Understanding The Euro Business

The formation of the Economic and Monetary Union (EMU) of Europe is the latest stage of the process of economic integration, which began in 1950 with the Schulman Plan. Since then EMU has always been on the agenda but the real thrust gained momentum only in the late 80s. The Treaty of Maastricht was signed in December 1991 and, since then, the process has been gaining momentum.

The date is now approaching when countries will link their economies, in an attempt to finally create the EMU and politically integrate Europe. Euro, the single currency of the EMU, is the key component of the integration. On January 1, 1999, 11 nations will start replacing their individual currencies with Euro. Not only will the 11 currencies become one but also the 11 countries will create an impressive economic power of roughly 300 million consumers. The consequent single new capital market will be the world’s second largest, after the USA.

The changeover to Euro will have a significant impact on the way enterprises in the EMU operate. Not only will the prices, invoices, salaries, benefits, accounting, contracts, taxes, have to be in Euro, the European trading block will also have impact on enterprise business strategies, distribution channels, pricing structures, purchase strategies, suppliers, IT systems, financial contracts.

Research shows that most of the work and expense of EMU for companies will be in the IT area. There are enormous opportunities for those enterprises that are ready to seize them-as well as threat for those that move too slowly. Apart from the enterprises operating within the Euro zone, others like multinationals with operation in the Euro zone will also be affected (enterprises that need to treat Euro as a significant foreign currency will be quoting and invoicing in it).

The governments of the member states have been preparing for the introduction of the Euro currency since 1994. Countries such as Germany, France, the Netherlands, Belgium, Luxembourg, Ireland and Italy have created task forces and forums comprising government ministries and the commercial sector to address the numerous issues brought about by EMU. In addition, the European Commission also runs a Euro IT forum with participation from the IT industry and its customers. The forum raises awareness lends among the industry, especially medium-sized business for preparing them for Euro. It also guides and encourages the software and service providers to meet their demand. The IT impact of the changeover takes place broadly in the same time scale as the period during which those responsible for IT systems have to face computer problems associated with the year 2000. Both tasks represent a major challenge in their own right. Especially for Europe, they represent a task of unprecedented scale for all enterprises with significant dependence on IT systems.

Euro will happen

In 1991, the European heads of states fixed the start date of the Euro currency as January 1, 1999. The days of most European currencies are numbered. Even though national banknotes and coins will not be withdrawn from circulation until 2002, the Euro will be of economic relevance to many businesses with effect from 1999. The transition to the single currency will take place in three phases.

PHASE A: In May 1998, leaders of 11 of the 15 European Union (EU) member states decided to join the first group adopting Euro. With the participating countries achieving a ‘high level of sustainable convergence,’ the other significant event of the phase has been establishing the European Central Bank (ECB) in Frankfurt am Main and announcing of exchange rates of the participating currencies against each other. Preparations by the administration, banks and financial institutions will be at peak in this phase. A number of Euro projects of leading banks are in their testing stage now.

PHASE B: From the beginning of 1999 until the end of 2002 the Euro can be used to make non-cash payments (eg bank transfers). The Phase B period starts from January 1, 1999 and lasts till the introduction of notes and coins, which will be at the beginning of 2002. The exchange rates of the participating currencies will be irrevocably fixed to the Euro and, therefore, the bilateral exchange rates will become conversion rates and Euro will become a currency in its own right. The responsibility of the monetary policy will be transferred to the European Central Bank (ECB). Companies can start with conversion on a voluntary basis. Some of the large corporations have already announced that they have become Euro-compliant and are putting pressure on their suppliers and partners to do so.

Another key issue of this phase is no compulsion and no prohibition on using the Euro during the transition period. The enterprises may or may not transact with government bodies or agencies in Euro from the start of Phase B. But they would work toward Euro functioning for tax returns, value added taxes and customs and duties. The business and public houses will have to deal with transactions denominated in Euro and national currency units during the transitional period. It is doubtful that an enterprise will be able to avoid Euro interactions before the end of the transition period. During this phase it will also be possible to open bank accounts in Euro. This will be a key decision by the companies, and the choice will largely depend on their location, trading model and the level of impact on IT systems. Even countries that have opted out of the first phase, eg Denmark and the UK or those outside the continent, USA for instance, will have to consider the effects on trading partners and subsidiaries and possible taxation requirements from them.

The central German bank, the Bundes Bank, for example, has agreed that beginning January 1999, all German commercial banks may transact in Euro or Deutsche mark for all cashless transactions-without the customer having to open a new account. Bank statements will show entries both in Euro and Deutsche mark.
During the transition period, companies and individuals throughout the Euro zone may make payments across accounts either in Euro or in the corresponding national currency. It will be the responsibility of the creditor’s bank to make the appropriate exchange conversion (where necessary) and put the resulting amount on the account of the creditor.

