Introduction

The booklet looks at what EMU will mean for businesses:

• how it might affect the economic environment in which they operate;

• how it might affect the outlook for businesses;

• and the practical implications for their operations.

• what has happened so far;

• where the United Kingdom stands;

• and what will happen in the future.

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?

The Maastricht Treaty

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.

... but allows them to join later.

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.

How will the Government decide?

• would joining EMU create better conditions for firms making long-term decisions to invest in the United Kingdom?

• how would adopting the single currency affect our financial services?

• even if there are long-term benefits, are business cycles and economic structures compatible so that we and others in Europe could live comfortably with euro interest rates on a permanent basis?

• if problems do emerge, is there sufficient flexibility to deal with them?

• and, the bottom line, will joining EMU help to promote higher growth, stability and a lasting increase in jobs?

The timetable

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.

Spring 1998 - January 1999

January 1999 - January 2002 (at the latest)

• wholesale financial markets

  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.

• large multinational 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.

• retail banking

  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.

• retailers

  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.

• small businesses

  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.

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.

• contract continuity

  The first regulation is designed to create legal certainty about the validity of contracts. Generally, it:

  • requires references to the ECU (which exists today) to be understood as references to the euro;
  • prevents EMU being used as a reason to break or change a contract;
  • gives rules on converting between national currencies and euro, and rounding the results.

• transitional arrangements

  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:

  • gives the name of the single currency - the euro. Each euro will be divided into 100 cents;

  • substitutes the euro for participating countries' currencies at the conversion rates which will be agreed;

  • allows national currencies to exist in parallel during the transitional period only. They will be temporary "denominations" of the euro, linked to it in law;

  • where a contract refers to a particular currency unit - to the old national currency, or to the euro itself - it is assumed that the payment will be made in that currency unit during the transitional period. The same applies to references in other legal documents, such as legislation;

  • obliges banks in participating countries to convert certain payments between the national currency and the euro;

  • gives rules on euro banknotes and coins.

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.

For these countries, EMU means:

• a single currency

  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.

• a single interest rate

  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.

• a single foreign exchange policy

  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.

• controls on 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.

However, there will be no separate limits on levels of tax or spending. All governments will remain free to set overall tax and spending at levels which they consider appropriate.

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.

What will change?

There are three important factors to consider:

• cheaper transaction costs

  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.

• removing uncertainty about exchange rates

  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.

• transparent price differences

  Quoting prices in the same currency in several EU countries will make price differences more obvious.

• What will these changes mean?

  There are some general themes which many businesses should consider when reviewing strategies:

• increased cross-border 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

• cross-border mergers and other joint ventures

  Increased competition might make relations with other businesses more necessary, and using a single currency might make them simpler.

• cross-border marketing and pricing

  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.

• distribution and purchasing

  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.

• raising 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.

• overseas investments

  Many factors affect investment decisions, at home and abroad. Sharing a currency, and the changes to competition that would result, might affect investment decisions.

• market opportunities and threats

  New opportunities and threats will arise for many businesses - especially but not only in countries which join the single currency.

At all times, businesses will need to be aware of:

• what their customers expect ...
• what their suppliers plan to do ...
• and how their competitors may react...

• whether or not the United Kingdom joins the single currency;

• the nature of the business concerned - its size, sector of activity, and amount of cross-border trade, for example.

The timing of the changes needed would also depend on the particular business. For example:

• a typical corner shop that deals mostly in cash might wait until its customers are using euro banknotes and coins before changing many internal systems to the euro;
• firms with large cross-border operations or sophisticated financial dealings, such as a multinational manufacturer, might want to use the euro for all their internal and much of their external business as soon as possible after 1999;
• a small business with extensive cross-border business or supplying a major manufacturer itself using the euro might want to use the euro early in the transitional period. But some small businesses will want to wait until euro banknotes and coins are available.

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.

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 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.

