|EMU means replacing currencies with the single currency ...||This booklet explains to businesses what Economic and Monetary Union (EMU) means for them. In simple terms, EMU will involve replacing the currencies of some European countries with a single currency - the euro. But as this booklet explains, this will mean much more than swapping one currency for another. It will affect many businesses outside as well as those located inside countries which join the single currency.|
|... but its effects go much further.|
|The UK has a choice about joining ...||The United Kingdom can decide whether or not it wants to join EMU. The Government will take its decision on the basis of the economic arguments. If it were to decide that the United Kingdom should join, it would need agreement in a referendum, as well as the agreement of Parliament.|
|... but whatever the decision, there will be implications for business ...||However, whether or not the United Kingdom joins, EMU will affect businesses here. This booklet is to help businesses meet the challenge of EMU successfully.|
|What does EMU mean for businesses?
The booklet looks at what EMU will mean for businesses:
|... affecting the business environment and needing practical changes.|
|This booklet provides information to help businesses ...||To help understand what EMU means, the booklet first
provides background information on:
|... and there will be more help available.||Factsheets will be produced to update this information,
particularly on detailed practical preparations. |
The Government is also establishing an Advisory Group of representatives from a wide range of business and trade associations and other interested bodies to discuss practical aspects of EMU. The group will help the Government decide what additional information to provide.
A form is provided on the final page of this booklet to request extra information. All the information mentioned will also be available through the internet at: http://www.hm-treasury.gov.uk.
The economic pros and cons of EMU
This booklet is not about the economic pros and cons of joining the single currency. The Government has separately published in July 1997 an independent survey of the economic pros and cons of joining the single currency. It is available from the Public Enquiries Unit of HM Treasury on 0171-270 4860, at many libraries and through the internet at: http://www.hm-treasury.gov.uk.
What has happened so far?
|There is a long history to EMU.||At least since the creation of the European Economic
Community (EEC) in 1957, there have been proposals
for greater economic cooperation, including a single currency.
The Maastricht Treaty
|The Maastricht Treaty put it into law ...||The Maastricht Treaty provides an economic, political and legal framework for the single currency, including three stages in the journey towards EMU.|
|... with a three-stage process.||The first stage - economic and monetary cooperation and
the development of the single market - was in place when
the Treaty was signed.
The second stage started in January 1994. It involves closer cooperation, as countries aim to make their economies suitable for EMU, and the setting up of the European Monetary Institute (EMI), to provide a forum in which national central banks prepare for the future European Central Bank (ECB).
The third stage of EMU is scheduled to begin on 1 January 1999. It will involve the introduction of the single currency - the euro - in those countries whose economies are assessed to be ready. The ECB will be responsible for the monetary policy of these countries.
|The Treaty lets the UK decide whether it wants to join ...
... recognises that not all countries will join at first ...
... but allows them to join later.
|The Treaty also allows the United Kingdom to decide
whether or not it wants to join EMU. Most other member states
are already committed to taking part, if and when they meet
the necessary economic conditions.
The Treaty foresees that not all countries will meet the economic conditions required to join EMU safely in January 1999. It allows those countries - and countries choosing not to join in 1999 - to join later, provided they can meet the conditions.
What about the United Kingdom?
|To join would need agreement from the Government, Parliament and the country.||The Maastricht Treaty allows the United Kingdom to
choose whether it wants to join EMU. As a matter of law, the
United Kingdom could only join if both the Government and
Parliament were to decide that it should do so. In addition,
the Government is committed to seek the agreement of the
people in a referendum, if it were to decide that the
United Kingdom should join.
How will the Government decide?
|The Government will make its decision on the economics.||
The United Kingdom is able to decide over the coming
months whether it would like to join EMU in January 1999. The
Government will take its decision on the basis of the
economic arguments. Whenever a decision is considered, the
Government will examine the following questions:
|No decisions yet taken on joining in January 1999 or at any later date.||While nothing has been ruled out, there are formidable obstacles to the United Kingdom joining the single currency in January 1999. If the Government were to decide that the United Kingdom should not join EMU in 1999, we could still join later.|
What will happen and when?
|A timetable for introducing the euro was agreed by heads
of EU governments at the European Council - or summit -
in December 1995, on the basis that the single currency
is introduced on schedule on 1 January 1999.
