Opinion of the Economic and Social Committee on the 'Impact of the introduction of the euro on the single market - Single Market Observatory` (98/C 407/07)

On 29 January 1998 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure, decided to draw up an Opinion on 'The impact of the introduction of the euro on the single market`.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 July 1998. The rapporteur was Mr Burani.

At its 357th plenary session (meeting of 9 September 1998) the Economic and Social Committee adopted the following opinion by 106 votes, with three abstentions.

1. Introduction

1.1. The general public, the business world and the social partners all have different views on the introduction of the euro. Some believe it will boost the economy, some think it will have a variety of influences as a result of the austerity measures imposed on public finances, while others believe it will have a relatively modest impact on the single market. The fact remains, however, that since the official decision to adopt the euro in eleven EU countries, there are more voices in favour than against. The ESC, for its part, wishes to further the discussions of the Commission, Council and European Parliament on the subject by providing an input of comments and opinions that have been freely expressed by the social partners.

1.2. As the subject has been dealt with in numerous official and unofficial publications, by the media and in specialist publications, there is certainly no lack of information. However, the ESC felt there was a need to look at the matter more closely by directly consulting firms, trade unions and consumers in open debates. To this end it organized two hearings - in Rome on 7 May and in London on 15 May. The dates were specifically chosen to hear people's immediate reactions following the official adoption of the euro; the venues were considered to be those most suitable for comparing prevailing opinions in a country which has joined monetary union with those in a country which has chosen to remain temporarily on the outside.

1.2.1. The ESC is well aware, however, that such a limited sample cannot be held to represent the whole of Europe and neither can the information thus acquired be automatically applied to all countries. Moreover, in the interest of brevity and clarity, the ESC restricted its study to some of the issues directly linked to the adoption of the euro, omitting those already discussed in other opinions, or those requiring an examination of parallel subjects.

1.3. This report takes into account the opinions expressed by participants in the two hearings, but, above all, contains views expressed by ESC members during the various drafting stages of the document. The ESC does not claim to have established any incontrovertible truths or to have made precise forecasts - in a market dominated by a myriad of external events independent of the will of governments, the best one can do is express flexible, practical principles that can be adapted to each individual situation.

2. Impact of the introduction of the euro on freedom of establishment

2.1. At first glance, the link between freedom of establishment - already firmly enshrined in the Treaty - and the single currency appears to be tenuous. However, several economic agents believe that the euro could have an impact on company relocation and on decisions regarding takeovers, concentrations and mergers.

2.2. The opportunity to make a direct comparison of costs and prices - which we will return to later - together with the elimination of exchange risks and currency fluctuations, will make it somewhat easier for entrepreneurs to conduct a preliminary economic assessment before choosing the ideal location for a business or service. Clearly, the single currency is not the only factor here - there is still considerable Member State divergency in terms of taxation, labour costs, labour availability and, in some cases, incentives.

2.3. Small and medium-sized firms, in particular, believe that the single currency will enable them to set up subsidiaries in countries where those conditions are more favourable than in their own; in some cases even they would go so far as to transfer the bulk of their business. In other words, for those countries which already have a more favourable climate in terms of taxation, labour costs and labour availability, the single currency would be the decisive factor in attracting new businesses.

2.4. The introduction of the euro would not seem to affect relocation to non-European third countries; the opposite in fact could happen if the Asian crisis persists, in which case the reassuringly stable 'euro area` would become more attractive. As for central and eastern European countries (CEEC), it is likely that if they adopt the euro as their currency of reference, this would be seen as a bonus point by those companies that are considering setting up business there. However, it should not be forgotten that the political and economic stability of these countries is of far greater consequence when it comes to making a final decision.

2.5. When companies are considering options such as takeovers, mergers or the acquisition of a stake in another company, the euro will be a considerably important factor, especially if it paves the way - as now seems likely - for the harmonization of accounting practices, the presentation of company accounts and internal and external audits. Decisions subject to the factors outlined in points 2.2 and 2.3 above will not be affected.

2.5.1. Amongst the greatest obstacles to rational forms of relocation and greatest hindrances to better investment distribution are the imbalances in fiscal legislation among the various countries. This is perhaps the most obvious weakness in the structure Europe has adopted: it has a single monetary authority but no single economic and fiscal policy. This is not intended as a criticism, but as a mere statement of fact. There is no doubt that, while various courses of action may have to be adopted, if we want the best results from the single currency, fiscal harmonization must be a top priority.

