Shaping our future

Monster icicles on the masts of the sailing ship - no it was not Ernest Shackleton’s “Endurance” - is my abiding memory of an ill-fated freezing trip to Euro Disney not long after its opening in the early 1990s.  It was a journey that would have taxed David Hempleman-Adams also - though he too might have found the frozen pirates equally incongruous.

Now from 1st January we have the Euro 11 (first members of ‘Euroland’) - France, Germany, Austria, Belgium, Finland, Italy, Ireland, Luxembourg, the Netherlands, Portugal and Spain having a combined market of 288 million - and each with their currencies fixed in “permafrost” to the euro.

Indeed, as your first footers were arriving, sterling’s exchange rate against the euro (set around 70p = 1 euro) will set the interest coupon on the Halifax Bank’s euro Deposit International Savings Account - the first account in euros and available from 4th January through the bank’s Jersey and Isle of Man subsidiaries.  The account requires a minimum opening balance of 10,000 Euros (around £6,800).  Abbey National Bank is likewise shortly launching a new “euro” mortgage - for customers paid in euros.

What it means

What does all this mean for business, the investor, and the mortgage payer?

First, the EMU is no TV glove puppet - it looks like being a reality that will shape our ends (and means) in business or as savers and borrowers whatever our politicians say.

The aims of the Euro 11 in joining the EMU are notionally:

1.  to make things easier and cheaper for businesses and individuals with no currency charges between members;

2.  to allow “price transparency” across Europe - just watch the price variance of that Fiat Punto between Spain and the UK at over 20%;

3.  to give “Europe” and its EMU players bigger economic clout;

4.  to allow better forward planning for business with less fluctuations in currency.

According to the Treasury less than one company in 15 has opened a euro account.  It’s not just the book-keeping however - UK companies will need to review their entire method of doing business.

Hilary Thompson, head of European Strategy at the Nat West: “Too many companies have taken the approach that the euro is just another currency and all they have to do is change a few systems.  But the impact will be far more fundamental and complex.  The strategic issues - pricing, distribution, relationships with suppliers and customer behaviour - should be the starting point.”

Chancellor Gordon Brown aims to have “UK PLC” ready to join as soon as possible and the new man in the hot-seat at the DTI, Stephen Byers, will be aiming UK industry in that direction - subject to New Labour’s re election and the inevitable referendum.  A recent poll of the “Suits” in the City put forward 2002 as a likely year for the UK to join the party.  Probably three years is the likely lead time in any event to any such major upheaval.

Tabloid angst

If we join it would be a case of Queen’s Head revisited for UK currency - yes on our coins but shock horror not on euro notes - all much to the tabloids’ angst.  Euro notes and coins come into being on January 1, 2002 - notes in denominations of 5, 10, 20, 50, 200 and 500 and 80 billion coins right down to euro cents.  Security-wise they’re taking it seriously; some of the Euro 11 are apparently mobilising their armies to collect the obsolete currency and deliver the new in 2002.  No chance of a Euro Disney style afternoon “shoot-out” to grab the swag!

Some of our main retailers such as Marks and Spencer are preparing to accept immediately Euro-denominated Eurocheques, traveller and personal cheques.  M and S is spending £100 million on making its tills “euro” friendly.

The UK political unease was evident at a recent regional launch of “euro” information where the chair - a follically challenged perennial “bean-counter” squealed “Politics - can’t allow it” - when it was suggested that he poll the 100 business people (post-breakfast) for their views.  In the face of a volley of bits of bread roll, he was prevailed upon to back down.  The result - an over 80% vote that it was going to happen and we’d better buckle down to preparing for it.

Scotland, of course, has its own preoccupation with the forthcoming elections for the Scottish Parliament.  Perhaps there is some degree of distraction from the “euro” issues at stake.  It is, however, likely that any Scottish company trading in the UK with a British exporter, conscious of cost and currency risk, could be faced with a demand for Euro-accounting.  Likewise the converse of exporters with “loadsa” different price lists for each European country are going to find downward pressure on pricing through so-called “price-transparency”.

Significant

The EU estimates of between £100,000 - £400,000 for small/medium-sized businesses’ conversion of systems to take on board the new currency is a significant investment which will affect their profitability in the short-term.  Corporate clients therefore need to adapt their trading terms and conditions to reflect these commercial implications.  The sweetener though for businesses and borrowers could be the lower interest rates.

The European Central Bank fixed 3% as its base rate on 22nd December 1998.  Forecasts of 4 and 5 per cent by the millennium herald the prospect of lower mortgage and borrowing costs for UK business.  Mortgage rates of around 6.5% and lower are predicted for the end of 1999.  Already there are some good fixed rates about.  The entry of Standard Life has also sharpened the competitive edge in the UK, leading to many mortgage experts advising prospective borrowers to be hesitant about diving for a Euro-mortgage.

Richard Verdin at the Legal and General: “For the time being, the Euro will be a foreign currency.  Until we are fully paid up members of the EU currency, fluctuations are bound to take place - so be warned you should pay your mortgage in the same currency in which your earnings are paid.  It’s not all about interest rates.”

Retain margin

If we become part of “Euroland”, mortgage rates - like the walls of Jericho - could easily come tumblin’ down.  But cross-border lenders would still have to retain margin to cope with regulatory systems in different countries.

However, the other side of the equation faces investors - lower rates on deposits.  The end of cushy 6/7% could lead to a whole heap of new money chasing leading equities.  Will “tracker” funds force share prices beyond the real value of companies in their portfolios.  Many fund managers are forecasting a continuing pattern of growth in Europe because economic conditions are still perceived as good.

Some pundits reckon the early part of 1999 could see a few “wobblies” in European-based unit trust portfolios as some fund managers grapple to find the correct price of their units.  There could be glitches in computer systems making it tricky to convert euro values into sterling.  In the main the increasing correlations between the various European stock markets will free fund managers to look at the whole European sector rather than just a single country-based approach.  If the UK enters EMU it will become part of the market, meaning investors will put more money into European stocks.  Conversely, UK and European funds are regarded as separate asset classes.

The UK could see new stake-holder pensions in 2001 at best - with implementation after the next General Election - about euro joining time, if we join.  Annuity rates are predicted to fall - and this will impact on those with personal pensions or under money purchase schemes.  If £1,000 of individual pension fund produces only £30 of income, people outside “final salary” schemes will probably have to invest their mortgage interest savings back into ISAs and pension plans just to maintain reasonable living standards in retirement.  The Treasury could help by simplifying some of the unnecessary complexity in our pension laws.  The “rich” charging structure applied by most companies - including the mutuals - could also be in for a shake-up if planned EU legislation allows us to pay pensions anywhere in the EU.  Dublin here we come!  Tax relief is not currently available on pension schemes domiciled abroad.

But, say the sceptics, one set of economic rules for greatly differing economies run by a Central European Bank is a disaster.  It could prevent a government acting to stave off a national economic crisis.  Certainly on foreign policy a Pan-European “palsy” seems to prevail.  A “stability pact” supposedly will prevent countries running deficits above 3 % - otherwise the defaulter country will be fined 5% of its output.  “Time tae pay - yer honour?”

Most key foreign commercial players are viewing Europe as a single market.  The Americans don’t think we should be on the outside - we’re the only ones they can understand!  Yet again our shop-keeping mentality seems to have kept us on the margin - this time with Sweden, Denmark as well as Greece - which didn’t make the prequalifying score for Euro Club land - and from the right to use the club logo.

Competition for UK companies is bound to hot-up as pricing structure becomes more transparent across Europe and there is corresponding pressure to cut costs.  The new European Central Bank in its early steps may have difficulty in restraining Brussels zealots from seeking to clobber enterprise with more regulatory rubbish and consequently on cost-cutting margins.  The EU also needs to sort out shibboleths like the Common Agricultural Policy.

A certainty

But there is one thing for certain — the European economy even in its present form is no Mickey Mouse entity.  New entrants such as Poland and Hungary seek membership.  And Europe is going to shape the way we live and the size of pocket money we have in lengthening life-spans.

Euro Disney, (now Disneyland Paris), had “white-knuckle” moments early on - but survived.  Euroland has started and for the bulk of Scottish business and the Scots it is likely to have substantially more impact than all the prospective noise from the Holyrood Parliament.

Don’t let us be Goofy!

Mike Bell is chairman of Solicitors Financial Services