The changeover can be divided into three distinct phases. The dates, other than 1 January 1999, should be regarded as guides rather than fixed at this stage.
|What happens ...||
|... and who is affected.|
|The simplified summary in the table is explained below.|
Spring 1998 - January 1999
|A decision in spring 1998 on which countries are ready ...||The first phase (often called Phase A or Stage 2B in
different publications), starts with the decision by governments of
EU countries on which countries qualify to join. The
European Central Bank (ECB) will then be set up, to prepare for
its future role.|
January 1999 - January 2002 (at the latest)
|... and for the single currency to be introduced on 1 January 1999.||On 1 January 1999, the start of this second phase (Phase B or Stage 3A in some publications), conversion rates between currencies of qualifying countries and the euro will be legally fixed. The euro will become the legal currency in those countries. The ECB will become responsible for interest rates.|
|Until 2002, transitional period rules apply ...||This period - known as the "transitional period" - allows public authorities and businesses extra time to prepare, and for euro banknotes and coins to be produced. National currencies will continue to exist in parallel to the euro, but will change in status. They will be temporary "denominations" or "units" of the euro (similar to the relationship between pounds and guineas historically being units of sterling). Since no euro banknotes or coins will be available, national banknotes and coins will be used for all cash transactions.|
|... there will be no euro banknotes or coins ...|
|Businesses will be able to choose to use the euro or national currency denominations for transactions, although they may come under pressure from customers to use one or the other. So, who will use the euro during this period?|
... the euro will be used mostly to the financial sector ...
International financial markets will use the euro instead of the currencies it replaces from 1 January 1999. Some bonds and equities previously in those currencies will be traded in euro. Governments of participating countries will issue debt in euro, and convert some existing debt.
... and some larger firms ...
Some multinational firms operating in Europe intend to use the euro from early in the transitional period, to simplify their accounts and finances. They might want suppliers to use the euro too.
... but many small and shops will still use national currencies.
In the United Kingdom, systems will be ready to pay euro between banks and to link cross-border banking payment systems. These would be needed chiefly, but not only, if we were to join. Banks in participating countries must make conversions in certain circumstances between national currency units and euro. Some banks may offer euro accounts for businesses. But generally, most high street banks expect to run most services in national currencies during this period.
Many - especially smaller - retailers do not expect extensive use of the euro during the transitional period. Exceptions might include shops accepting many payments by cards or cheques, if their customers are keen to use euro.
Like retailers, some small businesses do not expect to use the euro during the transitional period. Exceptions include firms with cross-border operations, or whose customers want to be invoiced and pay in euro.
January 2002 (at the latest) - July 2002 (at the latest)
|Euro banknotes and coins arrive around 2002 ...|
... and all activities switch to euro ...
|Euro banknotes and coins will be introduced in participating countries at the start of this phase (Phase C or Stage 3B in some publications). They will circulate alongside national currency banknotes and coins.|
|... except for dual circulation of national and euro cash for up to a further six months ...||The transitional period will have ended, so - other than for cash - national currencies will no longer have any meaning. All businesses and public authorities in countries which have joined the single currency will need to have converted to the euro. National banknotes and coins will be withdrawn from circulation during this period, probably following rules decided nationally.|
|... and the changeover is completed by July 2002.||The changeover will then be complete. The euro will have replaced the currencies of the participating countries for all purposes. Old national banknotes will remain convertible into euro according to national practices.|
There will be rules...
|Legal rules for the changeover
EU countries have agreed rules on introducing the euro. The rules are contained in two European Community regulations. These are respectively about contracts, and the replacement of national currencies with the euro and the transitional arrangements. There will be separate legislation setting the precise conversion rates between the euro and participating countries' currencies.
