Single currency – but not single market

Preparations are moving apace for the final stage in the European Union’s Economic and Monetary Union, the introduction of euro notes and coin at the end of this year. This is happening at all levels. The European Central Bank has been co-ordinating the printing of notes and the minting of coins. It still has the hardest task of all ahead – the controlled distribution of these notes and coins to banks, shops and the consumers in time for the changeover period.

Companies are also making preparations for the changeover period. Eurozone consumers are currently being shown two prices when they are being charged for a good or a service – one in the legacy currency, which is the value that they pay, and one in euros, which is for advice. Over the course of this year, this will reverse – with the price in euros becoming the ‘real’ price and the legacy currency being provided for advice. Banks too will begin to change their customers’ accounts into euro accounts – in Belgium, for example, this is due to start by the middle of the year. Vending machines and ATMs will have to be adapted to cope with the new currency too. We will examine this process in detail in next month’s issue of TreasuryToday.

New notes and coins will lead to change

Companies will have to change internally as well. Despite the existence of the euro as an electronic currency, only the largest use it when presenting their accounts. Most companies are still using the legacy currency. From the beginning of next year, all companies operating in the eurozone will have to present their accounts in euros.

The tourist and the business traveller will see significant advantages when travelling through the eurozone at the beginning of next year. Prices of hotel rooms will be readily comparable across Europe - and that souvenir or airport coffee will be paid for with the same cash whether in Frankfurt, Paris or Athens. So, superficially, it will seem as if the single market that we were promised at the signing of the Single European Act will have become a reality.

Fundamental barriers will remain

Yet, as every finance professional knows, there will remain fundamental barriers to a true single market. The standard rates of corporation tax in eurozone countries vary from 40% to 28%, with all manner of associated regulations. VAT is similarly different throughout the eurozone countries. The application of the various tax rules and other regulations remain a nightmare for the treasurer of the pan-European company.

The same problems arise in the European financial markets. Despite some significant deepening of the markets since the launch of the single currency at the beginning of 1999, there are still very major hurdles to overcome before it can be argued that there is a single European financial market. This is primarily because regulation of the financial markets is still performed nationally. This means that even EU directives, such as the UCITS directive, are interpreted slightly differently in all EU countries.

Single regulatory standard still some way off

Whilst the European Commission has recognised the need for a single regulatory standard for these markets throughout the EU, this is unlikely to be in place within the next few years. A ‘Group of Wise Men’ has proposed a new structure for the regulation of the EU financial markets, yet Lamfalussy, the group’s chairman, does not believe that the system will be operational before 2005 due to the complex nature of the EU legislative process. Already Lamfalussy’s predictions are coming true – the European Parliament’s economic and monetary policy committee has already suggested that the Group’s proposals go beyond the scope of the EU treaties.

Yet, until these fundamental barriers to a true European single market are overcome, there will continue to be inefficiencies within the financial markets. It is important that the pan-European companies know what these inefficiencies are and how to exploit them.