Making heads or tails of the euro.

After a promising start, the euro's value against the dollar has sputtered. Two euro watchers size up the business impact of Europe's single currency.

What many people once thought was no more than an interesting intellectual idea has arrived - a single currency adopted by 11 of the EU's 15 member states. And although Britain has not joined at the launch, the U.K. government is committed in principle to joining in the future if five key economic tests are met and the British electorate gives its support in a referendum.

The five economic tests include ensuring that the economic and monetary union creates better conditions for firms making long-term decisions to invest in the U.K.; considering the effects of the single currency on financial services, job creation, and sustainability; and ensuring appropriate compatibility between the British and continental business cycles.

The U.K. government has made its position on the euro very clear. The potential benefits of a successful single currency are obvious in terms of trade, transparency of costs, and currency stability. A common currency will benefit business both in Britain and the rest of Europe, so if all goes well, the Government believes Britain should join in.

Whatever the final outcome, American and other foreign-owned companies with U.K. operations can feel fully confident of our continuing commitment to economic stability and maintaining the business-friendly conditions that make the U.K. the natural entry point for investors in the single market. Our policy is to prepare now for possible entry to the single currency in the future, ensuring rapid euro adoption if the final decision is to go ahead, as well as UK-based businesses are aware of the consequences of the euro's introduction.

Even while Britain remains outside EMU, the single currency will be a reality for hundreds of thousands of businesses operating from the U.K. - indigenous companies and inward investors alike. Many companies that only deal with the domestic market are in supply chains with businesses trading in the rest of Europe and will therefore be affected.

From my background in BP, I was well aware of the importance to business of being ready for the euro when Prime Minister Tony Blair asked me to take responsibility for helping firms prepare for the euro. I had to supplement my existing knowledge by examining the commercial environment in which British-based small- and medium-sized businesses would trade, in order to understand what it would mean in day-to-day terms and communicate that.

I started by consulting with U.K.-based businesses that would be directly affected and setting up a team of officials in the Treasury to help communicate with business. It's clear that the euro will completely change the European business landscape, including the U.K. As the landscape alters, there will be both opportunities and challenges for businesses, and for many firms the euro will be the key to unlocking the eurozone market of nearly 300 million consumers.

We have a duty to increase the awareness among U.K. businesses of the need to prepare for the euro. The Treasury's own dedicated Euro Preparations Unit (EPU) has been working alongside other departments, including the Department of Trade and Industry and representative private sector bodies. Business advisers in the EPU have been speaking to audiences up and down the country to get the message across. Last year, the unit produced a set of 20 business fact-sheets, setting forth the issues that firms need to consider to prepare for the new currency. It has run a very effective multi-media awareness campaign, supporting a letter sent to 1.6 million small and medium-sized enterprises (SMEs), encouraging them to send for the fact-sheet and begin preparations.

We are also making sure that the public sector is in a position to support businesses that choose to pay taxes anti duties, submit reports in euros, and issue or redenominate share capital in the new currency. As a result of our efforts, all of this is now possible. Businesses can also receive Regional Selective Assistance grants denominated in euros where the project is internationally mobile.

Prices within the 11 euro countries will become more transparent, and U.K.-based firms able to quote in the currency will have prices directly comparable with those of other EU producers, rather than being concealed behind, or distorted by, exchange-rate differentials.

The single currency will also make it easier to sell into the eurozone, even from outside it. Promotional literature will only need to be produced in one currency and packaging will only need to display one price. Multinationals investing in Britain as an entry point to the European market will be able to simplify their financial arrangements. All companies may also gain access to finance at eurozone rates.

The overall effect of these changes will be to open markets across Europe, making it easier for firms operating from the U.K. to expand their business across the eurozone and take advantage of the changes the single currency will bring.

A recent government survey found that 45 percent of small- and medium-size businesses in the U.K. already had trading links directly or indirectly with the EU. No one can forecast how quickly these firms will now be affected, but one thing is certain: they will be affected.

Immediately after the introduction of the European single market seven years ago, many British firms operating exclusively within the domestic market felt it still did not affect them. That may have been true at the beginning, but if you look back now, it's clear that the forecasted changes have become reality - gradually rather than suddenly. The euro's effects are also likely to be felt over time. For instance, euro-denominated notes and coins will not actually be in circulation until 2002. Before then, the 11 national currencies will continue to be used, each fixed permanently in value against the euro.

Companies that don't export outside the U.K. at present may have been reluctant to do so before because of the complexities of dealing in multiple currencies. Now that the euro is here, they will only have to deal in one currency, even if selling into several countries Now that the euro is with us, the government is continuing to work very closely with large business institutions, including the banks, trade associations, and chambers of commerce, and many other intermediary organizations to facilitate the transition.

We have also set up a network of regional forums, chaired by senior business figures and including representatives of the various trade bodies, the chambers of commerce, and other key players. These too are working at a local level to ensure that businesses are prepared. Covering the whole country, they are helping us to reinforce and spread the message, as well as to provide detailed answers to questions specifically relating to small firms.

