Last autumn the prime minister asked me to take overall responsibility in government for helping businesses prepare for economic and monetary union (EMU). As managers in your own companies, you will realise how important it is for your businesses to prepare for the introduction of the single European currency, the euro. But recent research shows that just 5% of UK small to medium-sized enterprises have made any preparations so far, and 89% of them were unable to identify 1 January 1999 as the date for the euro's introduction.
Change often hits business without warning. This is not the case with the euro. British business has no excuse if it is not well prepared to take advantage of the changes in the market that the single currency will bring. I would like to explain why it is important for UK business to prepare for EMU now and tell you what the Government is doing to help businesses make the most of the opportunities EMU offers.
From next January, businesses across Europe will be able to deal with one another in a new single currency - the exchange rate between the euro and each of the 11 participating national currencies will be irrevocably fixed. Even though the UK will not be joining in this first wave, the euro will have a significant direct and indirect effect on a large number of British firms in all sectors of the economy.
The effects will be practical and, more importantly, strategic. Many UK firms will need to be prepared to deal in euros, even for purely domestic transactions. Those trading in the euro zone will find that being ready to deal in euros should give them a competitive advantage. For British firms dealing with more than one country in the new zone, the euro will simplify financial arrangements. It will allow them to rationalise their accounting systems and trade in fewer currencies. Many of those accustomed to dealing in sterling are likely to come under increased commercial pressure to offer their products in the single currency.
The euro is part of economic and monetary union and it will lead to a number of important changes to the market place. Within the euro zone, there will no longer be exchange rate risks or conversion costs; pricing in different countries will be transparent; and there will be a single interest rate regime across the whole zone.
These changes will have a number of strategic implications for firms in the UK. The creation of the euro represents the removal of one of the major barriers to trade in Europe. It is essential that UK businesses prepare so that they can benefit from these changes rather than losing out as the more open market results in greater competition. Alexander Ceramics employs 14 people making ceramic ornaments in Wales. It exports about 30% of its production, with Germany its major overseas market. 'We have had to adapt very quickly to EMU,' says managing director Alison Knight. 'We've had to come to an arrangement with our German distributors that we'll supply goods at a fixed rate. In the longer run, we're going to have to look at improving our efficiency and our innovation.'
Exporters could use this extended period of change as an opportunity to expand into new European markets. They may be able to form alliances with firms to distribute their products throughout the new euro zone, or they may decide to set up an internet site to advertise their products across the same area. But, in doing this, they will need to consider carefully how such an approach will affect margins. How far and for how long will they be able to maintain different prices in different markets? How can they reduce costs by rationalising marketing, pricing, packaging or borrowing, or by taking advantage of a wider market for sourcing? These strategic decisions will have other practical consequences. IT systems will need to be changed; brochures updated; staff trained and treasury functions modified to reflect the new circumstances.
The Government has already taken steps to help business prepare for EMU. Last autumn the chancellor set up a business advisory group to advise the Government on the implications of EMU for UK businesses. The group included representatives of business and business organisations such as the CBI, the Federation of Small Businesses and the TUC. It recommended that the Government should work in partnership with business to prepare for the impact of the euro on UK business. Its role should be to increase awareness, signpost companies to sources of help and provide more detailed information on specific issues of general interest to firms preparing for the euro.
The Government agrees with these conclusions. At the beginning of this year, it set up the Euro Preparations Unit (EPU), based in the Treasury and including secondees from business and the Department of Trade and Industry (DTI). The EPU is providing support to help business and the public sector prepare. The DTI and EPU are talking to businesses to find out what further information and guidance on EMU they need. There is a series of fact sheets about business preparations for the euro and a booklet on public sector preparations called Steps for 1999, available through a dedicated phone line (08456 0l 0l 99). There is an EMU internet site (http://www.euro.gov.uk) and a nationwide communications campaign has been launched in the press and subsequently on television, aimed at alerting businesses to the need to consider whether and how the euro will affect them.
The Government is supporting this with 12 new 'regional forums' to help businesses prepare at a local level. The forums, led by local business representatives with the involvement (in England) of the government offices for the regions, will bring together key regional bodies, such as representatives of business, Business Links, Chambers of Commerce, the CBI, training and enterprise councils, trade unions, local authorities and public sector bodies. Their role will be to identify key regional issues arising from the introduction of the euro and the likely effect on regional business activity and competitiveness. I would urge businesses to tap into these resources and the many others that are being provided by the banks and other intermediaries. EMU offers opportunities and challenges. It is imperative that British business is ready to meet them.