The euro will accelerate the integration of European markets and improve economic conditions throughout Europe. Reduced transaction costs and shorter transaction times are just part of the story. Foreign currency transaction risks and the related hedging costs will become a thing of the past within the euro home market. Considerable savings are also expected because of an improvement in cash pooling and cash management in European Monetary Union countries.
Siemens expects annual savings of up to DM30m (£10m) as a result of hedging costs associated with interest and currency dealings, and of transaction costs in cross-border payments. For the whole European Union, the related savings can easily add up to DM90bn.
The practical benefits of the euro as the single currency will make calculating, planning and internal reporting a simpler affair in the multi-national context. It helps to simplify internal comparisons and transfers and streamline administration. Increased comparability of costs will remove some existing uncertainties, making it far easier to decide on location for centres of competence and foreign investment.
An extended home market currency will affect sourcing decisions for all companies within the EMU, such as Siemens. As the majority of our business is undertaken in Europe, the tendency is to seek to match the currency of income and expenditure and therefore reduce currency risks. If companies within the EMU are offered two identical deals from suppliers, one quoted in sterling or dollars and the other quoted in euros, the euro supplier has a competitive advantage because it offers an extra benefit to the customer.
This is an important message for all UK companies. Whether the UK is in the EMU or not, if UK companies are not prepared to quote in euros, they will lose out long-term if their competitors do so. They will lose business as it will be easier for companies dealing in euros to deal with other companies doing likewise.
Customers will begin to expect the cost savings associated with wider use of the single currency to be passed on. They will demand these to be reflected in prices, whether or not the suppliers in question are capable of achieving these costs savings. Those that cannot will have to squeeze other costs harder in order to bridge the gap.
These issues are of particular relevance to UK-based companies which, until the UK actively participates in the euro, will be in the relatively disadvantaged position of having to treat it as a foreign currency. There will be even greater issues for those companies which have decided to ignore the coming of the euro, whether the UK is in the EMU or not. They will not be competing on a level playing field because companies dealing in euros will be able to pass on the benefits to customers.
Siemens’ own policy on implementing the single currency means that from 1 January 1999 – the date scheduled for the fixing of currency rates – Siemens would be in a position world-wide to conduct business with third parties in the euro. They will comprise not only customers, but suppliers too. From 1 October 1999, the start of Siemens’ fiscal year 1999/2000, Siemens world-wide will adopt the euro as its ‘house currency’ in place of the Deutschmark.
Siemens subsidiaries in countries not participating in the euro, such as the UK, are included in the process, despite the fact that their national economies will not participate from the outset.
There has been some confusion in the press about what our policy is with regard to our UK suppliers and the euro. So let me spell out our position. We are keen to encourage our 12,000 UK suppliers to use the euro for the reasons I have mentioned already. But our policy is strictly ‘no compulsion, no prohibition’. We will not force our suppliers to use the euro, and will remain flexible on payment, as long as pricing is competitive.
We anticipate the euro coming in through the back door in the UK. While we currently deal with customers in many currencies, from 1999 we and other UK companies exporting to the EMU zone will be paid by more and more customers in euros. To avoid foreign exchange currency risk, and to match income with expenditure, it will be more economic to pay their suppliers in euros as well. Therefore, the new currency will be in use in the UK – even before it is adopted by the UK Government.