UK: Welcome to the eurozone.

UK: Welcome to the eurozone. - Whether they like it or not, British businesses are going to have to deal with the euro. Even companies which think of themselves as wholly domestic will feel the ripple effect.

by Sarah Perrin.
Last Updated: 31 Aug 2010

Whether they like it or not, British businesses are going to have to deal with the euro. Even companies which think of themselves as wholly domestic will feel the ripple effect.

It's bold and it's brassy. It transcends national borders and offers to push foreign exchange risk to the frontiers of the European Union.

Those who can't handle it risk losing international business. Yes, the euro is coming to a supplier or purchaser near you. Will you be ready?

Anyone unsure of their answer should look sharp. Under the proposed timetable for the single currency, non-cash payments may be denominated in the euro from 1 January 1999. Coins and notes will enter circulation from the start of 2002. It's 1999 that counts, however. From that point, not only will accounting systems need to cope with euro transactions, but whole business strategies will be under pressure as pricing policies become suddenly transparent within the euro zone.

It seems that many businesses are anything but ready - and, worse still, feel no particular need to be. Earlier this year a survey by Barclays found huge euro ignorance and lack of preparation among UK companies.

The bank surveyed over 300 businesses with turnovers of £500,000 to £50 million. Nearly two-thirds of the companies, all of which trade regularly with other EU countries, believed the introduction of the euro would have little or no significant impact on their business if the UK initially stayed out of Emu. Three-quarters admitted making no specific plans to deal with Emu.

Granted the UK will probably keep sterling when that first wave comes crashing down. NatWest is only putting a 20% probability on the UK going in with the euro pack in 1999. But the six countries which at the moment look most likely to go ahead include two of the UK's most important markets, France and Germany, plus the Benelux trio, and Austria. Furthermore, Finland and Ireland look increasingly likely to qualify, and even Sweden, Spain, Portugal and Italy, unlikely to hit their economic targets, may nevertheless get close enough to get a sympathetic political hearing when the decision is made some time next year. That would leave just Greece, Denmark and the UK outside the euro loop.

The question is, how long can they remain outside? 'Most companies in the UK and most banks are planning for the UK to be out of the first wave,' says Colin Stringer, senior manager with consultants Cap Gemini. 'But if the euro proves to be a strong currency, the UK would find itself under severe pressure to participate within about 18 months of starting.' And even if it doesn't, domestic companies cannot ignore the euro.

Any company doing business with another inside the euro zone will need to adapt to the new currency in the same way as for any other foreign currency. That may sound simple enough in theory - after all, as an island of traders, UK businesses are au fait with the franc and the lira and the Deutschmark - the trouble is that the euro isn't just any other currency.

For starters, the practicalities of adapting to it are not the same. IT systems have long been programmed to handle the franc, but they need updating for the euro. Those who try to find the euro symbol on their word-processing packages will search in vain. Nor can businesses hope to get away without the facility to handle the euro, whether or not their governments intend to adopt it. During the three-year transition period from 1999, the principle of 'no compulsion, no prohibition' applies. So, although no one has to pay with the euro, purchasers have the right to choose to do so.

And although media coverage makes us feel as though the currency has been with us for ages, it has no track record. As a result, new financial products are being developed so that companies can hedge against it. Meanwhile, the option of hedging against other currencies will fall as deals are increasingly done in the euro.

Apart from the practical issues, the euro also creates a whole new strategic dimension. In the past, different currencies have made transparent price comparison between one supplier and another difficult. Customers will have a clearer idea of how prices differ between suppliers. As price transparency increases, prices themselves are set to fall. Adding to the uncertainty is the difficulty of predicting how widespread use of the euro will be at home.

Clearly the UK banking and financial services industry cannot avoid the euro. As well as designing new financial products to handle hedging in it, they will also have to cope with an expected increase in payment by plastic. Henri Ruff, head of the single currency unit at Visa EU region, says: 'We are at the frontline of it all and we are very busy preparing.

