The Euro: Landscape of industry will change

HISTORY'S VERDICT on the success or failure of the euro will rest on the power of the competitive forces it unleashes. For unless European business becomes more productive, and consumers enjoy lower prices, there is no economic rationale for the single currency.

But beneath the blanket economic gains for Europe will lie winners and losers in different industries.

The removal of the obstacle of national exchange rates will redraw the industrial landscape of the entire continent.

Successful industries tend to concentrate in particular geographical clusters. The phenomenon has been documented by leading management experts such as Michael Porter of Harvard University and John Kay of Oxford University, and was emphasised in the Government's White Paper on competitiveness.

But the boundaries imposed by the existence of separate national currencies have meant that Europe has had far more centres of excellence in every industry than the United States. European Union businesses have therefore generally been much less productive that their US counterparts because they have been unable to exploit the same economies of producing on a large scale.

All this is changing with the launch of a true single market of nearly 300 million people.

Countries that already enjoy a geographical concentration of particular industries within their borders will probably cement that advantage.

Their rivals stand to lose whole industries as Europe comes to look much more like the US.

This is particularly true in heavy industry such as steel production or car manufacture, where the costs of building and running the plant and equipment are high, and businesses such as pharmaceuticals, which require big investment in research and development.

The member countries already have particular strengths in certain industries. These are likely to be cemented by the arrival of the euro.

So, for example, Italy's traditional lead in textiles and leather goods, Germany's in cars and Finland's in high-technology communications will become even more pronounced.

The UK has its own strengths, with financial services and pharmaceuticals being the most obvious.

To some extent British businesses too ought to be able to take advantage of the creation of a big market free of boundaries. The catch is, of course, that Britain has stayed out of the first wave and, worse, is remaining lukewarm about joining later.

For the next few years that is unlikely to harm the UK's star performers. In the longer term, however, even the areas of excellence in British industry could lose out to centres of competition on the mainland.

According to David Owen at Dresdner Kleinwort Benson, the London investment bank: "If we stay out of the first wave, we'll be fine. If we stay out beyond that we will pay the penalty. The clustering will happen in the rest of Europe, even in the sectors where we have an advantage."

Analysts reckon the business earthquake will last at most five to ten years. In some industries there could be an entirely new competitive landscape before Britain has even got round to holding a referendum on whether to join.

Who Will Be The Winners And Losers In The New Europe?

Cars

Car makers should see some of the most dramatic gains from a single currency as all have cross-border operations, which have suffered from the vagaries of exchange rate changes. But it could see more consolidation into one or two regions than most other industries as the economies of scale in car production are so great. After all, the US has only Detroit.

Winners: Germany, Italy

Engineering

The European engineering industry is a patchwork

of businesses ranging

from giant conglomerates

to family firms, and is

ripe for consolidation. Germany has a clear advantage over the rest

of the EU in many areas

of engineering, especially

in mechanical engineering although less so in

high-technology

electronics.

Winner: Germany

Financial services

London sees more foreign exchange dealing than anywhere else in the world and has the biggest EU stock market. But there is a big question mark over whether staying out of the euro will harm London's lead.The big European banks are expected to grow even bigger through cross-border mergers, posing

more competition

to Britain.

Winner: UK or Germany

Pharmaceuticals

This is one industry where the UK has shone. With the biggest pharmaceuticals companies being in the UK, US and Switzerland the creation of a true single market ought to be an unambiguous plus for the industry leaders. The one catch will be the wide variations in price across the EU. Prices are likely to fall to the lowest European levels.

Winner: UK

Retailing

Retailers will be on the front line of greater competition and price transparency. Shoppers will be unwilling to tolerate big differences in costs. The French supermarkets have so far been the most aggressive about pricing competitively in euros and expanding into other countries. Outsiders such as America's Wal-Mart also plan to invade the euro countries.

Winner: France

Textiles

Europe has two countries that still have a significant textiles and clothing industry, the UK and Italy. Italy has concentrated on upmarket items. Britain has tended to remain embroiled in doomed competition with low- cost developing economies. Italy's clothing industry is one of the most successful in the world. The euro will reinforce its dominance.

Winner: Italy