How Wal-Mart can prevent a German-dominated euro

It will be business not politics that will determine the nature of a federal EU, so how Wal-Mart reacts to its problems in Germany is critical, says George Pitcher

I’ve long held that Wal-Mart is creating the critical mass to build a worldwide operation with the economies of scale to take retailing into a new era. But it’s been having a bit of trouble in Europe, the continent on which it is currently concentrating its expansion plans – the acquisition of Asda being a contribution to those plans. More specifically, it is having trouble in Germany. Allan Leighton, a former Asda man, resigned as head of Wal-Mart’s European operations last week amid signs that the group was struggling to make a decent fist of its loss-making German stores.

Then the German competition authority, the Bonn-based Cartel Office, claimed that it had found evidence that Wal-Mart, along with privately-owned discount retailers Aldi-Nord and Lidl, were selling some items below cost-price, a practice that is prohibited by retail laws in Germany. Wal-Mart has been ordered to raise the price of a number of its lines – mainly staples such as milk, butter and sugar – or face a fine of as much as DM1m (£315,000).

This throws up a number of apparent paradoxes about the kind of globalisation that Wal-Mart is engaged in. At the same time as it develops a one-world business, Wal-Mart finds itself exposed to local anti-trust regulations. This is perhaps as it should be – all global companies have to obey the same mantra of “thinking globally and acting locally”.

But it is more significant that Wal-Mart is being brought to book at a local level by an alleged driving force of international integration. At the European level, at least, Germany is supposedly the engine of a single European market with its own currency, integrating not only itself within an emergent federal European Union, but also integrating its own former Eastern Bloc and its economy within itself.

There is nothing inherently contradictory, of course, in Germany’s position as a driving force for political and monetary union while it is also enforcing its own competition regulations. If you like, it’s an advertisement for how European integration can develop alongside domestic policies that protect sovereignty. Why, in any case, should Germany be under any obligation to abandon its own regulatory framework before cross-border legal and trading regulations are vested in Brussels? And it is far from being alone in the euro zone in deploying a minimum prices policy – Ireland has only just abandoned a similar retail regulatory framework.

But, even taking all this into account, it is interesting that Germany would prefer Europe to be cast in its own mould, rather than accepting a true partnership with the rest of the European Union. Last week, Chancellor Gerhard Schroeder let it slip that he thought that the accelerating collapse in the value of the euro was not necessarily a bad thing, because it assisted German exporters emerging from the former eastern Germany to prosper if they were dealing deutschmarks into euros. That’s all right, then – just so long as the plummeting euro is of benefit to the Germans, we should all be happy.

In this context, one has to be concerned less about Germany doing things the European-federalist way than about it wanting Europe to do things the German way. Its economy is sufficiently robust to handle the stresses and strains of its responsibility for eastern integration and, indeed, it could be said that this is a blessing in disguise in that the German economy is expanding without overheating and without interest rates having to check runaway inflation.

More peripheral economies within the euro zone are not so fortunate. I have mentioned Ireland as a country formerly with a similar minimum prices policy. The Irish government recently lifted the ban against sales below cost-price in a bid to cool its economy, with an inflation rate running at 5.4 per cent – the highest in the euro zone. As it happens, Irish retailers believe that this move will precipitate price wars without having any profound effect on inflation, so the gesture may be an empty one.

But Ireland is having to abandon a retail pricing policy precisely because it is at the fringes of the European economy (and has surrendered the interest-rate option with euro-membership). The euro zone countries have no cause to do other than leave Ireland to its own devices and something has to be done to try to control its runaway inflation rate, in the hope of avoiding a spectacular bust after the Irish economic boom. By contrast, Germany is at the centre of the euro zone and can maintain its retail pricing policy simply because it has the ability to do so. Chancellor Schroeder’s Germany-centric comment with regard to the value of the euro says it all.

This is not a Eurosceptic point. As it happens, I’m a reasonably passionate pro-European. I’m not even part of that faction within the Europhiles that is anti-German. But I do think that there have been a couple of indications over the past week of what we can expect – or what we can’t expect – from Germany should we vote in a referendum to join the single currency after the next election.

Lord Simon, formerly of BP and of the current Government, is right when he says these matters will be settled by business people, not politicians. With its international commercial clout, we look therefore to the likes of Wal-Mart to stand up to the Germans and threaten to take its customers elsewhere.v

George Pitcher is a partner of issue management consultancy Luther Pendragon

Knowledge Bank

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