End of the honeymoon for the euro

THE honeymoon accompanying the launch of euro notes and coins is over. Now the people of Europe and the policymakers are having to face up to the reality.

The picture is not very reassuring. Many of the same structural factors which have led to economic sclerosis in euroland mean that the efficiencies claimed at the time of the launch of the notes and coins are not being achieved.

This is quickly feeding into the currency markets, where the rally is turning into a rout with the euro close to its lowest point this year at 88 US cents.

All this is underlined by Patrick Lenain of the Organisation for Economic Co-operation and Development economics department. He points out that the euro's street debut has been followed by a jump in the price of goods, has done nothing to remove costly bank charges for cross-border transactions within euroland, and is not increasing price transparency.

Manufacturers discourage cross-border purchases, because they are able to achieve better profits in national markets. Before the economic benefits of transparency can be achieved, regulatory reforms will be needed to speed cross-border trade.

This has been difficult enough in a European Union of 15 nations. It boggles the mind to think how it would be in an enlarged EU which includes economies as different in their needs as Latvia and France.

Euroland has afforded countries a degree of certainty in the currency markets, even if it meant submitting to a 25% devaluation against the dollar. But as the OECD points out, it also has brought distortions.

Shocks such as an increase in oil prices play very differently across the EU. France has an inflation rate of 1.3% against 5% in the Netherlands. Similarly there are big divergences in growth levels with economies such as Ireland 'overheating' up to recently.

Of itself, the OECD observes, the single currency has done nothing to improve economic integration. Huge sectors of euroland are protected by national barriers, including banking and energy - which explains why cross-border bank mergers of the kind desired by Lloyds TSB have been all but impossible. Nor has the euro yet become a reserve currency of choice.

Until Europe's political masters tackle underlying problems of cumbersome regulation, rigid labour markets and high operating costs, the single currency will do nothing to improve Europe's financial cohesion. Peter Hain, Peter Mandelson and other euro enthusiasts pushing Britain towards an early referendum must take note.

Retail confusion

IT IS amazing how quickly the views of City economic gurus can spin on a sixpence. December retail sales figures showing a 0.3% decline are being described as a 'huge surprise'. Certainly, they run counter to the survey evidence from the British Retail Consortium and the CBI and the buoyant numbers from retailers ranging from Tesco to Bhs.

In an attempt to make some sense of this, it is pointed out that in the final quarter of the year, sales were very robust climbing by 1.3%, even if they did fizzle in December.

Many analysts believe the strength of consumer spending may have been over- estimated and the long-waited retrenchment may already be underway. If that is the case, then those gloomy predictions of an early rise in interest rates this year are rapidly turning to dust.

With industry still deep in the doldrums, public investment taking a long time to come through and now the consumer starting to show caution, there must be real fear that the recession affecting much of the rest of the world is catching up with Britain.

Some analysts even suggest that the Bank of England may choose to cut rates from the present 4% when it meets next month. Isn't that a shocker?

Royal drowning

NOW that Carnival has burnished its offer for P&O Princess, there is little point in shareholders (including this one) giving approval to rival Royal Caribbean's love match at the St Valentine's Day extraordinary general meeting.

In these troubled times on equity markets, big battalion shareholders, struggling to improve investment performance, are likely to bite the hand off a buyer offering a strong element of cash.

The problem with Carnival's offer is that there can be no immediate gratification. There are still formidable anti-trust issues to overcome. But if Carnival boss Mickey Arison is correct, his company is in no worse a position than Royal Caribbean. It also has found grounds for challenging the alleged tax advantages of the Royal arrangements. P&O P's skippers Lord Sterling and Peter Ratcliffe will be reaching for the lifebelts.