Measured against Greenwich Mean Time, the interval between the UK and Italy is one hour, after both countries turned back the clocks at the end of October. But the prospect of an extra hour’s slumber was of little comfort to the UK businesses tossing and turning outside the eurozone.
Big Five firm Arthur Andersen warns in its latest report on preparing for the euro, ‘The Euro and Your Business’, that the longer companies prevaricate over a single currency strategy, the harder it will be for corporations to compete once the euro becomes legal tender on 1 January 1999.
The financial sector in Italy, meanwhile, is waking up to the vision of Economic and Monetary Union in a more optimistic frame of mind. The tremendous effort made by the now defunct Romano Prodi government to meet the Maastricht criteria engendered a willingness among the country’s euro-optimistic citizens to embrace the single currency. Carlo Ciampi, Italy’s much-respected finance minister, has attributed Italy’s place among the first 11 into EMU to the fact that his native land ‘has Europe in its blood’.
Freedom of choice
But the experiences of two small Tuscan towns reveal that it will take more than just enthusiasm to facilitate a smooth passage to the euro.
The communities of Fiesole (population 15,000) and Pontassieve (population 20,000) attempted to create a small-scale version of what might be the economic reality under the single currency. But their six-month ‘Ecco l’euro’ experiment does not offer UK companies a template for flawless financial operations within the eurozone.
The value of the Fiesole experience, in the light of the Andersen study, is that it reveals how the winners in the single currency market will be those firms that ‘take the opportunity to rethink how business is done’.
The government-backed single currency project ran from 1 October 1997 to 31 March 1998. It was conceived by the local councils as a means of facilitating circulation of a euro coin and a way of heightening awareness of monetary union. And like the first phase of EMU, the Fiesole experiment was to be implemented on the basis of ‘no compulsion, no prohibition’.
Local enterprises were entirely free to choose whether or not they wanted to trade in the euro.
Although the impetus came from the public sector, support for the initiative among the private sector was widespread, and the financial institutions provided a large part of the sponsorship. Following the approval of the Banca d’Italia, L3bn (#1m) was produced in euros. The exchange rate was set at one euro to L2000 (75p), available in denominations of a three-euro banknote and coins to the value of one and 0.50 euro.
But what the financial organisations, along with the local councils, could not have predicted was that the currency would not only arouse interest in Tuscany but that coin enthusiasts from all over Italy would join in the euro rush (5,000 reservations had been received for the single currency even before the money had reached the banks).
By the end of the first week, L750m (#28,000) had been exchanged, with the result that some banks’ supplies were exhausted. As one local bank official recalls: ‘On the first day the currency just streamed out of the euro-desks.’ The sudden dearth of currency meant circulation was effectively halted.
Although the local post offices also operated euro counters, unlike the banks, the branches decided that the amount of single currency requested for exchange by clients had to correspond to the value of a normal transaction.
By managing the euro in this way, the Post Office not only hoped to stagger demand, but to demonstrate how customers are most likely to use the currency under EMU.
As Carla Gatti of the Fiesole branch explains: ‘If a customer came in to buy a stamp and handed over L,5000 (#1.88) we would give them one euro in change. It was a way of establishing a direct link to what will be the economic reality under the single currency.’
While successful management of the currency may have been subject to a variety of influences, the parity in the euro/lire exchange rate meant it was relatively easy for businesses to maintain accounts. The only disadvantage, according to Daniele Fiaschi of the local savings bank in Fiesole, Casa di Risparmo di Firenze, was that the single currency effectively doubled the bank’s workload.
‘The disadvantage of the euro project for us,’ says Fiaschi, ‘was that we had to operate two sets of accounts, one in lire one in euro.’
The biggest advantage of the Ecco l’euro project for the savings bank was that it served as a dry-run, albeit crudely, for monetary union. Fiaschi believes, however, that while many Italian financial institutions are euro enthusiasts, they have made little preparation work for monetary union.
‘On 1 January, there will be no obligation for banks to keep accounts in euros, but even so, many banks still aren’t ready here. I think there will be a lot of problems at the beginning of the transition period.’
But it seems unlikely that many of the setbacks which hampered the Fiesole project will be reproduced under EMU. Professor Mike Artis, head of economics at the European University Institute of Florence, who headed the research team on ‘Ecco l’euro’, believes the project does not offer any real indication of how the single currency would behave in the commercial climate of the eurozone.
‘The number of useful lessons the experiment might have for UK observers is quite small. Unlike from 1 January, when monetary union arrives, in Fiesole and Pontassieve no-one had to take the experiment seriously,’ he says.
Professor Artis believes the real difficulty for UK businesses trying to formulate EMU strategy is compounded by uncertainty over the official exchange rates. But he sees no reason why the UK finance function should lose any sleep over trading within EMU.
Drawing a comparison between Canada and the United States, he asks: ‘Canada is not overrun by US dollars, so why should the UK be overrun by euros?’
But in contrast to the Canada/US relationship, the Blair administration has not dismissed the possibility that the UK will one day swap sterling for the euro. The fact that the government is now encouraging private enterprise to produce accounts in euros is an indication that entry into monetary union has not been ruled out.
One pro-euro campaign in Italy compares the changeover to the single currency to measuring the climate. ‘Whether in Fahrenheit or Centigrade,’ the slogan runs, ‘the temperature remains the same.’
