Noel Hepworth is a man with a mission – to prepare European business for European Monetary Union. But with much of the continent fraught with mounting uncertainty about EMU, has Hepworth drawn the short straw here? You wouldn’t think so to talk to him.
“First of all, I would say, ‘for heaven’s sake, don’t panic’,” he says.
Hepworth has been picked as project director for Federation des Experts-Comptable Europeene, the representative body of the accounting profession.(Appropriately for accountants, the body’s acronym is FEE.)
The European Commission has asked FEE to use the national and accounting professions across Europe as a “conduit of advice and information” for private and public enterprises about the introduction of the euro. With FEE only up and running since October and Hepworth facing an agenda he can’t even begin to see the end of, he is performing a fair impression of a ping-pong ball, bouncing between his offices in Croydon and Brussels.
FEE has appeared on the scene not a moment too soon. Despite the fact that newspapers are packed with forecasts about the prospects for EMU, there has so far been little practical advice for companies facing the change. This is despite the fact that the introduction of EMU could be the most daunting political, economic and business challenge for Europe this century.
Hepworth senses companies are ill-prepared but have a growing appetite to know more. “One of the points that is dawning on me – particularly for businesses in this country – is that people know very little about what is going on,” he says. “They don’t even know the basic dates.”
In part, this ignorance could be fuelled either by Europhobia, or by a belief that the Europhobes will keep Britain out of EMU. “But whether or not the UK joins a single currency, businesses have to be prepared,” says Dr Ian Peters, deputy director-general of the British Chambers of Commerce.
Kate Barker, chief economic adviser at the CBI, points out that EMU contains practical implications for companies of all sizes. “It is vital in the run-up to 1999 and the introduction of some form of monetary union in Europe that UK businesses have as much information as possible about what it will mean for them. We need to separate practical concerns from the political rhetoric.”
But what do financial directors think? According to a survey of 200 FDs from Britain, Germany and the Netherlands, only 31% of British companies have started to prepare for EMU. This contrasts with 54% in Netherlands and 45% in Germany. How much will EMU preparations cost? Under u1m, say the British FDs, all drawn from The Times Top 350 companies. But a minority of 10% think they may be looking at a bill-topping u10m.
Most FDs (605) in the survey, organised by CMG, the European IT services company, believe the euro will come into operation on 1 January 1999, the scheduled date. Even among the sceptics, 95% believe the euro will eventually come into existence.
Do FDs support EMU? 83% say yes. Do they believe it will be against Britain’s interests to stay outside EMU? 74% say it will. Will the euro have an impact on their treasury strategy? 62% say “some”, 33% say a “significant” impact. How long will it take you to prepare for EMU? 17% say less than three months, 58% up to a year and 25% up to two years.
So, given that action is required whether Britain is in or out, where do we start? The first step calls for recognition at the top that action is needed, says Hepworth. “You can’t expect not to be affected by the euro and, therefore, you can’t expect not to have to do anything about it,” he says. “Even if Britain opts out, businesses are bound to be invoiced in euros, they will have customers wanting invoices in euros and things like that.”
The bottom line is that there will have to be a euro facility in the accounting and reporting systems.
Planning for all this should start at the top. “The board and senior management should sit down and think about the implications of the euro for their company as a first step,” recommends Hepworth. “A good starting point is to bring together all the relevant managers as part of that process.”
But how can a company decide what it needs to do in its own circumstances?
“I think a lot depends on the kind of company it is,” says Tom Bamber, a consultant with CMG who is specialising in EMU matters. “To know what you have to do, you have to know what you do,” he says. “That may sound obvious but there are many institutions which cannot put their finger on all the types of products they are involved with, what their markets are and so forth.”
Bamber recommends a rigorous analysis to determine which processes will be affected by the introduction of the euro. To do this, the company needs to ensure it has an appropriate management structure to tackle the euro issue. Then it needs to use that structure to conduct the kind of rigorous audit of its activities that Bamber recommends.
