, rather than goods, whose share is shrinking. Britain also has a clear advantage in telecommunications, and a less pronounced lead in science-intensive areas such as pharmaceuticals, advanced instruments, computers and power-generating equipment.

Luckily, these are the right areas in which to have a head start. But apart from these cutting-edge areas, the chances of British manufacturing industry look dim.

The UK is at an overwhelming disadvantage in almost every other area, including food manufacture, plastics, textiles and much of the engineering sector, for instance.

These might be on the decline, but they still produce a lot of goods and employ a lot of people.

A separate report this week from management consultants KPMG points out that, quite apart from any large-scale redrawing of the industrial map, pan-European companies will do a lot of internal reshuffling anyway.

KPMG's Rory Colfer predicts that many will concentrate their accounting, treasury or purchasing operations on one site in single centres serving the entire company. This will be a matter, not of centralisation, but of increasing efficiency made possible by technology and triggered by the introduction of the Euro. "We are looking at the biggest changes in company structures since the 1970s," he says.

There is a final issue, which is that the pattern of production in a world of increasing returns is often unstable. One company can dominate an industry for decades and then, seemingly overnight, be toppled by another.

IBM used to be the titan of the computer industry; Microsoft will no doubt share its fate one day.

All in all, joining the single currency implies for all potential members an extraordinary degree of industrial restructuring in order to deliver the long-run economic benefits of a true single market.

At a guess, the EU will end up with one country making cars, another producing pharmaceuticals, another manufacturing Europe's textiles and clothing. Britain will lose two of these; we will not be home to Europe's Motown.

It doesn't mean EMU shouldn't go ahead, but it would be nice to believe Europe's politicians had thought about the economic consequences of what they were getting into.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore