Companies are restructuring to realise greater economies of scale, thereby boosting competitiveness. The risk for UK companies is that outside the euro, they will be isolated from these beneficial pressures.
Market analysts are now thinking in terms of pan-European industry sectors, rather than individual countries.
Multinationals are restructuring organisations to best serve the whole EU market by centralising certain functions. Smaller companies are engaged in vigorous take-over battles to acquire the optimum size to compete effectively in the new markets.
The launch of the euro has been instrumental in this. There has been an explosion of demand for euro-denominated bonds: more euro bonds were issued in 1999 than international dollar bonds. As a result, companies are finding it easier to finance acquisition and expansion, even without top-notch credit ratings.
Portfolio managers are also reaping the rewards: they can seek the highest return on assets from 11 countries without worrying about exchange-rates.
And the creation of the euro has spurred demand from corporations, start-ups and asset-holders for fewer pan-European stockmarkets.
So far, the City has benefited from these developments: London is still the clearing-house for European financial markets. The greater the M&A activity in the euro-zone the more business there is for London-based investment banks. But it is also true that other financial centres, such as Paris, are growing fast.
If Britain decides not to join the euro, the City will no doubt remain prosperous. But its prosperity will be less than it might have been. British companies also face risks from being outside the euro. Faced with currency volatility in Britain UK-based companies that export to the EU will start to move out. And those companies remaining in Britain will be isolated from the competitiveness that comes from being part of a single currency, causing them to lose market share.
- Lord sharman is former chairman of KPMG International
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