The euro: The challenge of 1999

The euro project is proceeding according to schedule; on January 1, 1999 it will become the legal currency of 11 member states of the European Union and will also be adopted at the same time by the Principality of Monaco. The conversion to the new currency in practice will be much swifter than generally envisaged only a few months ago.

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Following the meeting of the European Council in Brussels at the beginning of May, the start-up of Economic and Monetary Union (EMU) and the introduction of the euro on January 1, 1999 is now a final certainty. Eleven EU states, which have been deemed to have met the convergence criteria, will initially participate in the currency union (Germany, France, Italy, Spain, the Netherlands, Belgium, Austria, Portugal, Finland, Ireland and Luxembourg). Three other states, Monaco, San Marino and the Vatican, which already have existing currency arrangements with France and Italy respectively, will also adopt the new currency on January 1, 1999. Andorra, which does not have its own currency, but which currently uses both the French and Spanish currencies, will obviously have no alternative but to adopt the euro. Four EU states will remain outside the monetary union in its initial stage: the United Kingdom, Sweden, Denmark and Greece. Greece does not yet meet the convergence criteria required for membership, but is making substantial efforts towards these goals and has set itself the objective to be able to join in 2001. The political mood among large sections of the electorates in the United Kingdom, Sweden and Denmark is suspicious not only of the monetary union per se, but in general of the further progress towards a European political federation. However, it is difficult to imagine how these three states can in the longer term opt to stay out of the monetary union whilst remaining within the single market and enjoying the benefits thereof, since a single market cannot function efficiently until the threat of competitive devaluation has been removed. It is generally assumed that these three states will join the monetary union within the next few years, possibly as early as 2002.

The European Council meeting also made two other important decisions. Firstly, the European Central Bank was established in Frankfurt and the President and the five other members of the Executive Board of this institution were appointed (see separate section). Secondly, the irrevocable bilateral conversion rates between the participating currencies, which will come into force as at January 1, 1999, were announced (see table). This move is designed to prevent speculation with regard to the participating currencies in the run-up to the introduction of the euro. (The irrevocable conversion rates between the national currencies and the euro will not be known until December 31, 1998 when the ECU, the current basket of 12 EU currencies, becomes the euro by law. Since the ECU includes currencies which will not participate in the monetary union, in particular the currently overvalued pound sterling, the value of the ECU will continue to fluctuate between now and the end of the year).

As from the beginning of next year, the euro will be the sole legal currency of the participating states, and the national currencies will become temporary denominations of the euro. The period from January 1, 1999 to December 31, 2001 is officially designated as the interim period. From a legal point of view, all transactions during this period may be effected either in euro or in the various denominations thereof, i.e. the former national currencies. This is regulated by the so-called "neither - nor" clause, i.e. neither obligation, nor prevention". This means that no one can be obligated to pay a euro-denominated invoice in the new currency, should he or she wish to pay it in the national denomination; similarly, no one can be prevented from paying in euro an invoice established in the old national denomination. As from January 1, 2002 all bank accounts, salaries, invoices etc. will be converted by law to euro. The old national bank notes and coins will be withdrawn from circulation on July 1, 2002 at the latest.

Notwithstanding these legal provisions, it now appears increasingly likely that the major part of the economy will convert to the euro within the first few months of 1999. Obviously, low-value transactions, which by their very nature are effected in cash (e.g. newspapers, parking meters, etc.), will remain denominated in the old national currencies until the end of 2001 for lack of the physical euro money. However, there are no such constraints with regard to the immediate conversion to the euro of scriptural transactions (i.e. cheques, credit cards, bank transfers etc.); indeed, it has already been known for some time that many sectors of the economy will definitely convert to the euro on January 1, 1999. As from this date, transactions between the banking industry and the central banks will be in euro; the capital markets of the participating states have all announced that their operations will be converted to the new currency as from Monday, January 4, 1999; governments will start using the euro for their financial accounts; most significantly, many of the largest European companies, which operate internationally, have already announced their intention to switch to the euro from the very beginning. Indeed, no major company has announced that it will not be switching to the euro. The reasons are obvious. The benefits of monetary union are manifold: elimination of the cost and risks of foreign exchange between the participating states; transparency of pricing, which will lead to greater competition both with regard to sales and purchasing; standardisation of accounting and other systems etc. Small and medium-sized companies, which are often suppliers to the larger companies, will find it difficult, if not impossible, not to follow suit. Even the retail sector will not be long in delaying the conversion. As from January 11, 1999 (an extra week will be required for year end stock-taking) nearly all prices in the major retail chains will be quoted in both euro and in the old national denominations, and purchases will be able to be settled in either euro or in the old currency denominations. This, more than anything, will serve to "convert" the general public to the use of the euro.