The problem at the moment for most FDs is that all this sounds rather vague. This is not surprising when politicians are still arguing about whether the euro is going to start and, if so, who will be among the founder members. There are more questions than answers. But as the months pass, there will be more answers as professional bodies, such as FEE, get into their stride.
FEE has launched a Web site to provide information (https://www. euro.fee.be) and is working on a checklist of issues that companies need to tackle.
It will shortly be issuing a statement about current accounting technical issues which will also be available on the Web site. A statement on tax will follow and FEE is actively investigating issues such as treasury management, software and legal questions.
Hepworth says that FEE has so far identified around 200 questions which need answering. “Some of these are simple but others are very complex,” he notes. One possibility was a book to provide chapter and verse on them all.
Britain’s home-grown accountancy bodies are also on the case. The Chartered Institute of Management Accountants is working on checklists and planning a newsletter.
Its quarterly economic and business costs survey found that 52% of its members believe the transition to a single currency will generate “significant costs” for their business. Yet even though 42% expected Britain to adopt the single currency within five years, only 8% had started to make plans to prepare for it.
Gillian Lees, project manager in the public affairs department at CIMA, admits accountants are in for a heavy period of work over the next few years as they prepare their companies for the single currency.
“We are trying to help them by giving them the information they need because they need to be up to speed in order to help their businesses,” she says. “The larger companies have obviously got the resources to set up their own projects and do a lot of the work themselves. With the smaller companies, some of the issues might not even occur to them.”
The International Securities Market Association is smartly off the starting blocks with a detailed study of the cost and timescale for the switch-over to the European single currency for the international securities market. Not surprisingly, its study by Professor HM Scobie of the London-based European Economics and Financial Centre, finds that many intra-European foreign exchange businesses will diminish within the international securities market when the euro starts.
“Currency support activity within the eurozone will have to shrink,” Professor Scobie notes. Opportunities in bond trading and arbitrage will also disappear. So those companies with their own forex traders could be handing out redundancy notices.
The British Bankers’ Association (BBA) and the Association for Payment Clearing Services (APACS) have also been studying the implications of EMU. In a response to the European Commission’s paper on the practical arrangements for the introduction of the single currency, it identified some danger areas for banking. It warned that the banking industry needed a minimum of three years to implement all the changes needed for a single currency. And it estimated the cost to British banks as u994m at 1994 prices – about 2% of their annual operating costs.
Elsewhere, industry groupings such as the Association of British Insurers, the National Association of Pension Funds and the Finance and Leasing Association are urging their members to face up to the implications of EMU.
Presiding over all this activity, like a benevolent aunt refereeing a rowdy children’s game where nobody is quite sure of the rules, is the Old Lady of Threadneedle Street. The Bank of England has produced a guide to the practical issues arising from the introduction of the euro. (“516 business days to go before January 1999” enjoins the front cover.)
The Bank is also working with the Confederation of British Industry and the British Chambers of Commerce on a series of workshops designed to cover what the introduction of the euro means for business. As a result of these, the Bank has produced a further short guide covering what the euro means for business.
There is much to discuss both at board level and elsewhere in the company.
But hanging over all these discussions are some uncomfortable strategic questions, especially for those companies with significant European trading.
Hepworth points out that EMU will give rise to critical strategic issues about whether a British company should place orders in eurozone countries.
“For example, if you are in a eurozone country should you place orders for supply in other eurozone countries because you are then in a hard-currency trading area and the trading risks become less?” he asks. He believes there will be “some temptation” to locate orders and production facilities within eurozone countries.
“You can probably treat your subsidiaries largely as part of the home rather than the international market,” he says. “In fact, you should be thinking about dealing in a larger home rather than an international market.
You could almost certainly amalgamate your treasury with many of your finance functions.”
Of course, much depends on whether EMU happens and whether Britain joins.
That should become clearer as 1997 unfolds. Meanwhile, only the foolish will be doing nothing. And there will be plenty more advice available as the situation develops.
Watch this space …
Peter Bartram is a freelance journalist.