We are working to the current timetable that, as of 1.1.99, the euro will be in existence and people will be able to purchase with the euro on their cards. So we have to make sure that all member banks are in a position to handle that.' Visa has 28 member banks in the UK and around 22,000 world-wide. 'We have got to prepare for the first wave and for every eventuality,' says Ruff. 'We think there will be interest from card holders and corporate customers in transacting in the euro even if the UK isn't in the first wave. From Visa's point of view, it's irrelevant whether the UK is in or out.'

And so it should be for others. Multinationals, exporters and importers will need euro accounting ability to handle intra-company balances, and settle euro receipts and payments at the very least. But domestic companies supplying UK-based subsidiaries of foreign parents could even have to account for deals in euros. Stephen Teal, NatWest's head of European strategy and development, says it is natural for foreign companies to instruct UK subsidiaries to require any third parties to deal in euros. 'Most people expect the effect to be limited to people who import or export,' he says.

'But life is not like that.'

Malcolm Levitt, Barclays' EU adviser, agrees: 'Even when companies think their business is wholly domestically based, they may be wrong. Companies such as Siemens UK will use the euro, and some British multinationals have said that once they get euros, they will want to get rid of them and may start paying subcontractors with them.' This ripple effect, already named the 'creeping euro', will embrace even the small suppliers.

Changes to accounting systems are inevitable. De La Rue, manufacturer of cash-handling equipment and printer of paper currency and plastic payment cards, earned 37% of its £768 million worldwide sales in Europe in the year to March 1997. Finance director Richard Laing says: 'Looking at some of our European operations, we are going to have to make decisions as to whether they account in the euro or their national currency. My own view is that if we are going for the euro, then let's get on with it.

Some customers may want to deal in, say, francs (during the transition period). But I suspect our internal record-keeping would be done in euros.'

UK companies which do a lot of business in the euro zone could switch their statutory accounting to the euro too. They could also submit their tax returns using it. Companies in the UK can elect to submit in a currency other than sterling where that is the main currency for their business.

Many oil traders submit returns in US dollars, the currency in which most of their business is done, so removing a large proportion of foreign exchange gains and losses. Graham Shaw, a senior manager in Arthur Andersen's tax division, says: 'Companies which do a lot of trade in the EU will want to consider whether they want to start preparing their accounts in the euro. They may have looked at the issue before and rejected it because they did 20% of their trade in Germany and 15% in France and so on. But they may end up with 80%-90% as euro business, in which case using the euro for tax returns would be an option.'

There may be tax repercussions from increased price transparency too: UK tax authorities will be able to spot more easily any transfer pricing that shifts profits between subsidiaries to dodge tax. Shaw also expects the tax authorities to scrutinise cash-pooling policies more closely. Subsidiary A could effectively loan cash to subsidiary B in euros but at a preferential rate of interest. Different jurisdictions are likely to take differing positions on the need to make a corresponding tax adjustment. 'You can expect this to be looked at more closely because companies will be using cash pooling more widely,' warns Shaw.

There is also concern that the fixing of euro conversion rates could trigger taxable gains or losses on contracts maturing after that date, but denominated in a foreign currency switching to the euro. 'The question is to what extent the tax authorities will legislate to iron out the wrinkles that could lead to a taxable gain or loss,' Shaw explains. The intention is that the euro's birth should have a tax-neutral effect. The Inland Revenue is believed to be listening to concerns on the issue but may need to issue a statement of intent to calm fears.

Companies also need to review all their contracts to spot any involving currencies that will change to the euro. Theoretically, contracts running beyond the establishment of the fixed conversion rates could become invalid.

The EU has attempted to counter this by introducing a regulation stating that the introduction of the euro will not alter the terms of legal agreements.