The banking industry will also not be lagging in this respect. As from January 1, 1999, most - if not all - banks will offer their customers the option of converting their accounts to euro (such conversion will only become compulsory as from 2002). Most banks have already announced that there will be no charge for conversion between the euro and the old national denomination. Thus the holder of a euro account can pay in or disburse amounts in his or her old national currency free of charge. For payments in euro, new "euro" cheque books will be issued, which apart from displaying a "euro" sign or logo, will also incorporate a magnetic strip which will ensure that payment will be effected via the new euro clearing systems. This means that a resident of Monaco, for example, will be able to pay an invoice in, say, Germany in euro (even if the invoice is denominated in Deutsche Mark) without entailing any "foreign exchange" handling charges. If he chooses to pay in his old national (or Deutsche Mark) denomination, the banks will continue during the interim period to levy relatively high charges, since such payments have to be cleared manually. Since the banks will be converting their systems to the euro as from January 1, 1999, it is obviously in their interest to ensure that as many of their clients as possible do likewise.

It is also in the interest of small businesses to convert as soon as possible to the euro, particularly in a country like Monaco whose economy is to a significant extent dependent on tourism. Visitors from other euro-zone countries will prefer to be able to pay in euro (e.g. by credit card) since such payments will not be subject to "foreign exchange" costs in their country of residence (conversions between French francs and euro in, for example, Germany, Belgium, etc. will still be subject to "handling" charges during the interim period). In addition, the fact should not be overlooked that the euro will become a world currency of reference on an equal footing with the US dollar (in fact, the euro will be even more important than the US dollar in terms of underlying gross domestic product and international trade). In this new dual-currency world the minor currencies (including the national denominations of the states participating in EMU) will become marginalised; in particular, travellers from the euro-zone will think and calculate in euro and will tend to prefer to pay in euro whenever possible.

The conversion to the euro, which will entail a considerable amount of preparation, constitutes a major challenge for businesses during the coming months. Whereas the banking sector is able to implement a well-defined set of instructions issued by the central banks, industrial and commercial enterprises will to a large extent be left to their own devices, whereby the conversion process will be different for each individual enterprise. Conversion to the euro can be broken down into two different categories: strategic and technical. Of these, the strategic aspect is by far the most important, since its effects will be felt for a long time after the introduction of the euro, whereas the technical aspects are of a one-time and relatively well-defined nature.

The main challenge of the strategic aspect is constituted by the price transparency throughout the euro-zone, which is one of the main objectives and consequences of the monetary union. With prices shown in the new currency throughout the whole euro-zone, it will be very simple to compare prices from one region or state to another, thus increasing price competition and putting downward pressure on prices. This price transparency constitutes one of the main benefits for the consumer, and will force the industrial and commercial sector to increase efficiency, while at the same time excessive profit margins in certain sectors will be reduced. For example, one only has to think of the substantial differences in prices for certain products between the various states: automobiles, computers, etc. In addition, the trend towards purchasing via the Internet will accelerate this process. Although many companies will have to make considerable efforts to increase their efficiency and productivity to meet this new challenge, they will also benefit from the increase in price transparency on the purchasing side. In addition, the introduction of a single currency will open up new opportunities and markets for many companies. Finally, the elimination of the cost and risks of foreign exchange will enable companies to use the corresponding savings for other purposes, such as investments etc. The Principality of Monaco, due to its proximity to Italy, will be particularly concerned by the effects of price transparency. Moreover, the millions of annual visitors from other euro-zone countries will now easily be able to compare prices in Monaco and in the surrounding region with those in their own countries of origin, thereby prompting many retailers to adjust their pricing accordingly.