PHASE C: ‘For the first six months of 2002 both the Euro and national currencies will be in parallel circulation.’ Within a maximum period of six months from January 1, 2002, Euro notes will be introduced and national banknotes and coins withdrawn from circulation. All accounts in national currencies will automatically be expressed in Euro units, converted at official rates. By July 1, 2002 at the latest, Euro banknotes and coins will be the only legal tender in participating member states. This six-month period may well be reduced. If the full six-month period is imposed, business can expect to face high costs, particularly businesses which typically involve large cash transactions. These types of businesses are in favor of reducing the six-month period. On the other hand businesses which use machinery for cash handling and consumer protection bodies are in favor of increasing it. A decision to reduce this transitional period can be taken at national levels.

The Euro intro date

The exact date on which the Euro notes and coins shall be introduced is under discussion. The agreed date, January 1, 2002, is especially problematic for the business sectors which are very busy over the new year period (retail and tourism in particular). However, the decision to change the introduction date will have to be taken at the European level, because if Euro notes and coins are introduced on different dates in participating member states, it would cause serious problems for the suppliers and consumers.

Impact on companies

Euro will affect businesses in different territories and industries to varying degrees. The Euro is not just an EDP concern. It will not only affect bookkeeping, invoicing and purchase programs, but will have impact on corporate functions: marketing, procurement, financing, human resources, accounting and taxation and information systems. Adding to this are the economic and legal conditions that apply to the EMU.

The EMU presents an opportunity to the enterprises to review their distribution channels, purchasing strategies, suppliers, IT systems and business processes. It is critical for an enterprise to evaluate the competitiveness in the wider European trading zone.

The introduction of the Euro currency also has a number of benefits attached.

Falling transaction costs within the EMU area will lead to a larger common market that might make it worthwhile for locally active companies to become internationally active

With single-currency area the exchange rate volatility will be eliminated, simplifying trade

Higher transparency of prices

Comparable interest rates in one large Europe-wide money and capital market

A large foreign exchange market which will secure the Euro a greater weight than any individual currency, including Deutsche mark

In the long term this will give rise to an obligation to further harmonization in Europe-taxes, laws and subsidies.

The introduction of the EMU will touch on many operative and strategic corporate functions. There is no standard, general answer to the question: What effect will EMU have on an enterprise’s business? For enterprises of countries joining the EMU in the first phase or having trading partners in any of the countries in the first phase, the preparations must be very careful and timely, so that the opportunities and risks can be effectively handled. The key factors affecting the impact analysis are:

Importance of foreign business

Importance of payment transactions

Investment expenditure and current expenditure in the field of data processing and controlling

Price risk as against price opportunity

Product innovation

Changes in the market and in the competitive environment

Marketing, communications and cultural influences.

Implications on different business functions

The EMU will have practical implications on various functions of a business, including IT, marketing, administration, finance, personnel, legal and others. It will modify the nature of relationships with stakeholders of an enterprise; customers, suppliers, shareholders, lenders, tax authorities, consumers etc.

INFORMATION TECHNOLOGY: Research shows that most of the work and expense of EMU for companies will be in the IT area. Key issues with IT are choice of changeover dates, choice of strategy for changeover and resource implications in terms of equipment, software development, staff training, interface with suppliers and customer systems. All programs, files, databases, screens and reports containing references to financial information will need to be modified. Large companies may have thousands of computer-based applications currently in operation, many of which could be impacted by the introduction of Euro.

LEGAL ASPECTS: A European legislation drawn up for EMU countries will be established to address the technical issues such as continuity of contracts, rounding rules, conversion rules, triangulation. Whilst the introduction of the Euro itself neither gives rise to termination nor entitles a party to unilaterally terminate a contract or to ask for renegotiation, one question that should be looked into is whether particular contractual provision could come into force. According to the legal framework for the Euro, which will be binding on all EMU member states, receivables and liabilities that were previously denominated in Deutsche mark, French francs and other EMU currencies will continue unchanged in the new currency in accordance with the officially fixed conversion rate. As from January 1, 2002, the denomination of the former currencies will have to be read as references to Euro in accordance with the officially fixed conversion rates.

ACCOUNTING: The issues arising for accounting functions are wide and varied. Organizations will have to cope with input and output in both national currencies as well as the Euro, method of moving to Euro, conversion of historical data, rounding, triangulation, payments in Euro, bank accounts and reporting requirements.

PURCHASING STRATEGIES: The Euro will bring distinct comparisons between the cost levels in various countries. In light of the Euro, the purchasing strategies will be affected either because they are part of a new market strategy for the enterprise or because the Euro would create opportunities for savings.

MARKETING: The disappearance of exchange rates will stimulate trade and, for many businesses, this is likely to mean an increase in competition. The introduction of the Euro is seen as a strategic challenge. This will have a number of consequences for businesses at a commercial and marketing level; for example, deepening of domestic market, price transparency, opportunities for new products and services, increased competition etc.

