The transition to the euro across 11 EU member states will be a testing time. As theory moves into practice, strains will be very evident. However, for Europe's money managers there are several reasons to be optimistic. With interest rates converging and low, government deficits in decline and expansion anticipated in private capital markets, fund managers will find themselves with a bonanza of opportunity.

Indeed, it would appear that mutual funds are ahead of the game. Mutual funds are booming across Europe: the annual rate of growth to June 30 this year was 26.7% and compound annual growth between September 1992 and June 1998 reached 16.4%. Over the first six months of 1998, mutual funds soared well over the $2trn mark and although growth looks to have been a little more muted in the third quarter, 1998 looks set to be a record year.

At the end of June, money market funds accounted for approximately 20% of European mutual fund industry assets. This is little different from the proportion of assets utilising money market funds in the US. The big difference is that the US industry is much more diverse and mature than that in Europe as a whole. Institutional holdings in US mutual funds are significant and this is as true for money market funds as for any other asset type. US institutional investors account for 27% of all mutual fund accounts in the US and just over 45% of the assets in funds. Retirement savings are often cited as the reason behind the boom in mutual fund fortunes in North America and it is certainly true that around one third of defined contribution assets are in mutual funds, up from under 10% in 1985. This has lessons for Europe and may well provide much of the growth in the industry over the next decade.

Certainly, the next few years will see European governments setting the framework to reduce the burden of unfunded retirement promises. Whether schemes are individualised or collective, mutual funds have advantages as the tried and tested means of managing pension assets. The euro will have a part to play also, creating a new level of transparency in financial markets. Money market fundsmay well have a major role to play amongst institutions. After France, Luxembourg is second largest money market domicile in Europe. Although most of Luxembourg's money market funds are not classified as institutional, many are used by institutions.

The prospective market for money funds is only just beginning to develop in Europe. Part of the process of changeover to the euro will involve a flurry of activity as groups merge and refine their fund offerings. As average fund sizes for both money market and bond funds increase dramatically (and a similar effect can be expected in equity and balanced funds), and more marginal products disappear, the economics of fund management will be transformed. What will emerge will be a leaner and fitter, more efficient industry. The focus on returns will continue unabated and institutions will seek out the best returns on their available cash. Mutual funds could benefit but part of the process of change will undoubtedly include a downward pressure on fund expenses. This has happened in the US, where it has been calculated that during the period 1980-97, the cost of investing in equity funds has fallen by a third.

European mutual fund markets do appear to be undergoing significant changes already, with some markets' assets growing much more rapidly than ever before. It would appear that the constraints that accompany the euro are already having an impact on savings patterns. The star market so far in 1998 has been Italy, which started the year with mutual fund assets of $221.3bn; by the end of the first six months Italy's assets reached $361.9bn, making it the second largest domestic fund market in Europe after France. Italian funds have been beneficiaries of a shift in assets from traditional bank deposits and government stocks. The shift has barely favoured money market funds, which only grew by 13% in the first six months of 1998, whereas bond fund assets - which now comprise half of all Italian mutual fund assets - grew by 84.5% in US dollar terms. Equity assets, which account for 23% of Italian mutual fund assets, compared to 35.6% for Europe as a whole, grew by 76%.

France remains the largest fund market in Europe, although - when compared with many other markets - it has spent several years in relative decline, reflecting in large part a disenchantment with money market funds. Over the five years from 1992 to 1997, annual asset growth in mutual funds in France averaged just 0.4% a year. During the first half of this year, however, there was something of a sea change with industry assets growing by 15.2% in US dollar terms.

Historically, France's fund industry has been buoyed by money market funds; the current recovery in industry fortunes is concentrated in the equity sector and accounts for more than half of total industry growth over the period. The equity mutual fund sector in France is now the second largest in Europe after the UK, reflecting the success of the PEA scheme and growing awareness of the benefits of equity investing. Across all types of mutual fund in France a proportion are institutional vehicles and this is expected to continue to grow.

Certainly, the European mutual fund market is developing very fast; interest in equities is beginning to take hold and challenge more traditional deposit and bond funds. The use of funds by institutions is bound to grow apace - after all institutional markets in Europe are in many cases embryonic. What we cannot measure at present will be the impact of any attempt to impose Europe-wide withholding taxes.

Sheenagh Gordon-Harte is senior consultant with Lipper Analytical in London