The political squabble over the single currency threatens the single market too - a situation British business is not prepared to tolerate.
British business has always made sure it has a strong vocal role in the great European debate. Now, however, its collective voice is getting even louder - and perhaps just a little hoarse through exasperation. The UK political debate is in a mess, with sniper fire between Euro-enthusiast and Eurosceptic not only relentless but indiscriminate, cutting across traditional party lines. Political consensus on the single currency, the key issue for business, is clearly lacking, creating a political vacuum which the corporate world is starting to fill, albeit reluctantly.
Whether or not a letter to the Financial Times on 5 September from 15 leading UK businessmen proves to be a turning point in the debate will only become clear over time. It certainly made the position of at least these captains of industry clear (and led to a personal thank-you letter to each from the chancellor, Kenneth Clarke). The FT letter, signed by BP's Sir David Simon and Unilever's Niall FitzGerald among others, argues that, for Britain to rule out participation in the European single currency - either as one of the first group of countries to join or for the lifetime of the next parliament - 'could leave British business at a competitive disadvantage for years to come, whether or not Britain eventually chose to join'. To rule out a single currency at this stage could be interpreted as 'the first act in a process of disengagement from one of the largest markets in the world'.
The message is simple: no single currency for the UK may eventually mean no single market, something that cannot (and will not) be tolerated by today's pan-European managers - or inward investors for that matter. A survey of Institute of Directors (IoD) members taken in June emphasises the widespread backing for the single market, revealing that nearly four out of five directors unreservedly support the single market and its perceived economic benefits. But, of course, the prospect of a single currency strikes the raw nerve of sovereignty issues in the business community, as it does elsewhere in the UK. The same survey shows that a mere 31% of the 506 respondents are in favour of a unified European currency.
That is not to say that the likely economic benefits of economic and monetary union (EMU) are not appreciated. Most business people accept the logic of the savings made from operating in a single currency zone, with a recent (admittedly straw) poll among delegates attending a British Chambers of Commerce conference admitting by a ratio of 15:1 that a single currency would probably benefit British business. The problem is that no one really knows how big these benefits may (or may not) be or what may have to be given up in the process.
The views of Sir John Egan, chief executive of BAA, are typical. He finds it too difficult at present to make a worthwhile judgment of the impact of a single currency on his business. He wants clear answers to three questions.
'First, will it save much money? Second, will it make economies run better?
Germany is obviously going to insist on a hard currency regime; that's all very well but do you actually get any benefit in terms of employment and growth? Third, what sort of political effect will there be?' Until these questions are answered, he says, 'making your mind up about EMU is a bit like asking your lover, "shall we get married?" when you've only just met'.
In answering the first of Egan's questions, Christopher Johnson, author of the unambiguously titled, In with the Euro, Out with the Pound, believes that his estimate of foreign exchange savings of £3.5 billion is just the beginning. He suggests that the single currency will mean lower interest rates because sterling is currently supported in the foreign exchange markets through a risk premium of 1.5% to 2%. The resultant boost to business investment from lower interest rates also suggests a higher rate of economic growth, which, Johnson suggests, could amount to an extra half per cent a year for 10 years.
As to whether the advance of EMU will make economies perform better, one should compare Johnson's rosy scenario to recent estimates of the effects of the build-up to EMU from the Ernst & Young's ITEM (Independent Treasury Economic Model) Club. It has calculated that heavy costs will be incurred on the road to a single currency in keeping the UK's economic performance within the Maastricht Treaty's economic convergence criteria. ITEM suggests that the basic rate of tax in the UK would need to rise by at least four pence in the pound and public spending would need to be strictly controlled in order to reduce the budget deficit below the required 3% of GDP. In addition, interest rates would need to rise to at least 8% to 9% to keep inflation down to the European average and to keep the pound stable against the Deutschmark. Were Britain to follow such a path, ITEM believes the net cost to the economy could be as much as 3% in lost national income and 500,000 jobs by the end of the decade.
Egan's third question, the political impact of the single currency, is to many the most controversial. Egan himself puts it thus: 'Will EMU emasculate the sovereign governments? Almost certainly it will.' It's a point on which Sir Clive Thompson, chief executive at Rentokil and a signatory to the FT letter, cannot agree since in his view the emasculation has already taken place. 'The key economic levers operated by national governments are those controlling interest rates, exchange rates and fiscal policy,' he observes. Of these, 'our interest rates are almost incapable of being set in isolation. Our exchange rate is not under our control, and there's an inevitable convergence of taxation. Therefore the opportunities to have sovereignty have been substantially removed already.'
While the business jury is still debating whether the Government should take the current opt-out from EMU, most British businesses clearly support the social chapter opt-out from the Maastricht Treaty. The IoD survey shows that only 29% of respondents support the social chapter, which commits partaking governments to the promotion of improved living and working conditions and a better dialogue between management and labour. Thompson's view on this subject is fairly typical. 'The present Government's opt-out from the social chapter is a substantial economic benefit,' he says. 'How long we will be able to retain it and enjoy the benefits of the single market is unclear, but we should give it up at our peril.'
And yet on the issue of works councils, the chosen means of consultation between management and labour, most major British multinationals have chosen to opt out from the Government's opt-out. The works councils have no legal powers and although the UK Government had claimed that British-owned multinationals could exclude UK staff from works councils affecting the rest of its employees in Europe, companies like NatWest, BT, ICI, BP, GKN, Marks & Spencer, Pilkington, Coats Viyella and British Steel have seen little point in doing so. Many of the 100-plus UK multinationals that are affected by the directive have obviously decided a works council in Britain is a lesser evil than the complications of treating employees in different ways in the same single market.