... to ensure that agreements and contracts are not changed ...
The first regulation is designed to create legal certainty about the validity of contracts. Generally, it:
|... for conversions and rounding ...|
... deciding whether to use the euro or national currencies during the transitional period ...
The other regulation will deal with the replacement of national currencies, and with the use of national currencies and euro during the transitional period it:
|...and euro banknotes and coins.|
Countries which join later will have special arrangements.
|Countries which join later
Arrangements for countries which join the single currency after January 1999 will be separately negotiated. However, there is an agreement of equal treatement for countries which join later. The presumption is that they should be allowed a changeover period as long as that for countries joining in January 1999, if they require it.
What does EMU mean for business?
|Economic policy||Businesses are always affected by wider economic circumstances. Interest rates, inflation and government spending are outside their control, but affect their plans and success. Economic policy will be set in new ways in countries which join the single currency. Precisely how this might affect businesses is assessed more fully in the report on the pros and cons of EMU, referred to in the introduction.|
Joining the single currency might affect ...
|Countries joining the single currency
For these countries, EMU means:
... cross-border payments ...
Most obviously, these countries will share a currency. Their national currencies will be locked together and replaced by the euro. Businesses trading with other countries which have joined the single currency will no longer see prices rise or fall because of exchange rate changes between their currencies.
... interest rates ...
Sharing a currency means sharing a single monetary policy - in other words, sharing a single interest rate. The ECB will set short-term interest rates for the euro, to control inflation. It will be an independent central bank, so decisions on interest rates will be taken by central bankers, not politicians.
The interest rate set by the ECB will be used as the basis for commercial interest rates, in the same way that rates set today in the United Kingdom by the Bank of England form the basis for commercial interest rates. Commercial banks will continue to look at the creditworthiness of borrowers when setting actual interest rates for loans.
... exchange rates ...
Within limits, finance ministers of countries which join the single currency will together decide on the foreign exchange policy of the euro against other currencies, such as the yen and the dollar. However, the ECB will ultimately always be responsible for interest rates and inflation. These are usually the most important factors in determining exchange rates over the longer-term.
... and government borrowing ...
There will be limits on borrowing by governments of countries which join the single currency. This is to prevent one country from behaving recklessly and risking damage to the single currency area as a whole. Rules to prevent excessive borrowing forms are contained in the Maastricht Treaty. These were elaborated in the so-called "stability and growth pact" agreed at the European Council - or summit - in Amsterdam in June 1997.
|... but not tax and spending.|
Countries not joining will not be directly affected.
|Countries not joining the single currency|
These countries will not be directly affected by the changes described above. EU countries not joining the single currency will be able to choose whether to join a revised exchange rate mechanism - an agreement to keep their currencies' exchange rates within certain limits. The details of the revised mechanism were agreed at the European Council - or summit - in Amsterdam in June 1997. Like the existing exchange rate mechanism, to which most EU countries but not the United Kingdom belong, it is intended to make exchange rates in the EU more stable. It will be entirely voluntary. The Government has no plans to join the mechanism if the United Kingdom does not join the single currency.
|They can choose to join a new exchange rate mechanism.|
What does EMU mean for business?
|Business outlook||It is important for businesses - especially those which
compete cross-border in Europe - to understand that
EMU will be a change in the competitive environment. It will
affect businesses in the United Kingdom whether or not we join
the single currency.
What will change?
There are three important factors to consider:
|EMU will affect competition between businesses.|
It will reduce some of the costs of cross-border business ...
Cross-border trade often involves the need to change currencies. For some trade within Europe, this need will disappear. In such cases, it should be cheaper for firms to make payments between countries which join the single currency, since there will be no need to exchange currencies. Small businesses are likely to notice this more than larger firms. However, this does not mean that transaction costs will disappear - since banks are unlikely to stop charging altogether for cross-border services. The effect will be larger, of course, for firms in countries which join the single currency - but it will affect all businesses which trade in these countries.
