Industry awakes to the reality of Emu

It is only a matter of weeks before the introduction of European Monetary Union on New Year’s Day. Yet, despite government funded advertising and extensive media coverage, the majority of Britain’s small and medium sized businesses are still unaware of the full implications of the new currency. There are, however, signs that industry is starting […]

It is only a matter of weeks before the introduction of European Monetary Union on New Year’s Day. Yet, despite government funded advertising and extensive media coverage, the majority of Britain’s small and medium sized businesses are still unaware of the full implications of the new currency.

There are, however, signs that industry is starting to react. Last week, a paid-for seminar covering Emu, year 2000 issues and the Internet attracted over 100 delegates from the machine tool and electrical equipment industries.

At the seminar, organised by the Machine Tool Technologies Association (MTTA) and the Federation of British Electrotechnical and Allied Manufacturers Associations (BEAMA), speakers from the Treasury, banking and the legal profession spelt out the dangers of ignoring the business impact of these three issues.

Ignorance about the euro is widespread. The latest Government survey of 1,300 small companies revealed that only 11% of respondents knew the new currency was launching on 1 January next year. And 5%, had no plans to deal with the issues that will arise from its introduction. Not least of these is the pressure on firms in the supply chain to raise invoices and pay bills in euros.

Siemens, ICI and Rover have already said they expect their suppliers to deal in euros from next year. While there is no legal compulsion for firms to do so, it could be commercial suicide to refuse.

Treasury official Stewart James told delegates the introduction of the euro provided both opportunities and threats. A UK carpet manufacturer, he said, presently selling carpets at a 50% premium in Germany compared with France (because German householders were prepared to pay more), could find that situation changing as the euro makes people aware of the price differentials.

The so-called price transparency had already highlighted the fact that batteries sell in Spain for less than half the price in other European countries. The corollary to price transparency is input costs. ‘The implications are that your input costs will get cheaper,’ he adds.

Tony Haley, Midland Bank’s area manager for Loughborough, described the move to monetary union as ‘a journey into the unknown’. He referred to a survey of currency dealers’ forecasts of the value of the pound against the euro in two years’ time. This showed a 20% difference between the highest and lowest estimates.

The exchange rate issue that UK firms will face, even if they decide to make all their transactions in euros, is the biggest risk. And those ‘risks’ will have to be costed into prices with the potential for competitive disadvantage.

Smaller businesses which may never have been exposed to exchange rate risks will now have to face them, according to Haley. ‘What will you do about pricing strategy? How will you deal with payments coming to you in euros? Will you have to make returns to national governments that deal in euros? If you do not know the answers to these questions, it is time to start a dialogue with your banker’, he says.

Derek Price, managing director of Centreline Machine Tools, a manufacturer of multispindle drilling machines, has realised he will be competing head-to-head with Dutch rivals next year. ‘I knew that when it came to my tender in sterling, it would go to the bottom of the pile,’ he said.

Centreline has a £2m turnover and exports 60% by value of its drilling machines. From 1 January, its price list will be published in euros.

However, Price says that not all his European customers are keen to do business in euros. ‘I hear from my people in Germany and Italy that the market is very much euro-sceptic,’ says Price. His customers have said they want to continue to trade in marks and lira.

Companies already dealing in foreign currencies see the euro as less of an issue. Barry Holmes, managing director of BSL Engineering, which sells industrial control systems, said it imports most of its products from Germany. As a result, it already operates a multi-currency ledger. For him the switch to the euro will be ‘just another currency’.

Clive Ashmore, managing director of A&S Precision Machine Tools, which imports the Star sliding heading automatic CNC lathes, claims the euro will make no difference to his business. The machines are made in Germany under licence to Japan. ‘We will be paying in Yen as we have always done,’ says Ashmore.

Clearly, not every company will be affected by the introduction of the euro. The Government, however, is urging that businesses should make it a strategic priority to look at the issues.

Competitiveness issues

1 January 1999

The euro will be introduced for business transactions in Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain. National currencies will be used for cash transactions until euro notes and coins are introduced on 1 January 2002.

Global market

The euro-zone will account for 18% of world trade against 16% for the US.

UK’s position on EMU

The UK has elected to stay outside the euro zone for the lifetime of this parliament, with entry subject to referendum. But UK firms will, for example, be able to pay VAT and corporation tax in euros next year. Banks will also provide euro accounts.

Euro ‘creep’

Firms dealing with euro-zone clients will do business in euros, whether or not they are inside the euro zone. To balance the flow of currencies in the business, they will encourage their supply chain to invoice and receive payments in euros. Exporters and importers will have the greatest exposure, but UKfirms with UK-based customers will also be affected.

Price transparency

The euro will make price differentials more apparent, leading to the erosion of differential pricing across the EU and lower margins for companies that benefitted from this in the past. Some input costs for UK companies may fall. Inflation and interest rates will be lower in the short term. Transaction costs are expected to fall. Euro loans will cost less than sterling loans.

Exchange rate risks

UK firms and institutions will still be exposed to exchange rate fluctuations between the pound and the euro. But competitors within the euro zone will enjoy stable rates between participating countries.

For more information

Call the euro hotline on 08456 01 01 99 (http://www.euro.gov.uk).