While experiments like the one at Fiesole may give Italian commerce time to acclimatise to the demands of monetary union, the danger for UK businesses is that the longer they sit in the shade of the eurozone, the harder it will be to adjust to the EMU climate.
NORTHERN LIGHT: ROTHERHAM LEADS THE WAY
Rotherham seems an unlikely place for the greatest experiment in the UK currency since the introduction of decimalisation. But two weeks ago it entered the history books by becoming the first town in the UK to use the euro, writes Seamus Ward.
The local chamber of commerce launched Euro Ready Week by handing out thousands of vouchers which resemble euro bank notes. The vouchers could be exchanged at supermarkets, greengrocers and banks in the South Yorkshire town. Shops priced goods in euros and cents, as well as pounds and pence.
The pilot was backed by Tesco, Kwik Save, Vauxhall and British Steel, whose Rotherham engineering steel plant is the largest of its kind in Europe and the town’s biggest employer. British Steel has exports worth #4bn a year – 50% of its output – and has decided to invoice and make payments in euros from January.
Julie Kenny, managing director of local security equipment firm Pyronix, believes it is vital that firms in towns like Rotherham become aware of the effect the euro will have on their businesses. ‘We want to show Britain and Europe that Rotherham is open for trade in euros,’ she says. ‘The new currency will be operational on 1 January 1999 and we want to start making money in euros as soon as possible. My firm exports 40% of its output, the bulk to Europe. We all need to be euro-ready and euro-friendly if are to keep winning orders and remain competitive.’
Anna Chester, who helped co-ordinate the Rotherham experiment, says the euro trial was necessary to catch the attention of the public and the business community.
‘The idea of doing business seminars on the euro was never going to grab anybody,’ she says. ‘When there were seminars on the millennium bug, for example, there was a lot of apathy, not because people weren’t interested, but because they were too busy keeping their businesses running. The notion of adding a fun element to attract people’s attention worked incredibly well.’
As a result of the scheme, attendance at a series of lectures on the impact of the euro was high. ‘People are realising that just because the UK isn’t going in on the first wave doesn’t mean they aren’t going to be affected. If they are in the supply chain to British Steel, for example, they may well be paid in euros.’
The Rotherham experiment has attracted the attention of several other chambers of commerce wishing to organise similar events. And the local chamber plans a follow-up exercise early in the new year to assess the impact of the initiative.
Chester already knows it has stimulated debate. ‘Small shopkeeper level are a long way off. But those in the business community who thought the euro will not affect them because they do not export have had a rethink.
We have given them food for thought.’
SUPERMARKET SWEEP: FIRST TEST OF CURRENCY CONVERSION
The supermarkets which took part in the Ecco l’euro experience in Fiesole and Pontassieve give a good indication of how the local business community responded to the demands of the single currency.
The outlets are part of the UniCoop chain, one of the largest Italian food retailers with 120 stores in Tuscany, and their participation was seen as an excellent means of preparing the wider business for the monetary union. Head of marketing Franco Cioni, says the company felt the opportunity to become conversant with the workings of the single currency before EMU arrived would give UniCoop the competitive edge in the marketplace.
Unlike the smaller retailers in the experiment, the supermarket chain was able to draw on considerable financial and technological resources to adapt to the new currency.
One of the first steps UniCoop took was to make sure the electronic systems used in Fiesole and Pontassieve were euro-compliant. Cash registers, for example, were programmed to transact sales in lire and in euros and receipts showed totals in both currencies.
A difficult point
Dual pricing allowed the supermarkets and their customers to visualise how the lire converted to the single currency. But seeing products expressed in decimal points, for example 0.50 euro, caused some difficulty.
The range in lire coins stretches from as little as L50 (2p) to L500 (17p). For figures below L50, the amount the customer pays is rounded up or down. For example, if a customer spends L25,070 (#9.47p), the actual amount to pay would be L25,050.
Italians, therefore, are already practised in the art of rounding off, a skill that will be put to the test when the forecast exchange rate of one euro to L1957.61 is introduced on 1 January 1999. For example, under the fixed rate, a bottle of mineral water costing L480 could be converted either down to 0.25 or up to 0.26 euro.
The problem confronting businesses such as UniCoop will be how to reconcile a competitive pricing policy with the possibility that the market trend may require product prices to be rounded up. Certainly, the effects of the euro will be felt most by those areas of business where the costs involved in rounding up or down vary significantly.
Making the world go round
In a questionnaire compiled by the European University Institute of Florence, the businesses that took part in the trial were asked whether they had carried out some rounding when displaying prices in euro. Only 19% of respondents said ‘yes’, while an overwhelming 70% replied they had not employed the practice.
Professor Mike Artis, who led the evaluation of the project, says the technique was probably more widespread than the results indicate. ‘Most businesses would not say they had rounded up prices even if they had,’ he says. ‘The locals might have thought retailers were trying to cheat them.’
As Italian companies wait to see how the lire behaves under the official exchange rate, the issue of pricing is likely to move centre stage.
‘I think the introduction of the single currency will be quite traumatic,’ says Cioni. ‘Unlike the French, for example, who moved from the old franc to the new one, Italians have had the same currency for more than 100 years.’ Teresa Reilly and Seamus Ward are freelance journalists.
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