Mike Hitchcock, a spokesman for British Steel, notes the absurdity of not being involved. British Steel's total of overseas employees has been boosted by recent acquisitions; and he notes that, 'We have 45,000 employees in the UK and 8,000 in the rest of Europe. Only the latter would have been included under the opt-out but this would have been a bit of a nonsense.' The Engineering Employers' Federation (EEF) originally opposed to the principle of works councils, subsequently urged its members to set them up as the deadline approached. Peter Reid, European affairs co-ordinator, explains: 'We all hate them (works councils) but at the end of the day, how are you going to address the issues? You have to be pragmatic. It's a change in culture and most companies are going to have to manage it well.'
Egan also takes a pragmatic view, arguing that for a good employer already working well with staff, the changes involved will not be substantial.
'I think it's a very brave man who tells Nissan how to run a car plant, for example. Managers there are already brilliant at listening to their workforces as are many managers in other big companies. You have to listen.'
The Government has to listen too. Business people, like everyone else, are concerned about what closer European integration actually means. While most favour opting out of legislation likely to increase the costs of production, they doubt whether business interests can realistically tolerate opting out from a single currency for very long, if at all. Martin Sorrell, chief executive of WPP, has clear views on the subject. 'If not being in EMU means the UK doesn't have equal access to the single market, we will suffer for it. Most people want the economic benefits without the political disadvantages.
But if I was pushed to the absolute limit and asked if I would sacrifice the economic benefits in order to take a stand on the political question, the answer would have to be no.' His view is commonly held and his voice, along with that of his peers, will be getting ever louder in the ears of government ministers, of whatever political hue, in the year ahead.
How single a single market?
The view from the boardroom on the borderless way of working The single market was born of a common appreciation of the necessity of a free trade zone in Europe. It is now three years old, but even though the debate has moved on from the single market to the single currency, there are many areas where the former remains somewhat incomplete.
For Sir Clive Thompson, group chief executive of Rentokil, the single market has had more effect in terms of attitude than anything else. His is a service company established in every single EU country and as a true single market edges closer, he says, 'the cultural changes and the breakdown of national barriers means that we can provide services from one country into another in precisely the same way that we can provide service from an English town into a Welsh town'. Full realisation of the borderless way of working will take some time, however. 'For the moment, our customers in Germany, for example, are very restricted in terms of receiving service from people who are based in France, and our Spanish customers don't take well to receiving service from people based in Portugal.'
Martin Sorrell, chief executive of WPP, the marketing services group, agrees that the single market is by no means the end to national preferences.
'On 1 January, 1993, a European consumer was not born. Consumers are just as interesting for their dissimilarities as their similarities.' The benefits for Sorrell have been in the rationalisation of production, supply and distribution chains. This has made his clients much more efficient and effective, thereby simplifying life for Sorrell's people.
Sir John Egan, chief executive of BAA, sees substantial room for improvement in the single market. For the company which makes substantial profits out of airport retailing, there is one huge disadvantage, of course, namely the possible removal of duty free Captains of industry on the flaws of the single market.
From the top: Sir Clive Thompson; Martin Sorrell; and Sir John Egan exchanges between countries. 'That doesn't look like a very good idea to us,' he says. Elsewhere Egan points to differences in national governments' treatment of alcohol and says he does not believe the drive towards harmonisation will eradicate such discrepancies in alcohol duty rates in the foreseeable future. He points out that north-south attitudes to alcohol vary widely. 'In the south, alcohol is seen quite rightly as food and is zero-rated; in the north, it is seen as a dangerous drug.' With duties somewhere between 0% and 300%, is common ground possible? 'I doubt it - 150 % isn't going to make anybody very happy.'
Who can answer the tricky, technical questions?
Beyond the conflicting signals about the economic benefits and costs of a single currency, the logistics of actually getting there are also fraught with uncertainties. The Association for the Monetary Union of Europe (AMUE), a group of top European industrialists, including more than 230 companies and banks, has been urging companies to set up special committees to study how to prepare. Its recent report, Managing the Changeover to the Single Currency, is a product of a working group which recommends that companies should be training staff in the issues and remedies by the middle of next year.
Such groups are deemed necessary because there are still many unanswered questions over the technical aspects of a transition. Are existing corporate financial systems adequate, for example? Philips Electronics plans to start accounting internally in euros from 1999 and will encourage its suppliers to do the same.What effect will a euro-interest rate have on the corporate debt portfolio? ICI is considering whether to redenominate long-term debt into euros.
There are also problems that need to be sorted out in terms of the legal framework necessary to ensure contracts will not be disrupted by a single currency.
IT expenditure too will be large, with Marks & Spencer estimating the cost of its changeover at a minimum of £10 million. Professor Tim Congdon of Lombard of.
Street Research feels
that these logistical problems alone mean that EMU is still many years away. He says that if it does start up on the current schedule, the system will be chaotic and will have to be abandoned. It took six years of planning for decimalisation to be introduced, he notes, and no dates were announced until the Government was sure it could handle the logistics involved. '(The single currency) is a hugely impractical project,' says Congdon. 'In late 1997 or early 1998, it will have to be admitted that the logistical requirements are simply too great.'.
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