Digital Transformation » Systems & Software » MONETARY UNION – Doing business in a single currency

MONETARY UNION - Doing business in a single currency

The introduction of a common currency in Europe - with or without UKparticipation - will create a wide range of trading opportunities forBritish companies. Indeed, EMU could prove to be the European cornerstoneof greater business globalisation.

As there are plenty of people around who think a single European currency is a Mickey Mouse idea, a good place to start considering it is with a Disney Shop tee-shirt.

A senior manager in one company who travels a lot round Europe has been comparing the price of the same tee-shirt in different countries. His conclusion: the price varies as much as 30% between the cheapest and the most expensive country.

So what? There are even larger price variations on a huge range of consumer goods across Europe from Mars bars to washing machines. As of now, these price differentials are partly disguised because they are quoted in different currencies. As the euro takes over as a fixed exchange rate, the differentials suddenly become more striking.

It is a problem that Mike Littlechild, KPMG Management Consulting’s partner in charge of the firm’s EMU unit, regards as one of the challenges managers need to face as the single currency looms closer. “A lot of companies will find they won’t be able to maintain those price differentials in a single currency area,” Littlechild says.

The problem of price differentials is just one of a number landing on FDs’ desks. There are also issues of competitiveness and how to manage the transitional period. For FDs in Britain, there are further worries about whether the UK will join and, if so, when. And for those companies that straddle several EU countries, there are concerns over how to handle the accounting and trading problems if some countries are in and others out.

Ian Fletcher, policy executive with the British Chamber of Commerce, has been closely monitoring the EMU issue. He believes larger firms that currently spend time and money managing currency risk will win a significant benefit from EMU. But he admits: “This benefit has to be weighed up against other competitive factors.”

Fletcher believes some trading benefits of EMU are already flowing through as countries move towards the convergence criteria which are a condition of membership. With inflation under control, industry is already reaping the benefits of a more stable trading environment and cheaper borrowing, even though there have been a couple of recent interest rate rises in Britain.

Although it looks probable that Britain will not be among the first wave of EMU recruits, Fletcher believes companies cannot sit back and relax.

“The 1999 and 2002 target dates focus the mind and if we are left open with a second wave entry at some time, then I can see it might be quite a short period between the UK deciding to join and actually going in.” The message here is: companies that prevaricate could find themselves caught seriously short when the decision is taken.

Yet beyond the transitional period with its undoubted problems lies a new millennium of opportunity. Too few companies seem to have grasped the key features of the new situation that will develop as a single currency area matures in the first decade of the next century.

The single currency is just one of a number of trends changing the business and trading climates around the world. EMU should be seen as a major European cornerstone of the globalisation of business.

The euro has the potential to strengthen UK firms’ efforts to become ever more competitive in global markets. Creating a stable home market of continental size would provide the kind of bedrock for international competition traditionally enjoyed by the US – and which countries such as China may enjoy in 10 or 20 years time.

Low-cost borrowing and long-term low inflation are two important components of this enlarged home market which strengthen international competitiveness.

But the ability for European companies to cooperate more effectively among themselves in strategic joint ventures is another. Heavy upfront investment is increasingly the entry ticket to many world markets, and European-wide joint ventures – in areas such as aerospace, IT, telecommunications and pharmaceuticals – stand more chance of making it than individual national companies.

The second issue is that the creation of the single currency area could well stimulate a new drive to seek improved international competitiveness.

In the first wave of this, we are back to the tee-shirt. Companies across a whole range of industries will be looking for ways to equalise prices across Europe and they will generally be equalised in only one direction – down.

In turn, this could improve the overall competitiveness of European companies in world markets. Especially if, as seems likely, the introduction of the single currency area stimulates a search to cut overhead costs. This is already underway, with a growing emphasis on outsourcing costly activities such as accounting or IT, but the trend seems likely to grow.

A recent survey of 350 companies by Andersen Consulting – Vision 2010: designing tomorrow’s organisation – shows 60% of executives regard both joint ventures and outsourcing as critical to business success in the future. But as Mark Otway, partner at Andersen Consulting, notes: “Although the study shows us managers expect to outsource more operations, they have also told us their experience of what suppliers can deliver is rising too.”

Otway points out that more than six out of 10 respondents expect overall business performance to improve as a result of outsourcing a process.

“This market is maturing and executives are now viewing outsourcing as a key internal business strategy which allows them to pursue market-facing initiatives.”

