Outlook: Can firms foist the euro on the UK?

As the Conservative Party continues to tear itself apart over Europe, and with Labour all in a pickle over its position on EMU, Britain's leading companies are proceeding as if none of this were happening, confident in the assumption that come what may, Britain will be a part of the single currency sooner rather than later.

The latest example of this phenomenon is BP, which yesterday let it be known that it will probably start accounting for the purposes of records and payments to suppliers in euros from the official start date of 1999. Marks & Spencer has already said it will be making its tills euro-compatible, while many large companies are preparing to contract their suppliers in euros by the turn of the century.

This raises the intriguing possibility that there will be a de facto introduction of the single currency into Britain by our larger companies regardless of what the politicians and the electorate wants. So is the decision being made for us by big business? The answer seems to be that it all depends on quite how far these companies go.

Kate Barker, chief economist at the Confederation of British Industry, points out that there is an important distinction to be made between the currency a company chooses to denominate its business in and the currency which determines its cost base and supplies. The fact that a large number of companies chose to account in euros may not, in the end, have an appreciable economic effect. It is already not uncommon for big European companies to conduct their business in German marks, regardless of the country they are operating in. The purpose of doing it this way is not that of foisting the Bundesbank on the rest of Europe, but to pass off exchange rate risk on to someone else.

It seems likely that with the introduction of the euro, many more will latch on to this way of making others pay for exchange rate fluctuations.

The extent to which this process will in itself lead to the British economy falling within the ambit of a European-determined monetary policy depends on how deep it goes. So long as it is confined to inter-company and banking payment systems, the effect would probably be superficial. In the event of a sterling devaluation against the euro, for instance, it is impossible to imagine that the likes of BP would stick to the same euro prices with its UK suppliers. Actually what it would do is beat down the supplier to a lower price. In other words, the economic consequence of pricing in euros in this instance would be zero.

However, if companies were to go further, and start paying their employees in euros, so that the UK cost base became euro-denominated too, then we really would start to come under the sway of the European Central Bank and whatever interest rate it decides to set. No British company has yet said it intends to do this but it may be only a matter of time.