This is explained in part by the strange way Europe is going about introducing
a single currency. We have a set date, January 1, 1999. But we don't know
how many countries will meet the criteria, and therefore, we are not exactly
sure about the takeoff of the Economic and Monetary Union. Perhaps this
explains why European societies are so slow in preparing themselves. The
problem is even worse in those countries, like Spain or Italy, for which
entry in 1999 is uncertain.
I believe, however, that Italian and Spanish societies must urgently
begin to prepare themselves. If Spain does not enter in 1999, it will be
in 2000 or in 2001. The decision has been taken. Backpedaling on the EMU
has a very high political cost, which the European leaders would find hard
to swallow. The situation calls for action, for getting ready for the future,
not for arguing about whether monetary union is good or bad.
The prospective timetable
Though the process of creating monetary union is surrounded by uncertainty,
we know the main steps of the transition. This is the calendar which our
businesses will have to follow (See Chart 1).
The first phase will get under way within approximately one year. The
countries that will be included in the single currency's takeoff (January
1, 1999) will be determined using data for the entire fiscal year 1997 (average
inflation, public deficit with the accounts closed, etc.).
In this first phase, which will run approximately from April to December
1998, the European Central Bank will begin operations replacing the
current European Monetary Institute and production of the new coins
and notes will begin.
Seven coins (with values from 1 cent on the Euro to 2 Euros) and 7 notes
(with denominations between 2 and 500 Euros) are planned
The countries that join this group will maintain their own currencies
until the end of 1998. The official conversion rates between the Euro and
the participating currencies will be determined on January 1, the date on
which the new currency will become legal tender in all of the member countries.
The new currency will be legal tender as of January 1, 1999, but will
probably only be available at first as a unit of account, that is, in bank
accounts or other financial assets. The introduction of cash (coins and
notes) should take place between January 1, 1999 and December 31, 2001.
The exact date remains unknown, but will be determined before the new
currency is launched.
It is important to emphasize that the Euro will be, as of January 1,
1999, legal tender, which differentiates it from the current ECU. It is
true that the conversion rate from the ECU to the Euro will be one-to-one,
and that it is currently possible to have bank accounts in ECUs. However,
the ECU is only a unit of account and is not legal tender that could be
used as a method of payment in commercial transactions.
This means that as of January 1, many currencies will coexist in the
Euro zone: as many as there are countries in the Union, plus the Euro. All
of these will be legal tender and will be exchanged at fixed and irrevocable
rates (with very stringent rules about the decimals that should be used).
At first this coexistence will be at the level of bank accounts and other
banking instruments, but later there could be a period of simultaneous circulation
of the Euro and the national currencies in cash.
This period of coexistence will end during the first half of 2002. During
these last six months, the old notes and coins will be withdrawn from the
market, ceasing to be legal tender on July 1, 2002.
There are two aspects of this transition process that I find worth highlighting.
· First, the process is designed so that private agents
companies, clients, consumers take the initiative. The administrations
only set the essential reference points: legally guaranteeing the continuity
of contracts and the equivalence of coexisting currencies. However, the
public sector is bound to issue in Euros any debt due after December 31,
2001. Conversely, the private sector may adopt the Euro at its own pace,
when it is convenient and for such purposes as are deemed appropriate.
· The second element that I want to point out, which seems
to have been ignored until now, is that the change we are facing is of great
magnitude, with a very significant impact on the daily functioning of the
economy and businesses. By way of example, it is estimated that more than
three million dispensing machines and more than 150,000 automatic teller
machines will have to be modified. But the change entails even more than
this, given that it will affect many activities in every business (billing,
receipts, accounting, price setting, etc.).
What does the EURO mean for
business?
The introduction of the Euro is not a simple change in the unit of account,
as when two zeros were removed from the French franc, or when the United
Kingdom changed to the metric system. The essential point is that we change
currency and adopt the same one used by our main trading partners. This
will have a wide impact on the business community.
One level at which to analyze the change is its impact on business operations
the operational impact. We will have to adapt in many ways in order
to operate in both Euros and national currencies for a while, and then later
in Euros alone. This means reforming the accounting and billing systems,
price lists, payrolls, etc. Computer programs will have to be modified and
internal accounting procedures adjusted.
The operational impact is no small thing. Bad planning of operational
changes in business can leave profits in the red. But, certainly, the operational
aspects are not the crucial point of the transition to the Euro. For example,
it is estimated that the cost of adapting computers to the next century
(with the consequent change of digits in computer programs) is even higher.
The true impact of the Euro on business will take place at the strategic
level. The word strategic here has no special significance. It means that
for many businesses, the strategy used to adopt the new currency and incorporate
it can serve as a tool for becoming more competitive in the market.
This strategic impact is obvious in sectors such as banking. For the
financial sector, the single currency is the final step in homogenizing
banking services, and will make individual differentiation strategies more
important. Banks and credit unions should decide when they want to offer
products and services in Euros and how they should position themselves in
a market that will suddenly become much broader and more competitive.
The strategic impact is also clear in the export sector and in multinational
companies. The new currency's introduction will make possible direct and
simple comparisons between prices, salaries and productivity in different
parts of the European Union.
The impact on marketing policies for companies doing business in several
European countries could be devastating in so far as it imposes a "euro-price."
Something similar may happen between multinational groups and branches:
a single currency will simplify transfer price policies, determination of
production plans between plants, and other intra-company transactions.
Further, the Euro is not an issue that concerns only big companies, banks
and multinationals. I believe that small businesses and sectors like retail
must also take into account the importance of the imminent change. For example,
at retail level, the Euro will have an impact on price setting and profit
margins. The consumers' reaction to the new denominations must be taken
into account. How will numbers be rounded off? Will prices be published
in both currencies? How should cash registers be modified? How will consumers
react to the return of fractional currency? These are unknowns that we will
have to deal with.
The Euro will therefore affect trade and marketing, but also other important
areas of business: for example, financing. By now businesses' medium- and
long-term financing policies should already consider the impending scenario.
The potential interest rate risk should be evaluated, and the implications
of the future currency change on contracts being drawn up today should be
taken into account.
Finally, the impending Euro is not a dream nor a nice idea that might
come true in the year 2002. Despite the ups and downs of the process of
monetary union, the probability that the new currency will be in place in
the short term (2 or 3 years) is very high. And business had better be ready. |
