Money: A position on Europe

Eurosceptics may be getting increasing hot under the collar at the prospect of European monetary union, and even the Prime Minister seems to be getting worked up about the threat of a federal Europe. Most investors however treat the EMU as one big yawn. But whether we in the UK like it or not, Economic and Monetary Union (EMU) is probably going to happen, and its consequences will be anything but dull.

"Within Europe, I would expect EMU to go ahead on time with a core group, and the peripheral countries to join later," says David Aserkoff, equity strategist at securities house Credit Suisse First Boston. "Germany, France and the Netherlands are seen as the core candidates for EMU, with Spain and Italy on the edges."

Supposing this scenario is right, Mr Aserkoff says manufacturing and exporting stocks within the core group, such as Volkswagen and German engineering stock Preussag, could be good buys. In the peripheral group, interest-rate sensitive stocks such as banks might be a better bet, he says. Others say your first move should be to drop shares in countries outside the core group. "My opinion is that the south European countries will not be included," says John Lomax, European strategist at merchant bank BZW.

Paul O'Connor, UK equity strategist at BZW, says the strength or otherwise of the inner core and outer currencies is the key to how monetary union will impact the UK market - assuming sterling stays outside the euro-zone. If the euro was stronger than the mark it replaced, this would be good for UK exporters like British Steel. And the euro is more likely to be strong if monetary union is limited to a core group of countries, Mr O'Connor says.

Shares of alcoholic drink companies, which tend to export to the peripheral countries like Spain and Italy, could do badly if EMU only includes the core countries and leaves the peseta and the lira to languish.

If you're happy to go against the grain, believing the UK will sign up for a single currency, you could make significant capital gains buying long-term sterling bonds, Mr Aserkoff says. Long-term bond yields in Britain are now two full percentage points higher than their German equivalents and if the pound merged with the mark the UK yields would drop - sending the selling price of the bond steeply higher.

UK bank and insurance stocks would do well if Britain took part in EMU. "Other financial groups would see them as takeover targets," seeing them as a way of getting a business foothold in the exclusive "euro-zone", Mr Aserkoff says.

Exporters would benefit most directly from monetary union, being able to get away without hedging their currency risks, and without the noise of the exchange rate getting in the way," says Mr O'Connor. He adds that good exporters could well be found in the engineering sector, citing Spirax- Sarco as an example.

Institutional investors can already hold bonds denominated in ecus - a currency based on a basket of European Union currencies and these can be used as an investment bet that monetary union will go ahead. But ecu bonds are denominated in millions of ecu. They are not intended for small investors, and investment funds containing them are hard to find.

You can have an ecu bank account, though. One of the currency funds Fidelity Investments offers, which are designed as deposit accounts, is denominated in ecu. The current rate of interest is 2.9 per cent and you have to have a minimum of pounds 2,000 in your account.

And you can already have euro coins jangling in your pocket. The Isle of Man treasury offers euros in various denominations, minted in silver and gold. These are actually legal tender on the island, although in practice no one pays their shopping bill with them. They are just pretty collectors' items destined to stay in their presentation boxes.