In that context, the Prime Minister's speech at the London Business School last Tuesday was designed to be reassuring. "Britain should join a successful single currency," Tony Blair said, "provided the economic conditions are met. It is conditional. It is not inevitable. Both intention and conditions are genuine. We have, as a Government, resolved the political issues in favour of the principle of joining, should the economic tests be met. But they must be met."
The whole thrust of the speech was positive enough to smoke the Tory "wets" out of hiding: Kenneth Clarke duly delivered an echoing broadside in favour of the euro, and therefore served warning on William Hague that the Conservative europhiles would no longer suffer in silence. Mr Hague will not be able to run the sort of campaign he did during the European elections without revealing the splits in his own party.
Nevertheless, the noises from the Chancellor's camp are less reassuring. Gordon Brown is reported to be open to a delay in holding the euro referendum, as he is keen to cement his claim to have improved Britain's economic performance. The Chancellor need not be concerned. Friday's GDP figures show that growth was 0.5 per cent in the second quarter, a respectable rate. The fears of recession at the end of last year have gone. Even manufacturing output has been recovering since its December-February trough despite sagging export volumes.
In short, the overheating which was the legacy of the Tories' pre-election boomlet has been expunged without a full-blown recession. Mr Brown's decision to vest interest rate policy in the Bank of England has been amply vindicated. (Indeed, central bank independence is about to become an all-party consensus if the shadow chancellor's hints this week are taken at face value).
What is worrying is that neither the Chancellor nor the Prime Minister appear to understand that there are real economic costs to their delaying strategy on the euro. Across the eurozone, businesses are adjusting to a new reality in which they are no longer able to segment national markets and charge whatever price the local customers will bear. Multinationals are overwhelmingly taking the view that they will need one price list for the whole euro-zone or they will find their customers - wholesalers, retailers and consumers - taking advantage of the price differences to buy in the cheaper countries. The euro removes the last obstacles to a real single European market like the US market - and Britain is not in.
The extent to which prices can vary with different currencies is often underestimated, but a useful approximation was given in a recent study in the American Economic Review (December 1996) which looked at price differences across the United States-Canada border. Despite a common language, and free trade, this showed that the price differences just one mile across the border were equivalent to the price differences within either the US or Canada created by a distance of 1,780 miles. In effect, the abolition of currency differences in the euro-zone is shrinking the pan-European market, bringing those competitors far closer to home.
Many of the biggest multinationals think they will be to able to move their existing and widely differing euro-zone prices in line with their current average. But this is almost certainly an error. In fact, the euro- zone will look like the more competitive of the existing national markets after 2002, when the existing national notes and coin are exchanged for the physical euro notes and coin. If it is worth the most competitive business in a sector selling at a low price in, say, Belgium now, it is not likely to raise its price in future just to be friendly to its competitors. Prices are likely to be lower than today's average price level.
The steady downwards pressure on prices and profit margins in Europe is already beginning, according to the recent study from Dresdner Kleinwort Benson. Although the euro is the most far-reaching spur to such alignment, as it will affect every type of product and market, both e-commerce and global overcapacity in manufacturing are adding to the mix. This squeeze on margins will, as always, lead to a quest for efficiency gains, productivity improvements and modernisation. The analogy is precisely with the first 10 years of the European Community after 1958, when trade liberalisation spurred businesses in the original six to consolidate and grow more efficient.
This also, of course, means mergers so businesses can produce on a bigger scale. And there is, indeed, an unparalleled merger boom going on in Europe, with mergers and acquisitions activity in the first six months of this year reaching nearly $500bn, five times the peak of the last European merger boom in 1990. As Ben Funnell of Morgan Stanley pointed out in his recent study: "There are several factors driving mergers and acquisitions in Europe, the most important of which is EMU. As national competition barriers come tumbling down, so the feasibility of entering and competing effectively in neighbouring markets rises, but this is particularly the case in less-differentiated, commodity-type industries where scale economies are important. The financial-services industries are arguably the best example of this feature of EMU."
We have already had BNP's bid for Societe Generale and Paribas, Banco Santander-BCH, Fortis-Generale de Banque, San Paolo-IMI, and Credito Italiano- Unicredito. But this wave of consolidation is probably just beginning. In sector after sector, there are far more European companies producing goods and services than US companies, despite the similar size of the markets. There are nine machine tool makers making up half the European market, against just four making up half the US market; seven insurance companies against four; 12 banks against six; two car companies against one and so forth.
Excluding the utilities sector (where Europe is highly concentrated due to the legacy of public ownership), there are 110 European companies making up 50 per cent of sales in their respective sectors in Europe against just 77 companies in the United States. According to Morgan Stanley, the average European company has a market capitalisation of $7.4bn, just half that of the average US company. Indeed, the US scale economies are probably the most important remaining explanation for lagging European productivity levels. Moreover, the US is not resting on its laurels.
British businesses are certainly not standing aside from this consolidation, but unless they are already multinational in their scope, they will be partially protected from these new pressures to perform by our decision not to participate in EMU. And if they are multinational, their decisions on consolidation may lead them to place a higher share of their restructured production capability in the currency-risk free environment of the euro- zone. Meanwhile, British consumers will continue to lose out. Tony Blair and Gordon Brown should not forget that, in business, time means money.
Christopher Huhne, a Liberal Democrat MEP, is on the European Parliament's Economic and Monetary Affairs CommitteeReuse content