PRODUCTION MANAGEMENT: Since it will be possible to compare costs, it will also be easier to compare productivity. The exposure to large EU markets would mean tendency toward locating businesses near the large consumer markets. If a competent production plan is not followed, the competitive presence in these geographical locations will be increasingly difficult.

TRAINING: Client and customer queries about the Euro can only be dealt with properly if the key staff have been trained early enough. Trainers will have to devote additional time and attention to those personnel that have direct contact with customers. Key issues include the schedule of the program, structure of training, possibility of computer-based training, cost of training and assessment of training resources.

Euro and IT

Most businesses have begun the long process of reviewing their internal IT systems for Euro compliance and planning the fixing or replacement of non-compliant systems. The adaptation of business software poses one of the main challenges. Companies operating with standard packages will require upgrades in order to cope with the Euro. Many companies which have in-house legacy systems, often written in old programming languages, have bigger problems in hand. In many cases, these applications are poorly documented or the programmers have left the company. Euro is also an opportunity to switch over to more open software applications.

The IT changes review will be a critical and fundamental part of the Euro impact analysis. The enterprise would require to review the output and input representation of currency data. Screens and report layouts would have to be modified to reflect the changes. The following are some of the areas that will need to be looked at:

The Euro symbol will have to be included on future keyboards so that companies can begin using it in their price lists, catalogs. An ISO code-EUR-has also been officially adopted

External interface, EDI, would need to satisfy EU legal requirements for financial reporting to the government

Organizations would have to adapt their cash handling equipment. This is of key importance to companies which are in direct contact with the consumers, eg point of sale equipment, automated teller machines, credit card charging equipment.

The IT system changes will have to be communicated to the staff, customers and even the end-users. This will require corresponding documentation and training.

Historical financial data will have to be converted to Euro for comparison of pre- and post-Euro values

Programs and files will need to be modified to accommodate the EU-specified rounding rules, currency conversions using triangulation, expressing Euro in specified significant decimal places and others.

Information systems that will be affected by the Euro changeover include:

Payroll system

Treasury management and reporting system

Reporting/cost control system

Purchasing system

Plant/manufacturing systems (ERP)

Shipping/invoicing/warehousing system

Accounting/legal software

Fixed asset sub-ledgers, which keep track of the fixed assets and their value.

Many information systems would require upgrading on a regular basis due to obsolescence or due to new company needs. The introduction of the Euro will provide companies with a dual opportunity. Companies would evaluate combining the need to upgrade the existing systems with their adaptation to the introduction of the Euro.

Euro and Y2K

All companies will also be assessing the ability of their information systems to deal with the millennium problem. This is a significant project which will require scanning all the software to identify potential difficulties. Euro is identified as a business issue and an opportunity, whilst year 2000 clearly belongs to the IT realm. The two initiatives are on a collision course as they compete for resources. It is a situation where the urgent is competing with the important. In many respects, the approaches to these two projects are similar: companies could undertake the scanning phase of the Euro project and year 2000 project simultaneously. Indian companies addressing the European markets should evaluate this as a possibility while making Euro/Y2K proposals. As the full impact of Euro compliance becomes clear, specialists agree that Euro adoption is far more complex and wide-ranging than tackling the year 2000 problem.

The Euro conversion market size

The Euro compliance market is estimated to be in the order of $200 billion (according to the Gartner Group). Of this the business potential for the IT companies is estimated to be more than $100 billion. Euro implies radical changes in all those underlying processes where currency is a primary denomination, which is an estimated 85% of all commercial systems processing. A number of enterprising IT companies have already started developing methodologies, solutions and packages to address the Euro market.

Euro compliance is a commercial necessity both for organizations which trade with the participating countries and those financial institutions which handle the securities and instruments which will be denominated in Euro from January 1, 1999. In other words, it is a global issue.

Germany and France are seen as key drivers of the Euro adaptation, together having the IT Euro conversion marketshare of about $42 billion.

Europe has already started the preparations for Euro adoption-more than 85% of European organizations confirmed Euro budgets in early 1998. The existence of an appropriate budget is one way of establishing whether an issue is fully recognized or not. However, the current situation of Euro is suffering from a high degree of complexity and insufficient time. Many countries and companies started their Euro preparations dangerously late. The knowledge and availability of tools and Euro solutions is still limited. Consultants and external advisors will play a key role in identifying solutions. There are evidences of significant skill shortages in many areas with wages and fee inflation rising fast. Even in Euro leaders like Germany, insufficient preoccupation with Euro planning and a slow uptake of new information technology issues, including Y2K, will combine to create a volatile marketplace.

Europe is poised to increase global IT spending, as companies can postpone some projects, but cannot-on the whole-stop all the other projects to avoid losing market positioning and competitive advantage. India’s share of the Euro pie will depend upon its dedication and preparedness to address the issue.

Karan Kang

karankang@hotmail.com

 

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