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Single signals

The subject of the euro can stir up controversy like little else. Whether the UK joins the euro will depend in part on the effect that entry would have on financial services.

The sensitivity of the issue can be gauged by the extreme reticence of many financial services companies, with only chief executives allowed to speak on the subject.

Even the Chancellor and Prime Minister are believed to have differing views on the euro but discipline has been enforced by sticking to the five economic tests. One of these relates to the impact that euro entry would have on this country&#39s financial services industry. The others concern the convergence between the UK and eurozone economies, flexibility and the effects on investment and employment.

The Treasury has promised to carry out the assessments within two years of the next election. If these are favourable, it will recommend joining the euro, which would trigger a referendum.

Of course, the euro has been around since 1999, when countries set exchange rates. The original 11 currencies were joined by the Greek drachma last year and since the beginning of this year the euro has had a retail presence. But aside from sovereignty and macro-economic impact, what impact would euro entry have for retail financial services in the UK?

One of the arguments most frequently heard in favour is that it would let borrowers take advantage of lower European rates. Abbey National, Barclays and Woolwich currently offer euro mortgages.

However, it is a niche product with tight criteria restrictions and is only available to people paid in euros. Abbey National marketing manager Kieran Hartigan explains that the currency risk would otherwise be too great.

Fund management companies have long had to deal with currency risk and have mechanisms in place to manage it. For a company such as Threadneedle, which now does more business in euros than in sterling, the euro has resulted in cost savings. If the UK enters the euro, Threadneedle director of communications Richard Eats says there would be further savings to be made.

But the bigger and more interesting change, he says, is the reshaping of fund management that would ensue. The euro, says Eats, is already having a profound impact.

He points to how the single currency has created the European bond market. Whereas before in, say, Belgium, the market was too small, now a Belgian company can raise money in another eurozone country without any exchange-rate risk. This, says Eats, has led to a bigger and more liquid bond market, enabling the development of high-yield European bond funds.

He says Threadneedle has benefited from this and predicts if the UK were to enter the euro, funds could undergo a similar transformation. Once the currency risk is removed, much of the rationale for funds to be restricted to a particular country is lost. Eats is doubtful that there would still be UK growth funds after the UK went into the euro.

This would be reflected in the profile of portfolios. The national preference for home market funds – over half of the average UK portfolio is in UK funds – could change in line with what has happened in eurozone countries.

Campaigners against the common currency, however, argue that financial services would be adversely affected. Neil O&#39Brien is a researcher for the non-party-political”No” campaign – a group that supports membership of the EU but presses for the retention of sterling. He says the UK&#39s financial services industry would suffer due to the increased regulation and tax harmonisation.

This raises the issue of the link between the single currency and the single market for financial services that all EU countries have signed up to and want to achieve by 2005.

For instance, if a German wants to pay a cheque into his bank account in France, the fact that both countries share a common currency in the euro does not stop the bank from adding charges and there being delays. A UK fund manager can take advantage of legislation allowing him to market funds into Europe but still has to account for foreign exchange variations.

Current holder of the EU presidency Spanish Prime Minister José Marîa Aznar, speaking at the recent Barcelona summit, said the successful launch of the euro meant we needed “more Europe”, such as the integrated financial market. Documentation from the EC is clear – the single financial services market is there to harvest the “undeniable opportunities” of the euro.

The Treasury denies that a link between the euro and the single market is necessary, and campaigners such as O&#39Brien say connecting the two is a rhetorical device of those keen to pursue closer integration.

However reluctant they may be to speak openly, for multinational financial services companies the euro and the single market present obvious opportunities.

Axa, Royal Bank of Scotland, Aegon and ABN Amro are some of the invited members of the European Financial Services Round Table which, under the chairmanship of CGNU chairman Pehr Gyllenhammar, is pushing for further EU integration. When Gyllenhammar was recently asked about the euro, he said it was helpful to a single market but on its own was insufficient.

A spokesman for Axa in the UK says the euro is a purely political decision but it is making preparations in case this country does decide to go in and would be able to draw on the experiences of its European company in managing the changeover. Not all companies are so discreet on the issue – global giant Citibank describes the euro is as “a once-in-a-gener-ation opportunity”.


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