... remove some exchange rate uncertainty ...
Businesses which trade or invest in foreign currencies run a risk of exchange rate movements upsetting their plans. In the case of trade between countries joining the single currency, these uncertainties will disappear. Businesses will not be able to hope that exchange rates movements between countries joining EMU will protect them from competition. They will need to rely on other strategies. If, as is likely, the euro becomes widely used internationally, firms may find that prices are set in euro for some heavily-traded products. This might in some cases transfer exchange rate risk to firms in countries not joining the single currency.
... and make price differences clearer.
Quoting prices in the same currency in several EU countries will make price differences more obvious.
|The importance will vary from business to business ...||The importance of these on individual firms in the United Kingdom will obviously depend on whether we join the single currency. But even if we do not, there will still be effects on firms in the United Kingdom. They will depend on the sector of business, and the degree of cross-border trade and investment in countries which have adopted the euro.|
... but it might be worth firms reviewing strategies ...
There are some general themes which many businesses should consider when reviewing strategies:
... being aware that fiercer competition ...
If cross-border trade is made easier by EMU, then businesses in countries joining the single currency face tougher competition from foreign firms. Meanwhile, there will be opportunities for businesses abroad. Businesses in countries outside the single currency wanting to exporto to countries which have joined will need to compete against firms from across the single currency area which will share the same currency as the purchaser
... possibilities for new relations with other businesses ...
Increased competition might make relations with other businesses more necessary, and using a single currency might make them simpler.
... greater difficulty in selling at different prices in different countries ...
Prices inside EMU will be quoted all in the same currency. This makes selling at different prices in different countries more difficult. Price breaks in euro will clearly differ from those in national currencies, and may require some redesign and positioning of products and pricing strategies in various markets.
Sharing a currency might make alternative arrangements simpler and cheaper. It would no longer be necessary to choose distribution centres and suppliers to balance flows in the different currencies to be replaced by the euro in order to protect businesses from exchange risk.
... more possibilities to raise finance ...
Sharing a currency may expand the range of options available to firms seeking to raise capital. Bond and equity (share) markets in euro may be more attractive than the markets they will replace. Further details are described in relation to practical changes.
... and changing investment possibilities ...
Many factors affect investment decisions, at home and abroad. Sharing a currency, and the changes to competition that would result, might affect investment decisions.
... will create opportunities and threats.
New opportunities and threats will arise for many businesses - especially but not only in countries which join the single currency.
Firms need to think about customers, suppliers and competitors ...
|What should businesses think about?|
At all times, businesses will need to be aware of:
|... here and abroad.|
What does it mean for business?
|Practicalities||EMU will have practical implications for many firms. The implications for an individual business in the United Kingdom will depend on two key factors:|
|Practical changes will vary from firm to firm ...|
|... and depend on whether or not the UK joins ...|
|If the United Kingdom were to join EMU, every business
in the country would be affected. There would be
far-reaching practical effects. If we were not to join, then businesses
with cross-border operations in continental Europe or with
firms based in countries which have adopted the single
currency might still require practical changes, although businesses
with purely local markets, customers and suppliers would
probably not be affected in practical terms.|
The timing of the changes needed would also depend on
the particular business. For example:
Many firms have found it useful to carry out a preliminary look at the likely impact of EMU on their business practices. Some have found it useful to appoint a coordinator to oversee preparations for EMU within their organisation.
|... but there are some common issues.||Some common considerations are listed below. Further details on these will be published in the future in factsheets to accompany this booklet. An order form is printed on the final page.|
Changing accounts and financial systems.
|Financial systems and accounts |
In countries which join the single currency, all firms' accounting systems will need to cope with the replacement of the national currency with the euro. In countries which do not join, firms which today keep accounts of dealings in other major European currencies would need to handle the euro, although other businesses' accounts would not be affected.
