Jose Manuel Barroso, President of the European Commission, claimed yesterday that Britain is "closer than ever before" to joining the euro.
Speaking to French radio, Mr Barosso said that the global economic downturn has caused a rethinking amongst certain senior politicians in London, and that "a period of consideration" is beginning. Although Mr Barosso refused to name names, he said that top level figures have told him Britain "would have been better off" if it had joined the single European currency.
It had been generally thought that Gordon Brown's premiership would put the issue of the euro firmly to one side; the Prime Minister is famously sceptical about the benefits to Britain of joining the single currency, consistently denying that any of his 'five economic tests' have been satisfied. However, the problems suffered by the sterling in recent months may have cause a rethink; there are many who suggest that euro membership would provide much needed stability for the British financial sector, and go some way to repairing the damage wrought on the real economy.
Membership of the euro would clearly have significant effects for almost every British citizen. However, the change would perhaps be most pronounced for small business. Indeed, it is these organisations that tend to be amongst the most vociferous proponents of euro membership. But what would single currency really mean for small business?
According to a Treasury survey, more than 50% of small businesses in the UK consider themselves to have existing trading links with eurozone countries. This is clearly a significant proportion, and these are the businesses that have the most to gain from euro membership. For these firms, membership would bring an instant increase in efficiency; the administrative costs of multi-currency invoicing and accounting, as well as the actual costs of currency exchange, would be eliminated. Pricing would be more transparent, and the potential for costly mistakes would be significantly reduced.
Amongst the most beneficial aspects of membership would be the elimination of sterling-euro currency fluctuations. Currently, poor timing in converting payment can cost businesses dearly; exposure to currency risk is one of the biggest problems facing businesses that trade across borders. Clearly, membership of the single currency would remove this risk entirely, thus also removing the necessity for businesses to rely on complex hedging techniques to safeguard their money. From around 22 months before the final abolition of the pound, the sterling-euro exchange rate would be fixed. As such, the uncertainty regarding currency fluctuations would cease even before 'E-day' (the point of introduction for euro notes and coins) or 'S-day' (the day on which sterling would stop).
A significant gripe for small businesses, however, is the increase in competition that would inevitable come as a result of entry into the eurozone. Virtually overnight, consumers would have access to a far broader base of retailers and service providers with whom they could do business. This is good news for the consumer - increased competition pushes prices down, and should theoretically increase the quality of service. Businesses would have to fight harder to maintain or develop their market share.
However, many businesses fail to recognise that the advantages would be two-way; while consumers would have access to a more competitive retail market, businesses would be able to draw from a larger and more competitive range of suppliers.
Combating the downturn
Some commentators are suggesting that euro membership is a potential answer to Britain's current financial and economic problems. In reality, however, this is simply inaccurate; current guidelines suggest that the joining process takes two to three years, and the Government's own policy relies on a 36 month lead-in time. Furthermore, in the past much of the argument in favour of euro membership has revolved around interest rates; in the past, the European Central Bank (ECB) rate has been more favourable for borrowers than the Bank of England base rate. However, the unprecedentedly severe cuts made by the Bank of England mean that rate-tracking borrowing is now cheaper in the UK than in a eurozone country. That said, the Bank of England's one-and-a-half-point cut (which is likely to be followed by another half-point reduction this week) is illustrative of the scale of trouble in which the British economy finds itself. The fact that the ECB saw fit to reduce rates by only half a point has been seen by many as symptomatic of the relative health of the eurozone.
One wonders which senior politicians Mr Barossa has been speaking with. However, no matter how the politicians feel, British membership is still contingent upon a referendum - and regardless of the advantages and disadvantages, the majority of the British public oppose joining the eurozone. A sharpening of the downturn could, however, persuade some that the time is right for euro membership. As such, business owners should be examining the implications for their organisations.