The doom and gloom merchants, who confidently predicted that cash euros would cause huge confusion when they began circulating in 12 European countries at the start of this year, were routed. Even British tabloids searching for “euro chaos” stories soon gave up and went back to chasing the usual celebrities.
Just how well the change-over from the dozen national currencies went has now been revealed in a Bank of England research study*. It, described the change-over as “executed almost immaculately”.
The 150-page study reveals that 15 billion bank notes with a face value of EUR635bn were printed and 52 billion coins, with a value of EUR16bn were minted. More than 7,500 security vehicles carted the money, first to national bank stores, then to bank branches and finally to retail chains and other outlets.
The Bank of England study draws out the lessons for UK business, should the UK decide to join the currency. Wholesale financial markets would change over to the euro as soon as the UK entered the beginning of the transition period. But “mass financial services” as the Bank likes to call them – it means everything from business bank accounts to insurance policies – wouldn’t begin changing until later in the transition period. This change would happen at the mass changeover point, when the full-scale retail payment and transaction processing infrastructure would be in place. Notes and coins would start circulating in the UK at the end of the transition period, within 24 to 30 months of a “yes” referendum vote.
There are clear lessons for all businesses in the report, but the companies which should be paying most attention are those which handle large amounts of cash. There were some surprises in the way the continental public reacted to the changeover, which could be reflected in any UK experience.
First, Europeans seemed more anxious to get rid of their legacy cash than most pundits predicted. The result was long queues at banks in the first few days, even though legacy currencies remained legal tender for two months and could be exchanged at banks for much longer periods. The Bank of England recommends making the length of the changeover period a key point in any UK euro public awareness campaign to avoid the same problem.
Another surprise was the number of high-value legacy notes being spent in shops. (“A packet of chewing gum please and sorry I haven’t got anything smaller than FFr500.”) There are two possible explanations for this. One is that people were using retailers as an alternative to banks for changing their legacy cash into euros. The other is that dirty money was being washed through the retail system to avoid the attention that it would attract from banks’ money laundering regulations. As the report notes: “A UK cash changeover would provide both an opportunity for the authorities, through the banks, to enforce anti-money laundering regulations, and for criminals, to circumvent them.”
Based on the European experience, the Bank gives some advice on cash handling should the euro come to Britain. Large retailers, it says, would need to provide change in euros from day one. Small shops, pubs and restaurants should set up systems – perhaps with two tills – to give change in the same currency as payment.
What’s clear is that the first few days after the changeover produce queues as staff struggle to deal with the extra volume of unfamiliar transactions.
Any business faced with this prospect, suggests the Bank, might consider tactics such as deploying extra staff into the front-line, introducing numbered queue tickets, providing different services at each window or counter point and extra seating for the elderly.
On the subject of queues, the Bank notes that the only way some countries avoided major hold-ups at major railway stations in the first few days was to let some passengers travel free. But with avaricious train operating companies and a PPP-financed London Underground ruling the transport roost here, don’t bank on that dispensation.
If the euro comes to the UK, companies will need to pay particular attention to a couple of issues with their banks. First, they will need to liaise very closely with banks about the switch-over from sterling to euro. The Bank points out: “If corporate customers’ own internal operations and accounting systems were not converted at the same time as the bank account conversion, reconciliation problems could arise when companies received information electronically from the their banks, though there were fewer reconciliation problems in the first wave in practice than feared.”
The other thorny area is the switch from sterling to euro cheques, which might prove trickier than in most of Europe. This is partly because Britain uses proportionately more cheques than any first-wave country, apart from France and Ireland. But it’s also because the euro and pound value are much closer than most first-wave currencies – so it’s easier to confuse one for the other. FDs might like to start thinking about what safeguards can be built into cheque handling processes to prevent this happening.
It’s the sort of mistake that would be picked up down the line, but only after it’s caused a lot of hassle.
The Bank also provides some useful advice on what to do about dividend payments and IPOs in the run-up to a euro conversion. Until the start of the “mass changeover”, registrars should continue to pay dividends in sterling. After that point, but before E-day, they could pay in either euros or sterling.
On IPOs, the bank points out that as many small investors subscribe by cheque, it would be best to allow subscribers to pay in sterling until the end of the transition period. That shouldn’t prevent subscribers paying in euros if they wish to. A survey carried out by the Bank of England in March 2002 suggested that 90,000 UK businesses already had bank accounts denominated in euros. Interestingly, nearly half of those businesses didn’t have bank accounts in any other currency. The euro had also overtaken the mighty dollar as the most commonly held foreign currency account.
But there wasn’t much evidence that European tourists were using the euro. Even in the bazaars of London’s cosmopolitan Oxford Street, Marks & Spencer and Selfridges reported only a small percentage of customers paying in the new currency. When it comes to buying prawn sandwiches or knickers, the pound still holds sway.
* Practical issues arising from the euro, number 17, Bank of England.
SWITCHING TO THE EURO
One of the most uncertain aspects of the single European currency prior to its launch was the question whether the euro would be used by companies trading within the UK.
The Bank of England reports that, during the euro transition period, some 60 per cent of companies expected that the proportion of sales and purchases booked in euros would increase over time. The evidence in the first half of 2002 is that a smaller proportion – less than 45 per cent – did so.
The main reason for switching to euro pricing and invoicing, cited by 54 per cent of the sample, was customer demand, the Bank says. Just over a fifth of companies said supplier pressure was making them change currency, while 15 per cent said that it was their own choice to do so.