The timetable for such changes will depend on the extent of trade conducted in euro rather than the national currencies early during the transitional period. Larger firms especially will want to consider whether to change all their accounting systems at the same time, or change different systems as required. It may depend on customers and suppliers. Firms will need to work with their key trading partners - particularly those using electronic date interchanges.
Whether or not we join the single currency, businesses would continue to be able to choose in accordance with existing law which currency to use for their formal accounts. If we were to join, businesses would be able to continue to compile their accounts in sterling until at least the end of the transitional period. The accountancy profession has been studying the implications.
Cash-handling is chiefly an issue if we join ...
Cash-handling would chiefly be an issue if the United Kingdom were to join the single currency, although some shops and businesses today already handle foreign currencies - in airports and tourist resorts, for example - and they would need to adapt for the euro whether or not we join. Although many electronic tills would be able to handle cheque and credit card payments in euro, the volume of cash circulating during the period of dual currency circulation would pose a challenge.
|... it raises questions about the changeover ...||Cash-handling issues include:|
|... although decisions on the changeover remain to be taken.|
|... plus strategic considerations ...||No firm decisions have yet been made about how the
first three matters will be handled. There will probably be
some national discretion, especially about removing national
currency banknotes and coins. But there will be practical
considerations for retailers handling large volumes of cash:
Many businesses would prefer to minimise dual-running, although other firms such as those which need to replace vending machines and cash dispensers would prefer longer. Our experience during decimalisation could prove very useful here.
Implications for borrowing ...
Companies borrow money directly through banks, by issuing bonds, and by issuing equities (shares). The relative attractions of such options might change as a result of EMU. Markets in bonds and equities in euro may be larger and more attractive in than some of the fragmented markets in national currencies. Firms with bonds or shares denominated in currencies replaced by the euro will have to consider how to redenominate them to euro. Banks and other financial institutions might introduce new products. Businesses should consider what, if any, implications these might have for their financing.
|... bonds and shares ...|
|... treasury operations and other financial services.|
|More generally, firms - especially those with
cross-border operations - will want to consider the financial services
they require. Larger businesses, with internal treasury
operations, will need to consider the effects of EMU on the
financial markets, as well as their internal arrangements.
The Bank of England is coordinating preparations in the financial sector. Details of its publications are given in the final section of this booklet.
Displaying prices in countries which join EMU ...
... will need to balance retailers' and consumers' interests.
|Price displays |
For any business in a country adopting the euro there will be implications for price marking and display. These are unlikely to arise in countries which do not join the single currency.
The European Commission has organised discussions between consumer and retail groups about tacklng the issue.
|It will be important to balance the needs of consumers
against the fact that rigid pricing display rules could impose
extra costs on businesses. |
As well as price displays in shops, businesses should also consider prices printed directly on products, or displayed in literature and publications.
Prices quoted in national currencies are unlikely to convert to "attractive" or "round" numbers in euro. Companies would need to decide whether to set new pricing points and, if so, when. Alternatively, they could consider new pricing and packaging strategies - with manufacturing implications.
|IT implications arise from many of the
... beware long-lead times ...
... and the millenium problem.
|Information technology (IT) |
Many of the above-mentioned issues involve IT. In some businesses, IT systems controlling accounts, stock control, prices and payroll (for example) may be linked. In others, they are separate. There is no single solution to changing IT to handle the euro.
Companies that have considered implications for IT stress the importance of early evaluation rather than assuming the task to be straightforward. This is all the more important given the long lead-times in some cases and the closeness of changes needed for the millenium date change.
|Effects on legal contracts.||Legal issues|
As described, European legislation will usually prevent EMU affecting contracts. So, for example, outstanding loans in a currency replaced by the euro would be repaid at the same rate of interest and over the same time period, but in euro at the correct conversion rate.