• how the euro banknotes and coins will be introduced;

• how the period of dual circulation of euro and national currency banknotes and coins will be handled;

• how the national currency banknotes and coins will be withdrawn;

• whether the introduction of the single currency allows cash-handling in some businesses to be rationalised.

• receiving cash and giving change;

• accounting for cash transactions;

• making operations transparent to the customer;

• guarding against fraud and theft.

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.

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.

The Bank of England is coordinating preparations in the financial sector. Details of its publications are given in the final section of this booklet.

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.

As well as price displays in shops, businesses should also consider prices printed directly on products, or displayed in literature and publications.

Pricing policy

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.

... and the millenium problem.

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.

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.

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.

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.

• when public authorities would make payments, such as pensions and benefits, in euro;

• when to change internal government accounts to euro;

• when existing government debt would be changed to euro;

• how to change references in legislation to convenient amounts in national currencies, (such as thresholds for fines or taxes) which would convert to inconvenient amounts when converted to euro;

• educating the public;

• training public employees.

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.

Business strategy

• lower transaction costs
• exchange rate uncertainty
• price transparency
• readiness of suppliers
• expectations of customers
• what competitors might do
• business finance
• pricing and marketing strategies
• distribution, production and purchasing networks
• relations with other businesses

Financial systems and accounts

• company accounts
• internal financial information systems
• management reporting
• financial reporting

Cash-handling

• handling cash in dual-circulation
• replacing multiple currencies
• payment cards and cheques

Business finance

• raising finance
• foreign exchange practices
• converting bonds and equities
• relations with banks and other financial institutions
• treasury operations

Prices

• price displays
• price markings on products
• promotional literature and publications
• customer information
• regulatory implications
• price points, marketing and product sizes

Machinery

• vending machines
• cash tills and EPOS machines

Information technology

• hardware
• applications software
• database conversion
• links between systems
• historical data
• electronic data interchange
• lead times

Legal issues

• existing contracts running beyond January 1999
• new contracts

Relations with public authorities

• timing for changing to the single currency
• regulatory implications
• education and information
• taxes

Training and personnel

• staff training
• payroll and national insurance
• pension funds
• appointing individuals

Association of British Insurers
51 Gresham Street
London EC2V 7HQ

Association of Corporate Treasurers
12 Devereux Court
London WC2R 3JJ

Association for Payment Clearing Services
Mercury House
Triton Court
14 Finsbury Square
London EC2 1BR

British Bankers' Association
Pinners Hall
105-108
Old Broad Street
London EC2N 1EX

British Retail Consortium
Bedford House
69-79 Fulham High Street
London SW6 3JW

Confederation of British Industry
Centre Point
103 New Oxford Street
London WC1A 1DU
Publication: see Bank of England

Federation of Small Businesses
Press and Parliamentary Office
2 Catherine Place
Westminster
London SW1E 6HF

The Forum of Private Business
The Ruskin Chambers
Drury Lane
Knutsford
Cheshire WA16 6HA

The Hundred Group of finance directors
Publication: "The Single European Currency" price
£25 available from KPMG distribution centre, 58
Clarendon Road, Watford WD1 1DA

International Securities Market WD1 1DAAssociation
7 Limeharbour
Docklands
London E14 9NQ
Publication: "The cost and timescale for the switchover to the European single currency for the international securities market"

International Swaps and Derivatives Association
1 New Change
London EC4M 9QQ

London Investment Banking Association
6 Frederick's Place
London EC2R 8BT
Publication: "The practical implications of converting London's capital markets to a single currency"

National Association of Pension Funds
12-18 Grosvenor Gardens
London SW1W ODH

Public Enquiries Group (HO-1)
Bank of England
Threadneedle Street
London, EC2R 8AH
telephone 0171-601 4878
fax 0171-601 5460.

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.

EMU team (practical questions)
HM Treasury
Parliament Street
London SW1P 3AG

or

Europe Directorate
the Department of Trade and Industry
Kingsgate House
66-74 Victoria Street
London SW1E 6SW

These addresses should not be used for requests for further copies of this publication. Please use the form on the following page.