On the technical side, every enterprise will have to make considerable investments in terms of time and money in order to prepare for the conversion to the euro. Accounting systems will have to be adapted to function in at least two currencies for the three-year interim period. For example, certain social security organisations may not be able to switch to the euro with regard to declarations until 2002; the tax authorities, however, have announced that they will accept declarations in euro from businesses (and in certain countries also from individuals) as from 1999. This will affect in particular those companies which hitherto have operated only in one currency, i.e. the majority of small and medium-sized businesses. Treasury operations, although in future substantially simpler in view of the extensive euro-zone, will also have to be modified. Although foreign exchange and hedging costs will be eliminated in respect of the euro-zone states, banks may introduce new or higher charges in order to compensate for their immediate loss of income from euro-zone related foreign exchange revenues. Major expense may also be incurred by many companies with regard to the conversion of their computer systems; in many cases new software will have to be purchased in order to handle simultaneously the euro and the national denomination for a period of three years, and this may also in certain instances entail the replacement or upgrading of the necessary hardware. In addition to this, many companies are also faced with the simultaneous but otherwise unrelated problem of the year 2000 "bug". From a legal point of view modifications may also be necessary: in spite of the principle of the continuation of contracts, whereby all contracts based on the currencies of the participating states will be converted automatically to euro, contracts which refer to currencies outside the euro-zone will have to be reviewed and modified if appropriate. Even some contracts based on the currencies of the participating states may have to be modified with regard to certain aspects (e.g. "Paribor" will have to be replaced with the new "euribor", etc.). Furthermore, share capital amounts will in many cases be amended to achieve round amounts in euro; this will entail extraordinary general meetings, notarial documentation and fees, etc. Finally, certain other modifications may become necessary to conform to the adaptation of the various commercial codes within the framework of the conversion to the euro (articles of association etc.). Companies will also have to elaborate a campaign of communications, not only externally in respect of customers and suppliers in order to co-ordinate the exact timing of the change-over to the euro, but also internally in respect of staff and the conversion of salaries and other social benefits to the euro. A note of warning: those companies, which opt to delay the conversion process, may discover that the consultants required for the conversion may not be available.

In view of the fact that its economy depends to a very large extent on international business and tourism, Monaco is in an ideal position to benefit as from January 1, 1999 from the introduction of the euro. Since its population is already used to handling many different currencies on a day-to-day basis, the change-over to the euro is expected to be much smoother than in many of the other participating states. In particular those companies, which choose to be in the vanguard of the change-over, will benefit from being able to express their pricing in what will be one of the two world currencies of reference. In addition, those companies will find that the euro will also be acceptable in many parts of the world where today transactions can in practice only be effected in US dollars, thereby further reducing the risks and costs of foreign exchange. Companies, which decide to delay conversion until the mandatory date of 2002, will obviously not be able to reap such benefits during the interim period. In view of the large numbers of visitors to the Principality, the retail sector also has every interest in converting to the euro as soon as possible, or at least to introduce double pricing and to enable payment in euro.

The Monegasque financial sector is extremely well placed to reap substantial benefits from the conversion to the euro. As from January 1, 1999 all banks will be required to report to the central bank in euro and all are expected to switch their own internal accounting systems to euro as from the start. With their strong emphasis on private banking, the financial institutions in Monaco will above all benefit from the considerable expansion of the capital markets in the euro-zone, which themselves are all converting to the euro as from Monday, January 4, 1999. Since foreign exchange risks will be eliminated between the euro-zone states, many institutional and private investors will be able to widen their portfolios to include securities which hitherto were denominated in other currencies. Furthermore, since the euro will become one of the two major world currencies of reference, many third party nations will find it necessary to maintain a substantial part of their foreign exchange reserves in euro, whereas today the bulk of such reserves is often in US dollars. A large portion of these euro-reserves held by third countries will be reinvested in the euro-zone capital markets. Substantial growth is also expected in the equity markets. Apart from the positive effects of the fast-increasing trend towards equity as opposed to bank financing, the physical stock markets are one-by-one changing over to electronic trading. In view of this development as well as the introduction of the single currency the need for individual national stock exchanges will diminish; this will probably result ultimately in a consolidation of the present stock markets and the creation of several pan-European stock markets along the lines of those in the United States.