Countdown to the Euro: Prices set for a drop - eventually

THE ACID test of the success of the euro will be whether its launch creates a genuine single European market. For only if there is a real increase in competition, boosting business and cutting prices for consumers, will the single currency generate all of its promised economic benefits.

The 300 million citizens of the first 11 countries to join will want to be able to judge quite quickly whether the euro is having an impact where it matters - on their wallets. Some experts are predicting widespread outbreaks of price wars.

There is certainly plenty of scope for competition sending prices downwards. An internal Treasury report last March, which formed the basis of further investigations by the European Commission, found huge disparities in prices between countries.

Some of these variations have already achieved notoriety thanks to consumer pressure. Cars, for one. A report by the commission last year found that a Fiat Punto cost 21.4 per cent less in France than in the UK, a Renault Megane was 22 per cent cheaper in Germany, while a larger car such as the VW Passat was 14 per cent cheaper in France.

In some items, however, UK shoppers do better than their continental counterparts. For example, CDs sell for about 15 per cent less here than in France. But, of course, they are cheaper still in the bigger and more competitive American market. Only about a quarter of British prices are lower than prices for equivalent goods and services in the United States.

Only for a handful of items, such as clothing and footwear, are British prices among the EU's lowest. For others, including housing and transport, they are about the highest.

Bank charges are substantially lower in the UK than over the Channel, at pounds 18 a year for an account in credit compared with pounds 35 in Germany and pounds 88 in France. This advantage reflects precisely the fact that British high street banking is far more competitive - and demonstrates the scale of gains that could lie ahead for consumers.

The theory is that the switch to a single currency will boost spending power in two ways. First, with everything priced in euros, it will be easier to compare prices because the tags will no longer have different currencies on them. People will become more willing to cross borders to shop, especially for expensive items. And that goes for Britons too, even though the UK is staying out of the first wave of membership.

Differences in VAT rates and sales duties complicate the comparison. But there can be little doubt that consumer pressure will force manufacturers to adjust their prices and, probably, will force governments to bring taxes more closely into line. The willingness of British consumers to spend a day on the cross-Channel ferries simply to buy cheaper alcohol and tobacco is a vivid demonstration of the potential consumer power.

Francesca Arcidiaco, of the Consumers' Association, says: "We do expect the increased transparency and increased competition to drive prices down." She adds, however, that it will not happen right away, and that the impact on the UK will be indirect.

The second result of the launch of the euro will be to make it easier for businesses to take advantage of economies of scale. Experts at the National Institute for Economic and Social Research in London found that much of the difference in productivity levels between US factories and European ones was the fact that the former had much bigger production runs thanks to their larger market. As long as euroland does become a genuine single market, that boost to productivity from scale should translate into a better deal for customers, as well as higher profits.

How quickly this might all happen is another matter. It is not until 2002 that the new notes and coins will be introduced, so prices will continue to be displayed in national currencies as well as euros.

Many businesses are waiting to see what others do before changing their own prices. Retailers are under no compulsion to accept euros before 1 January 2002, although those signing up will be entitled to display the official "We accept euros" stickers.

Meanwhile, they put a higher priority on dealing with questions such as how to convert a DM1.99 price, which will be the equivalent of euros1.02, without being accused of profiteering from the changeover. The European Commission has suggested retailers might try to get a competitive edge by launching "rounding down" campaigns. The Commission has set up observatories in each country to monitor price changes after the launch of the single currency.

To start with there is likely to be too little familiarity with the new currency for the fresh wind of competition to blow all the cobwebs off the European economy. The UK will not feel the full force until it joins, anyway. Other obstacles to lower prices will persist, especially for products such as fine perfumes or cars, where the distribution system is tightly controlled by the makers, so that competition is pretty weak anyway.

In addition, cultural influences will continue to divide the EU market, with widely differing preferences for everything - from whether a washing machine should be top or front-loading, to how much spice should be in sausages.

The Germans spend a higher proportion of their incomes on hygiene products, the Belgians splash out on accessories and Britons are the keenest buyers of books, newspapers and stationery. There is no such thing - yet - as the harmonised euro consumer.

Thus while some manufacturers, such as Procter & Gamble and Allied Domecq, are opting for European-wide brands and prices others, including Unilever, and also retailers such as Marks & Spencer, have indicated they will continue to set prices according to the local conditions.

But there is no question that pressure will build to tear down artificial barriers to pan- European sales.

Take exclusive distribution networks for products such as expensive perfumes or pharmaceuticals, or regulations on the origins of food products. These will be in the front line of competition. Pressure from producers for protection from pan-European competitors explains those classic euro-scare stories about whether, say, cheese is only "feta" if it is made in Greece, whereas cheddar can be made anywhere. An EU directive in your favour is one of the best ways of protecting your market.

In the end, though, the grand single currency project will have failed if the average, everyday European shopper does not have a wider choice at lower prices in the coming years. Its economic success and its political support will depend, ultimately, on what the euro in your pocket will buy.

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