A single European currency provokes strong emotions. So much so that most economic arguments for or against entry have not yet been properly aired. Public perceptions have thus far been based on an in-built mistrust of our European partners or a fear of irrevocably missing the train to perceived eternal wealth and prosperity.
Entry itself may not pose the greatest threat to British industry. The danger lies in joining the single currency at the wrong exchange rate. If the Government is forced into monetary union at a rate of, say, DM2.80 it would run the risk of seriously undermining the substantial strides made by many UK companies in reducing their cost bases to become more competitive.
The achievement of an aggregate 25 30% reduction in unit cost rate since the last recession could be wiped out by the cost burden attendant with entry at the wrong rate.
In truth, of course, if entry at any given rate was the situation which confronted British industry, then it would have little choice but to accept it. But the speed of change demanded by entry at such an inflated level would undoubtedly undermine the cost reduction initiatives implemented so successfully by many engineering exporters.
If Britain had smoothed the gradual strengthening of its currency as, for example, the Germans have done with the Deutschmark, then British industry could more easily accommodate the transition.
Other misconceptions about the single currency remain. It has been argued that the euro’s introduction will accelerate the integration of European markets and lead to an improvement in economic conditions. But trading is one thing; economic integration is quite another. European trading will undoubtedly be accelerated by the euro. The euro will not automatically bring about economic integration. That will depend more on the level of convergence of other fiscal influences, from taxation, employment law, the development of a common social benefit culture, and so on.
The consequences, though, of a rash or ill-judged decision on the euro could yet affect more than just the colour of the notes in our pockets. To remain competitive, British industry will have to accelerate its cost down initiatives. If it is inhibited from doing so by the additional cost burden of Emu an unrealistic exchange rate, inflexible working practices and a punitive tax regime British industry would give stronger consideration to the prospect of cost reductions being sought through other means, and perhaps even contracting out certain functions to countries which offered a lower, more flexible cost base.
This would follow a trend already set by a growing number of software companies which source their technical capability not just from Europe and the US but from India and the Middle East too.
Global communications will allow these changes to be accommodated without compromise on quality or convenience. CAD and technical data exchange across continents is commonplace and technological strides in other forms of data transfer and videoconferencing make such a move more feasible.
As chief executive of a global business my responsibility is not to the British Government or even to the British economy, but to our shareholders. To maintain improvements in shareholder value, margins must be protected and prices not cut to compensate for currency changes.
However undesirable, many companies will find it hard to resist at least considering new, lower cost economies to ensure that their shareholders are shielded from the likely potential pain associated with entry to a single currency. This is a prospect which the Government should ignore at its peril and take steps to avoid.
Richard Taylor is chief executive of Haden MacLellan Holdings.