Businesses drawing up or holding contracts which refer to currencies that are likely to be replaced by the euro will want to consider how those contracts will be affected. In particular, they should be aware of contracts which contain references to the euro or EMU.
|Interaction with public authorities is important for firms' plans.||Relations with public authorities|
Businesses interact with public authorities in many ways. They provide information and pay taxes, for example, and receive grants or payments for goods and services. One important factor determining when businesses will switch to the euro will be the approach taken by public authorities.
|Government plans vary across Europe...||Public authorities will be affected in many of the same ways as the private sector by EMU. Many governments have decided to make the changeover to the euro for most of their activities at a single time, towards the end of the transitional period, perhaps when the general public is using euro banknotes and coins. Some other governments, mostly in countries with smaller government systems, are planning services in both euro and national currency from early in the transitional period, perhaps January 1999.|
|... no decisions yet made about UK authorities if we join ...||No firm decisions have been made about how public
authorities in the United Kingdom would handle
the changeover if we were to join. However, it is likely that
the Government would decide to follow the choice of many
other countries and wait until the end of the transitional period
to make the changeover.
Tax authorities in the United Kingdom accept payments (although not declarations) for some purposes in a number of currencies today. It is likely that they would accept some payments in euro, especially for corporate taxes, during the transitional period. They are looking at options available for declaring and paying taxes in euro, especially if the United Kingdom were to join the single currency.
|... but changes likely to be later rather than sooner in the transitional period.|
|Taxes are an important consideration...|
|Some countries have published guides setting out the changeover strategy that they plan to follow when they join the single currency. If the United Kingdom were to decide to join, the Government would need to set out its approach. The Government would be able to learn from other countries' experience, and the valuable experience gained in the United Kingdom during decimalisation.|
|... but other issues too.||In addition to taxation, public authorities in countries
which join the single currency will need to consider:|
|Staff need to understand changes ...||Training and personnel|
In all businesses affected by the introduction of the euro, staff will need to understand changes affecting the business resulting from EMU. Where staff come into contact with customers they will need to be able to explain the implications. In some cases, good training will be essential for firms to benefit from opportunites which arise from EMU, or even to prevent difficulties arising. Businesses, trades unions and employees in countries which join the single currency will also need to consider the effects on paying salaries and on pensions.
|... perhaps to explain to customers.|
What does it mean for business?
The following checklist is based on the practical
changes described above, plus checklists produced by trade
and business associations in the United Kingdom and
elsewhere in Europe. The relevance of particular items will depend
on the type of business, and whether the United Kingdom
joins EMU. The list is not-exhaustive, and suggested additions
Financial systems and accounts
Relations with public authorities
Training and personnel
|Other publications...||A selection of national business associations which have produced information for their members about the practicalities of EMU in the form of guides or newsletters is listed below. Guides about the practicalities which have been advertised publicly are listed, although in some cases there may be charges.|
|... please tell HM Treasury if you publish a guide or newsletter for businesses about EMU.||This list will be updated regularly and trade and business organisations are encouraged to write to HM Treasury (addressed to the EMU team: see below) with a copy if they would like to be included in future lists.|
Association of British Chambers of Commerce|
22 Carlisle Place
London SW1P 13A
Publication: see Bank of England
Association of British Insurers
Association of Corporate Treasurers
Association for Payment Clearing Services
British Bankers' Association
British Retail Consortium
Confederation of British Industry
Federation of Small Businesses
The Forum of Private Business
The Hundred Group of finance directors
International Securities Market WD1 1DAAssociation
International Swaps and Derivatives Association
London Investment Banking Association
National Association of Pension Funds
|Bank of England||Separately, the Bank of England has been
coordinating preparations in the financial markets and will continue to
do so. It produces a quarterly report on the state of
practical preparations across the economy, focusing on the
financial sector. Copies are available from:
Public Enquiries Group (HO-1)
The Bank of England has also produced a short guide for businesses, "What does it mean for business", in association with the Confederation of British Industry and the British Chambers of Commerce. It is available from any of these three organisations.
|Queries||Business and trade associations and many banks are
useful sources of help. In addition, queries about how EMU
will affect businesses in practical terms can be addressed to:
EMU team (practical questions)
These addresses should not be used for requests for further copies of this publication. Please use the form on the following page.