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COVER STORY – Emu: the final countdown.

It would be wrong to say that British businesses aren’t aware of the single European currency. But an exclusive survey of Financial Director readers conducted with national law firm Pinsent Curtis reveals that many are simply not doing enough to prepare for it. A worryingly high proportion of the 151 respondents – one in five – are not even convinced that the euro will launch next January. In almost half of Britain’s businesses, Emu isn’t even a board-level issue. Sixty percent of businesses do not yet have an Emu working party, and half of those do not expect to form one over the next six months. Almost 90% of respondents keep up to date on Emu developments by reading magazines and newspapers (a flattering statistic for us in the media world, perhaps), but more than 40% are not discussing the issue with their banks, and two-thirds appear not to be taking professional advice on Emu from their lawyers or accountants. But perhaps the most damning statistic of all came out of the question, “Are you satisfied that your company is doing all it can with regard to these issues?” Amazingly, 48% either said No, or just didn’t know. John Cleland, a partner in the banking and finance group of Pinsent Curtis, says that these findings are very disturbing. “The overwhelming feeling I get from the figures is that directors are aware that there is a problem, but it doesn’t strike them as being an immediate concern,” he says. “A number of them seem to be treating the euro as just another foreign currency, which perhaps misses some of the very unusual and relevant features of the euro.” Take these survey statistics, for example: by far the most significant benefit to be gained from sterling’s (ultimate?) entry into the euro is the removal of exchange rate uncertainty, having scored an average 4.2 marks on a scale from 1 to 5. In those businesses that do have an Emu working party, the biggest problem on the agenda is the legal and regulatory impact (which would include such matters as financial reporting), followed by the netting and rounding rules. The euro, in other words, is widely regarded as simply a numbers game, not much more sophisticated than a complicated “decimalisation” programme. Only a tiny handful of respondents suggested other important benefits from the euro. They included reduced bank charges and a more stable UK economy, but a few recognised – unprompted – that the euro could reshape the customer-supplier relationship. They suggested that pan-European pricing, the ability to secure supplies from all across Europe and greater ease in benchmarking suppliers would all be spin-off benefits. Surprisingly few respondents felt in any way threatened or better off by the prospect of transparent pricing – by which existing price differentials of up to 25% from one country to the next would be blatantly exposed once all price tickets and catalogues are in euros. A fifth thought they would suffer, mostly because the process of harmonising selling prices would result in lower prices, overall. An even smaller proportion thought that they would benefit – again, because prices from suppliers would be lower. Almost half felt that price transparency would have no impact, on balance, while 17% didn’t know how it would affect them. It is perhaps difficult to take this ambivalence at face value, given the (relative) lack of effort or research that appears to have gone into the Emu issue in many boardrooms. For example, 44% of respondents do not believe or do not know that foreign multinationals operating in the UK are likely to require suppliers to tender and invoice in euros, for example, despite fairly clear evidence that this is exactly what is going to happen. Such companies may be in for a shock if they suddenly find that their local customers decide, in effect, to outsource their foreign exchange exposure by making the euro their operating currency for all their European operations. As we have said on numerous occasions, it is increasingly likely that British businesses are going to find themselves “exporting” to customers in Britain. Most respondents also thought that the euro’s cost-versus-benefit equation would favour larger companies (those with turnover greater than £250m) – though a sizeable minority regarded the issue as being unrelated to size. “To the extent that the euro becomes an issue to the large companies, they may require smaller suppliers and customers to actually adapt to the new regime,” warns Cleland. “So there’s a trickle-down effect. Notwithstanding they think that it’s only a big company problem, big company problems will become smaller company problems because of the nature of the distribution chain and the manufacturing chain.” One reason why the euro is on the agenda but at the bottom of the list appears to be that it is being crowded out by the millennium bug. “Resource conflict” between these two fin de siecle issues is resulting in most effort being put into the year 2000 problem. The excuse appears to be, “At least we know when Britain is going to enter the year 2000. We don’t know when it’s going to enter Emu.” But as Cleland points out, Emu starts in 1999 – a year before the millennium bomb blows up. His theory is that the date-change problem has had a higher, racier profile in the press: “There’s been more press speculation that the millennium bomb is actually going to cost them money if they don’t sort it out,” he says. “In fairness to them, it may well be that, with limited resources available to them, they are giving priority to the millennium bomb.” But 40% of businesses have established a working party, and finance directors are members of 61% of them. (They are also much more likely to chair it.) Treasurers and chief executives also feature prominently, while many respondents added that IT directors and managers also have a place on such working parties. Only one specifically mentioned that the head of human resources was also on the