Currency will drive move to one market

THE EURO is arriving just in time to give impetus to Europe's single market, which might otherwise look as if it is running out of puff. The European Commission's annual survey of progress shows that big gains in the single market have been tailing off.

One key benchmark is the scale of the price differences within and between EU member States. The better integrated the EU market, the smaller the price differences ought to be.

In a perfectly functioning market, any variation in prices should be gradually reduced by some merchant willing to buy in the cheaper area and sell in the most expensive. Price differences should reflect no more than transport costs and the differing service of sales outlets.

Currently, that is far from the case. True, the variability around the average price for consumers' spending has fallen from 21% in 1990 to a little less than 15% today. That is real progress.

But price variability has been stuck at about the same level for three years, which is why the euro area needs the single currency to increase price competition. Price differences between member States are still three to five times greater than price differences within them.

The Commission also finds that its second-best market opening solution - pushing through mutual recognition of national standards - is not as effective as full harmonisation.

Many firms say that they do not believe EU partner countries will accept other EU countries' standards and will continue to produce goods to a slightly different specification to meet differing national standards even when, in theory, the same product should be accepted. There needs to be greater certainty about EU-wide approval.

There are, though, some real successes. Public procurement is gradually being opened up to competition: open tendering accounts for 15% of total procurement, nearly double the proportion in 1995.

The introduction of the euro is also continuing to integrate financial markets. Any area where currency risk used to be an obstacle has suddenly taken off. The corporate bond market, private equity finance, crossborder shareholdings and direct foreign investment (in plants) between one member State to another are all soaring.

The Commission says the amount of new capital raised by domestic companies rose by 49% in the euro-zone last year. Pension and investment funds have started to shift their holdings of assets in a dramatic way and both now hold fewer than half their assets in domestic securities.

Perhaps most interesting is the vast increase in direct investment within the EU as firms establish subsidiaries in other member States. Although manufacturing output has not even doubled since 1992, such foreign direct investment has soared to nine times its 1992 level, compared with a fourfold rise in direct investment outside the EU.

There are also some political successes to report which will help integrate euro-zone markets even more rapidly. At present, the cost of small payments is much higher if they go across borders - even in Euroland - than if they take place within a country. A e100 (£61) cross-border payment can cost e24 to make.

Both the Parliament and the Council of Ministers have agreed to the proposal brought forward by the Commission under which card payments and cash withdrawals will cost the same anywhere in the EU as they do within the member country from next July.

This small payments regulation - it applies to euro payments of less than e12,500 - will do as much to encourage trade as the physical reality of notes and coins and has been passed in record time.

It also contains a provision insisted upon by the Swedish and Danish governments. Even though they are not yet participating in the single currency, they will be able to insist that their banks charge no more for transfers in and out of euro accounts anywhere in the euro-zone than they charge for domestic transfers in their national currencies. For many small businesses, that will encourage business with the euro area.

And if Chancellor Gordon Brown is serious about our euro membership prospects, he should apply the same provision in Britain too.

Chris Huhne, Liberal Democrat MEP for South-East England, is a member of the European Parliament's economic and monetary affairs committee.

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