In fact, there is a decent case to be made that the main impact on the European economy of EMU, if it happens, will not be at a macro level but at a micro level. The change will not be so much in interest rates or government policy, but in company behaviour.
This is an argument which is being made in particular by the UBS economics team in London, and it seems a convincing one. The starting point is that there is not a lot of leeway available to national governments in setting monetary policy, or increasingly fiscal policy. So the monetary policy imposed by the European Central Bank, and the fiscal policy determined by the stability pact now being negotiated, will be pretty much the standard orthodoxy required by the financial markets. A common currency, however, will force convergence in other ways, for example in pension provision. It would not be possible for one country to carry on with pensions paid largely on a pay-as-you-go basis, if other members of the currency union had funded schemes, a point which has great implications for stock markets in continental Europe.
So macro-economic convergence will force convergency in the size and structure of share markets. But what about industrial structure? I became aware of another implication of the single currency in conversation with a director of a large continental food firm last week. This company prices its products differently in different markets. It tends to manufacture locally and, in countries where costs are higher, charges more for its goods. The fact that this is not the most efficient method of manufacture is compensated by the fact that exchange exposure is limited. In theory the company could presumably cover itself against shifts on the exchanges but in practice local manufacture is a convenient way of so doing. In any case, the company can get away with it: while there are different currencies these differences in prices are not apparent.
Were there to be a single currency, not only would exchange rate risk be eliminated: any pricing differences would become immediately apparent. One macro effect would be to force convergence in VAT rates; the micro equivalent would be a rapid harmonisation in prices and an almost equally rapid shift in production to the lowest-cost production centres. If companies did not harmonise prices then arbitrage would do so; and the convergence of prices would mean that they could no longer "carry" high-cost plants by imposing higher prices on those markets.
Now in a general sense this point is appreciated by the policy-makers, for one of the arguments in favour of EMU is that it will encourage economic convergence. But there is not much evidence that they appreciate this will mean factory closures in the high-cost locations and/or a general rise in the price levels in low-cost ones.
This last point was put by a colleague to the chief executive of another large European food group: would joining the single currency mean a rise in the general level of UK prices?
The response was a guarded one - according to my colleague a lot of shilly- shallying and the implicit acknowledgement that UK prices for this group's products would rise towards continental levels, but no clear answer. That might be understandable under the circumstances, but my colleague was distinctly underwhelmed.
So there are two potential micro shifts - the shift of continental European financial systems to the equity culture, and the harmonisation of prices, or at least the prices at which producers sell their goods wholesale, across Europe. If the latter were to result in rises in the British price level, I'm not sure whether that would count as a micro or a macro effect in economic terms, but it would certainly be pretty macro in political terms.
But the overwhelming balance of probability is that, even if the project goes ahead, the UK will not be part of it. Will these micro effects still happen in the UK?
I think the answer is yes, because in the world of finance the anticipation of an event is almost as important as the event itself. Think back to privatisation: before a nationalised industry was privatised the management would tackle many of the underlying problems of the business. The quality of service started to improve, overmanning started to be reduced. In management terms the preparation for privatisation gave the spur: change started to happen before the actual share sale.
It is reasonable to expect a similar process to occur with regard to EMU. You can see this happening in fiscal policy: governments doing what they know they should have done years ago to correct their deficits. Now expect it to start happening at a company level: companies improving the efficiency of their European plants, taking the decisions they know they should have taken and which they are now spurred to do.
The result will be a more efficient and a more specialised Europe. This will affect the "outs" as well as the "ins", because the business community will work on the assumption that the outs may join later. This will have two main effects: the European economy will benefit from the drive to increase efficiency; but the social costs of this harmonisation of the European economy will be large.
Most important of all, the European economy will come to look much more like the American one, with even small companies seeking to sell their products to the wider market. But countering this will be political unrest, as more jobs are seen to go to low-cost countries.
Arguably that would help the UK as it is, by European standards, a relatively low-cost producer. But that would further intensify the concern in other countries about this cost advantage and increase the efforts by other countries to ensure that Britain does not have an "unfair" advantage from these lower costs. The single currency will force politicians to confront the costs as well as the benefits of economies becoming more specialised, costs which will show up particularly in the form of changing employment - and unemployment.Reuse content