working party, a surprising statistic given that the staff training implications of euro-cash are acknowledged by more than half the respondents. Most working parties are also responsible for implementing their recommendations, though just under a quarter currently have a budget for doing so. So far, only 17% of businesses have estimated the cost of preparing for the euro. On average, the cost is said to be around 1.25% of turnover, though some estimates ranged as high as 10%. Our survey asked whether respondents currently use ecus, the European currency unit that is made up of a basket of currencies. Up to 30% use the ecu, particularly for tendering for contracts, prices and catalogues, anything to do with Brussels, and some regulatory filings and financial reporting. That figure was surprisingly high in Cleland’s view. “The ecu is technically very interesting from a legal perspective,” he adds. The ecu is supposed to swap into the euro on a one-for-one basis next January but, because the currency “mix” that makes up the ecu sometimes changes, Cleland warns that some contracts may mean that the ultimate switch rate is different from that. Contracts that do not define the ecu, or which define it as being “as determined from time to time” should be fine. But contracts that define the ecu “as of a particular date” may mean that the contracted ecu does not become a contracted euro. Our survey also asked respondents, “If the euro were to be introduced tomorrow, what do you think the exchange rate with sterling would be?” The aim was to discover whether FDs were aware of the ecu-euro linkage. Just under half the respondents answered this question, though a few ducked it by giving a deutschemark exchange rate. Those who answered in euros correctly suggested an average rate of around euro 1.52 – almost exactly the same as the current ecu/sterling rate – though answers varied from euro 1.00 to euro 2.10. Those who gave DM answers suggested – hoped for? – a rate around DM2.70, some 12% lower than the current rate. One of the great, fundamental benefits that the euro is supposed to offer is its strength as the third truly global currency, alongside the dollar and yen. The euro was intended to offer not just the elimination of exchange rate uncertainty, but the prospect of permanently low inflation and low interest rates. All the attributes of the deutschemark are intended to wash off onto the euro. Indeed, a low inflation/low interest rate environment was perceived as being the second most important benefit to British companies if the UK were to join the euro. It scored just under 4 out of 5. One-third of respondents even ranked this as the single most important advantage of Emu membership. But there has been a recent and worrying dispute between France and Germany over the chairmanship of the European Central Bank, raising fresh fears about the conduct of euro monetary policy and the degree of political interference. Barely a year ago, there was so much talk about France fudging its pension liabilities and Germany playing accounting games with its gold reserves – all so that they can qualify for Emu membership – that it was beginning to look as though the only country that would actually qualify without cheating would be Luxembourg – which shares its currency with Belgium. By the time this survey was conducted – the last fortnight in February – there had been much talk of how Italy was desperately shoe-horning its finances into the Maastricht criteria; the euro was increasingly looking like a broad currency, potentially a soft currency. It is now known that 11 EU currencies look as though they will qualify for euro membership. Indeed, as this issue was going to press, the Greek drachma joined the European exchange rate mechanism (ERM) as a precondition to joining the euro, perhaps as soon as 2002. Against this background, it is interesting to see the extent to which British finance directors are concerned that the euro will not be a low inflation/low interest rate currency. On balance, they appear to be not desperately worried, but the shape of the bell curve of responses to our question makes it clear that FDs do not regard it as a racing certainty that the euro will simply be the deutschemark in another guise: more than 40% of respondents ranked their level of concern on this issue as more than 5 out of 10. Moreover, only 5% of respondents thought that economic cycles and economic behaviour amongst the likely first-wave member countries have harmonised sufficiently to make the euro a success. Even though a third believe that they will harmonise “in time”, half are unconvinced while 11% don’t know. Perhaps it isn’t surprising, then, that there is a certain ambivalence over whether sterling ought to join the euro. Only one-third of respondents would have liked to have seen sterling join the euro next January. Just over a quarter – 28% – think that British membership would increase their company’s profitability, while only a third think that they will be at a competitive disadvantage with sterling outside Emu. On balance, the respondents are far from convinced that the British electorate would support Emu entry if a referendum were to be held after the next general election. Perhaps one of the most revealing – yet disturbing – statistics comes from the question, “Will trade between countries/companies within the euro-zone increase, to the detriment of those outside the euro-zone?” Almost 60% said No. But given the advantages which the respondents themselves pointed to in terms of currency stability, it would be surprising if euro-zone businesses didn’t take advantage of that by increasing the amount of business they do with fellow euro-zone businesses, at the expense of companies in Britain. Given Britain’s apparent lack of preparation for the euro, this could be the one survey response that turns out to be most painfully wrong. Graphics by Ciaran Bradley Data compiled by Jane Bray-Nicholls, Pinsent Curtis.

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