A recent KPMG survey of more than 300 major European firms employing more than 5,000 people found 94 percent had an EMU strategy. The average estimate of costs was $20 million, mostly on IT. No less than 77 percent of firms thought EMU would increase their profitability in the long-term. Although most firms did not think the euro would be the major currency for pricing, purchasing, and wages until 2002, 23 percent of firms intended to switch to the euro at its launch, another 19 percent next year, and a further 27 percent in 2001, suggesting that the euro will become the currency of trade in the eurozone sooner than many people think.

Two-thirds of firms questioned had variable prices across the zone - the highest and lowest prices on average varied by 57 percent across Europe - but 86 percent expected the prices to narrow.

While the euro's implications will come as a shock to some businesses, their far-sighted competitors will be planning to make the most of the lucrative new eurozone market as it becomes more open. Even for those who have already prepared, there is still much to be done. Many have only looked at the costs of the euro and not the potential benefits. Others only concentrated on the technical issues involved. It is important that businesses also identify the opportunities that will arise and strategic issues they need to address. For every forward-looking company the single currency could be the opportunity to review its whole commercial strategy.

These are all simple messages, but they need to be taken on board and acted upon. The challenges ahead are clear. The question is, which businesses will identify the opportunities and be first to the prize?

Some claim the euro is a marvelous invention that will foster a European economic renaissance. Others say it's a foolhardy scheme doomed to disaster. In reality, it's little more than a new name for the Deutschemark or French franc.

The largest economies of Euroland, aside from Italy, have had fixed exchange rates for years, sometimes decades. An Austrian schilling was simply another name for a Belgian or French franc, which was another name for the German mark. Calling them all "euros" may make it slightly easier to compare prices, but it's essentially just a new name for the same thing.

Sharing a common currency can make it easier to do business, for much the same reason that sharing a common language helps communication. But the giants of Euroland had fixed exchange rates for years, so the new scheme offers Germany and France only a modest reduction in transactions costs and exchange rate risks.For Italy, Spain, and Portugal, however, the benefits are far more significant. Those countries had a long history of currency devaluations, so world investors demanded higher interest rates. Now, the "Club Med" countries can raise capital at much lower interest rates, which has elevated the discounted present value of their stock markets. But the euro does nothing to improve incentives to work or invest in the dirigiste welfare states.

Euroskeptics once warned the euro wouldn't be as "hard" as the Deutschemark. One explanation was that Italy might run up an unbearable national debt, and one bad apple could spoil the bunch. This led to Maastricht rules limiting government borrowing. But fiscal rules are essentially irrelevant. Austria and Belgium often had huge and chronic budget deficits, but their currencies remained strong. Several Asian countries recently had budget surpluses just before their currencies collapsed.

American states and cities share the same money - as do Hong Kong and Argentina - without sharing fiscal rules or political union. The 50 states borrow as much as they like, and don't "harmonize" their tax systems. Some have no income tax; others have no sales tax.

Just because Italian government bonds are denominated in euros doesn't mean they cease to be the obligation of the Italian government. If some future Italian government accumulates so much debt that investors fear default, then interest rates on Italian bonds would soar, just as when New York City faced high interest rates during a fiscal crisis. Currency union eliminates internal exchange rate risk, not default risk.

British conservatives criticize the euro's "one-size-fits-all interest rate policy." The Irish economy is growing too rapidly, they argue, and therefore "needs" higher interest rates to prevent inflation. Other economies are sluggish, and supposedly need lower rates to "stimulate demand." This argument reflects a quaint Keynesian view, which regards vigorous economic growth as inherently inflationary, and relies on omniscient central planners - central bankers - to fine-tune demand.

Economic growth is far more exuberant in California's Silicon Valley than in Appalachia, but nobody says interest rates should or could be higher in the Valley. Prices of "nontraded" goods, or land and hotels, are high in Silicon Valley, and such prices may likewise rise most briskly in the fastest growing areas of Euroland. That is not inflation, but the only way of bringing localized demand into balance with fixed supply. Real estate aside, it's impossible for Ireland to have persistently higher inflation than Italy if both use the same money. If similar goods were cheaper in Italy, then Ireland would import them, forcing Irish firms to roll back prices.

Some economists, even those who predict the euro will be "soft," argue that it will be hugely popular as a reserve asset, displacing the dollar. Why? Why should the euro be any more desirable as a reserve currency than the strongest, most proven currencies of Euroland? One European currency offers less diversification than several currencies, not more. And EMU member countries, hoping to export their way out of chronic unemployment, are no more likely to let the euro rise against the dollar than they would have been to let their local currencies appreciate.

Some say the euro will be a better reserve asset because the market in euro-denominated government bills and bonds will supposedly be broader and more liquid. That seems inconsistent with EMU's emphasis on restraining government borrowing. Another reason often given for the euro's alleged desirability as a reserve asset is that the GDP of the Euroland is nearly as large as that of the U.S. But that's always been true. Besides, nearly half of Europe's GDP consists of government salaries and transfer payments, which are - unfortunately - difficult to export.

In short, both critics and fans of the euro are making much ado about nothing much. When you combine nearly a dozen overtaxed, overregulated economies and give them a new name, all you get is one big overtaxed, overregulated economy.

Lord Simon is the U.K. Minister for Trade and Competitiveness and former chairman of BP.

Alan Reynolds ([e-mail]) is director of Economic Research at the Hudson Institute, and senior editor of the Institute's journal, American Outlook.