3. The impact of the introduction of the euro on competition

3.1. The use of the euro will probably not be restricted to EMU countries. It is likely that foreign traders in other Member States, most central and eastern European countries and other non-member states will adopt it in place of the dollar as the currency of invoice and settlement, at least with the 'in` countries and with countries of unstable currency. Of course, all will depend on the inherent stability of the European currency and on the confidence bestowed upon it by the rest of the world. Apart from the purely monetary effects, which are outside the scope of this opinion, the first, most obvious effect of this 'globalization` will be a direct comparison of costs and prices. This is currently being hampered by the wide variety of currencies and exchange rate fluctuations, and also - it should be remembered - by a lack of standardization which is hitting several sectors particularly hard.

3.2. If values can thus be compared, the supply terms of goods and services will become more transparent, thereby intensifying competition. Companies and consumers will therefore be able to make better-informed choices. But while the benefits for consumers are clear, there is no hard evidence that a majority of companies - particularly small and medium-sized enterprises (SMEs) - have already envisaged the impact that price comparability will have on their businesses.

3.3. The subject of value comparability may be easy to comprehend, but it is only one aspect of a far more wide-ranging and complex phenomenon, which includes:

- the rapid growth in electronic trading via the Internet, which greatly simplifies purchase and payment arrangements for goods and services, thereby helping to enhance consumer choice;

- the creation of international payment systems enabling money to be transferred rapidly, safely and at increasingly lower cost;

- the sharp drop in telecommunications charges and the growing 'computer culture` in small and medium-sized companies and among consumers;

- the faster and more efficient transport of consumer durables - not to mention the lower costs - which makes it cheaper to buy goods from further afield.

3.4. The euro, therefore, is a significant boost to the trend which sees 'location` becoming less and less important, both in terms of production/distribution facilities and areas of influence. The traditional 'market niches` and oligopolies will therefore probably give way to a market that is more open to competition. This will penalize the less efficient firms, or those too small to withstand competition from others that are better suited to penetrate the markets.

3.5. If this forecast becomes reality - or if there is a trend in that direction - companies will inevitably become larger. The financial sector, for example, which will be the first to feel the effects of the single currency (together with a number of other factors), will be followed by the rest of the market. The first to gain from this state of affairs will be the consumer, in terms of lower prices, better quality products/services and greater market transparency. However, it will be necessary to assess the effects of upsizing on jobs. Indeed, this might not necessarily lead to more jobs - at worst it could lead to even fewer jobs. Another possible effect - in the medium term - could be that of creating new oligopolies in a market which tends to be dominated by ever-larger companies. This is something the Commission will have to monitor carefully.

3.6. Many SMEs operating exclusively on local markets do not seem to be fully aware of these developments and their implications. In their view, price comparability between various countries will not have direct repercussions on their markets, with the exception of cross-border regions, where price comparison has already been going on for some time despite the currency differences. This has, at times, involved a considerable displacement of purchases. While this attitude may be justified in the case of businesses which require the physical, on-site presence of the SME (machine shops, maintenance services etc.), it would be damaging for manufacturers, distributors and service providers, as the idea of 'area control` would become a mere illusion in the light of the new developments.

3.6.1. The ESC believes that a greater business culture should be propagated amongst small and medium-sized operators, in order to make them aware that new strategies are needed to address a global situation which is likely to evolve rapidly over the next few years. Manufacturers' hold on local markets - currently subject to a relatively modest consumer mobility - is likely to be affected by new forms of electronic trading and by the ease of payment offered by a single European currency.

3.7. But major companies operating on international markets will not be immune to the effects of the introduction of the euro either. Price comparability will only highlight what is already obvious - each EU country has different price levels. Such differences can, of course, be explained by a variety of factors which the rules of the single market affect only slightly - each country has a different cost of living, different social security and taxation systems, and market size/structure. The single market will, in time, bring about an ever increasing convergence of these systems, while stopping short of total uniformity.

3.8. However, there are differences in the prices of identical or similar goods that cannot be explained merely by different market conditions in different countries. In the car market, for example, investigations conducted by consumers and by the Commission have brought to light examples of considerable, not to say macroscopic differences. One such example is that of brand of car sold in the United Kingdom at a 44 % mark-up compared to the price of the same car in the Netherlands and in Portugal. While in a market of free competition prices cannot be fixed, there are certainly cases which will need to be investigated after the introduction of the euro, in the light of possible breaches of Articles 85 and 86 of the Treaty.

3.9. Broadly speaking, apart from the cases in which Commission intervention might be needed, the rules of the market should hold sway, though within the objective limits imposed by the different conditions in each country. The chance to directly compare prices and the greater choice of supply in a European global market will have the effect of moderating price differences, thus boosting competition.