As a result, Patricia Godfrey, a partner with lawyers Nabarro Nathanson, doesn't expect a huge number of contracts to be frustrated by the introduction of the euro. 'But that will not stop some people having a go,' she warns. 'If one party has a deep pocket and the other doesn't, the strong party may seek to re-negotiate the terms.'

Finance departments need to review their operations too. Companies within the euro zone will avoid exchange risk with euro deals, but not UK companies if the UK is outside it. Businesses should think about hedging against the euro. Barclays Bank is developing euro forward contracts, bonds and debt products with post 1 January 1999 maturities for launch during 1998. A full range of foreign exchange, money market and derivative products denominated in the euro are also in the pipeline. Companies may also be able to streamline cash management, pooling funds in fewer countries and fewer accounts, with resulting efficiency gains and reduced bank charges. For companies such as Rank, the treasury function is at the heart of planning. 'We set up a task force within the treasury department,' says Nigel Turnbull, Rank's finance director and chairman of the 100 Group's technical committee.

'The task force will be raising questions as to whether we need one within the company in general.'

The euro will affect companies in many basic operational ways, too. Marketing material and price lists may need to be reprinted to include the euro.

Overseas staff in the zone will need to be paid in the euro. Payslips may need to be printed in dual currencies to smooth the transition and allow employees to become familiar with the euro equivalents of their salaries. Staff themselves need to be trained to understand what the euro means for them, the business and their customers. Barclays is beginning a major internal training programme this autumn which, it hopes, will cascade down through all staff levels. At Visa, Ruff says: 'We are immersing our staff in what the euro is, what the opportunities are.'

The changeover will not be cheap. BZW estimates that the total compliance costs for the euro for the whole business community in the EU will be £15.1billion. Most of this will be spent on IT, 'with estimates putting that at between 40%-60% of the total,' says Jonathan Kay, leader of Sema's financial services consulting group. 'But it isn't really an IT issue,' he says. Kay believes that the euro is much more of a strategic issue.

With one currency in operation across much of Europe, corporate and personal buyers will be able to compare costs of goods as never before. It won't be viable simply to translate prices into euros. '£9.99 will translate into gobbledygook in euros,' says Levitt. All strategic impact will be lost. The market place will become increasingly competitive, but some downs have an up: companies could cash in on the competitive pricing to cut their own purchase costs. The euro isn't just about costs, it is also about benefits.

With this in mind, the more enlightened companies are now moving into a higher gear. Even though it isn't anticipating a major impact on its key business, hotel and leisure group Stakis has set up a joint year 2000-EMU task force to steer preparations for both. 'It includes IT people, people from hotel and casino operations, legal people, accountants and the tea lady,' says finance director Neil Chisman. Others have gone further.

Retailer Marks & Spencer has a dedicated EMU team. Finance director Robert Colvill says: 'We have a group that is dealing with the euro across all the different disciplines. There is nothing you can leave out of account.

It covers IT, personnel, financial services, everybody gets drawn into the discussion.' M&S is directly affected through its European stores.

Colvill explains the company's thinking: 'We have to assume that Germany, France and the Benelux countries will be in the first wave. So that will be provided for in our own internal planning. We must also provide for the possibility that our Irish and Spanish stores will be involved. The forward planning for our overseas stores becomes the contingency planning for our UK stores.' M&S is installing new point of sales equipment in all its stores, though this is for 'a whole host of reasons', Colvill stresses. The £100 million reported cost of the new tills, including training, cannot be laid uniquely at the euro's door. Nevertheless it will make M&S ready for the euro. 'Within that modernisation programme, we have incorporated the need to handle the euro so it will be possible to accept the euro in our stores in the UK.'

As more and more publicity is given to this land-mark in European history, the hope is that the slow reaction of the rest of UK business will speed up. The issue will not go away. As NatWest's Teal says starkly: 'If you are in a supplier chain that has the euro, then you can run but you can't hide. Love it or loathe it, people will have to deal with it.'.

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