Andrew J Derrer, vice-president of applications consulting for Oracle Corporation in Europe, Middle East and Africa, believes European companies should regard introduction of the single currency area as an opportunity to look at the effectiveness of their business processes.

“We are seeing that the euro is one of a number of catalysts for change,” Derrer says. He sees more companies introducing shared service centres – perhaps at a Europe-wide level – to handle common back-office functions.

This could include activities such as accounts payable and receivable, general ledger accounting, vendor approvals, vendor creation, procurement, inventory management, treasury functions and, in some cases, IT.

But Derrer warns: “A shared service centre isn’t merely the creation of a centralised function which consolidates activities that are currently performed in many different locations. It should be a remoulding and a reshaping of functions to provide a service level agreement with the operating business units.” Others also see this as an opportunity to build new Europe-wide business processes that work more effectively.

The third issue is the growing impact of electronic information exchange and, more specifically, electronic trading. Derrer believes the single currency area will make it simpler in one respect for companies to offer their products across the whole of Europe. “For example, when customers access a web site, they see one common price list.”

And if companies do use the stimulus of EMU to reshape business processes and build more European service centres for back-office functions, they may also create an environment in which they will swap more information.

Indeed, a centralised back-office could even provide opportunities to raise the quality of information available to different parts of the business.

The service centre could be a haven for all the talents in, for example, management information systems. It could develop best practice models to apply across the company in all its trading countries.

Beyond the exchange of information lies the question of electronic trading.

Again, the betting is that a single currency area will stimulate this by making payments easier between countries.

Some companies have already created sophisticated inter-country electronic trading systems. For example, Texas Instruments has built Europe-wide links with more than 2,000 trading partners. In one application, Texas Instruments allows distributors to access its own database of product prices. The system allows distributors from all over Europe to find answers to straightforward queries quickly and whenever they need the information.

As the single currency area takes hold, it is likely more and more companies will want to develop pan-European electronic trading links such as this.

In the context of all these changes, the challenge of EMU seems, if anything, more daunting than ever. Yet it also provides a context for the transition period. Moreover, it provides a way of changing the psychology of the situation. At the moment, too many companies are looking on the change to EMU as something that has to be done because there is no choice. As a result of this, there is a real danger that the issue is being handled at too low a level in the company.

If companies start to look at the broader opportunities, suddenly the picture looks more positive. There are opportunities for those bold enough to grasp them. And EMU looks a more exciting prospect. Move over Mickey.

Ireland warms to euro

British companies may be glowering with uncertainty at the prospect of the euro, but in the Emerald Isle Irish eyes are smiling. Within the European Union, Ireland is better prepared than most other countries to meet the Maastricht criteria for joining EMU.

The Irish business community takes a positive view of the prospects for monetary union. The Irish Economic and Social Research Institute concluded that Ireland would be a net gainer from EMU.

Michael Delaney, FD of Carroll Joinery, a IR#16m company that makes joinery products for the building trade, believes EMU will have benefits for his company. The company already exports to Britain and some European countries outside the EU. But Delaney relishes the prospect of the company getting stuck into a single market with a single currency.

He is upbeat about the transition to EMU. “I think the change-over will be quicker than anticipated,” he says. “Once a few companies start to change to the euro and get used to it, they will see that it is not so different and awesome as was anticipated. In fact, it may become fashionable to change to the euro and seen to be a progressive move.”

But what about the specific benefits for Carroll Joinery? Delaney sees a limited benefit on the foreign exchange front immediately – reducing the need for foreign exchange purchases by between 10% and 20%. But if countries such as Britain, Sweden and Denmark – where the company’s big business partners are located – join in a second wave, that figure will rise sharply.

A critical benefit will be the ability to borrow more easily elsewhere in Europe. “We could borrow deutschmark now at a lower interest rate than locally but the currency risks negate the benefits of the interest rate saving,” he says. “Take away the currency risk and it means that you can borrow across the border in Germany at a euro rate. We can shop more widely for borrowing without exchange risks.”

The general trading situation Delaney sees a neutral. There will be increased opportunities for the company to sell its products more easily in EMU countries – but the same applies to competitors elsewhere in those countries.

The fact that currency risk is taken out of trading with EMU countries is the key benefit.

For other companies dragging their feet in euro preparations, Delaney points to one of the findings of the European Commission’s green paper on practical arrangements for introduction of the single currency. There are many advantages for companies that take a lead and conduct all or part of their internal operations in the single currency before 2002.

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