4. The impact of the euro on competitiveness

4.1. The subject of internal competitiveness has been touched upon in the previous chapter - greater competition must encourage all economic agents to be increasingly efficient and to operate at increasingly competitive costs. As for external competitiveness, i.e. Europe versus the rest of the world, the analysis of the problem becomes more complex and certain aspects that go beyond the aim of this opinion would need to be considered. The ESC will therefore restrict itself to examining the introduction of the euro as one of the factors of competitiveness, but certainly not the only one.

4.2. The elimination of exchange risks, of insurance costs against such risks and of transaction costs within the euro-zone should bring about a cost reduction per se - a reduction which the Commission puts at between 0,5 % and 1 % of total costs. Moreover, several countries will be able to reduce their short-term rates. But the most important competitive advantage should come from elsewhere - the choice of the euro as a reference currency and currency of invoice as a result of its stability and of the international prestige it will have acquired. The Americans have an obvious advantage in this respect, though the euro should eventually gain the same importance and prestige as the dollar. However, we are not waging a war against the dollar; both currencies have - or should have - different spheres of influence that will be able to coexist quite happily in a climate of healthy monetary 'competitiveness`.

4.3. As a result of the probable increase in global competitiveness, companies from non-member states may well - to a greater or lesser extent - relocate towards the 'euro zone`, thereby increasing competition. Although many European concerns might look on this as a new threat, it should be viewed positively in terms of the new investment and jobs it would bring.

4.4. Viewed in its entirety, the greater competition brought about by the euro should lead to streamlining in the manufacturing, distribution and service sectors - a process which cannot take place without sacrificing companies that are only marginally competitive. It will be a difficult task for the authorities to ensure that the rules of the market are not distorted by intervention to keep such companies afloat, while, at the same time, ensuring that jobs are not sacrificed.

5. The impact of the euro on employment

5.1. The question of whether, how and to what extent the euro will have an impact on employment is the subject of heated debate; opinions take due account of the political and social aspects of the problem. The ESC, which has put forward its own opinion () on the subject, will merely refer here to established facts regarding the concrete impact of the euro on employment as a feature of the single market.

5.2. The only sector which will be directly affected by the adoption of the euro is, of course, the financial sector (particularly banking). A considerable part of banking turnover comes from brokerage in different currencies and coverage of exchange risks. The resulting profits are proportionate to the percentage of the bank's international business and usually make up a significant slice of the major banks' annual profits. The convergence of 11 currencies into one will have a disastrous impact on net profits. As for jobs, there is no doubt that fewer and smaller transactions will - in the short term - mean fewer staff requirements. The Committee therefore stresses the need for back-up measures to offer new job opportunities to workers who have been laid off. In certain Member States there are some very successful examples of such measures.

5.3. At present it is unclear whether the banking sector as a whole will be able to reabsorb the surplus human resources via retraining and by increasing business in other sectors. Neither is it clear whether, in the medium term, it will manage to find new business to compensate. Much depends on the degree of competitiveness of the European Bank vis-à-vis the banks of non-member states.

5.4. In all other fields, the impact of the euro on employment must be seen in the light of the element of stability it will bring to the economy, and the fact that it will foster external competitiveness, the convergence of European economies and social harmony. External factors, such as the economic situation in the rest of the world, political uncertainty and job market pressure caused by immigration from non-member states and by the future enlargement of the European Union, must not be forgotten, however; they are of vital importance in an environment that is becoming increasingly global and interdependent.

5.5. As regards employment policy, there is no doubt that a side-effect of the need to respect the rules laid down in the stability and growth pact is a restriction of government freedom to use public investment to boost employment. The task of creating new jobs will therefore fall mainly to the private sector, via an investment policy compatible with growth. However, such a policy must be accompanied by adequate fiscal measures and by a favourable social climate. This means that the public authorities, companies and trade unions would have to bear collective responsibility and cooperate closely.

6. Conclusions

6.1. The Committee hearings - albeit with the above reservations on the representative nature of the sample - were actually quite reassuring: the consensus is that the euro is a cohesive factor for Europe and will give Europe credibility in the eyes of the outside world. This is the current attitude - it is now up to the governments, social partners and individual citizens to take up the challenge and turn this belief into reality.

6.2. It should also be borne in mind that the situations in each individual EU country will not develop along the same lines, even though they may tend to converge in the medium-long term. We cannot therefore expect the introduction of the euro to immediately banish all differences and to be the perfect crown to the single market. Neither will it be possible for the euro alone to resolve the problems relating to fiscal harmonization and standards, job/company mobility and wage comparison - these problems are not related to the single currency, but the euro will at least have the merit of highlighting them and of acting as a reminder of the need to resolve them.

Brussels, 9 September 1998.

The President of the Economic and Social Committee

Tom JENKINS

() See ESC Opinion on 'Employment and the euro`.