Euro and its Implications on Industry

Ravi Ramu

KPMGBangalore

Euro and its Implications on Industry

Introduction to Euro International Implications of the Euro Europe and India Benefits Expected from Euro Benefits for India Areas of Concern for India Preparations for the Euro Are You Ready ?

The Timetable for Euro Implementation

1997 1998 1999 2000 2001 2002

Six months later Withdrawal of national notes and coins

• ECB established

• Participating states identified

1/1/99

• Irrevocable locking of exchange rates

• Euro becomes currency in its own right

• Government debt dominated on Euro

• Wholesale activity mainly in Euro

1/1/02

• Latest date for Euro notes and coins introduction

Phase A Phase B Phase C

• National bank notes remain legal tender

• No compulsion / no prohibition principle

• Dual legal tender period

Euro is not:

Rectification of a defect, but a change in the way an enterprise operates its business

A technical issue, but a business related issue

Just a finance and information systems problem, but a problem concerning organisations

Factors affecting Transition in Europe

Operational versus strategic aspects- Minimise costs and risks- Maximise opportunities

Transition period- Company’s own ability to change- Company’s business relations with customers

Cost and revenue mismatch- Less mismatch where both cost and revenue bases are within EMU

Price transparency- Buyer pressure to fix common price between participating states

The bottom line- Issue of competitive advantage- Understand the way Europe is changing

International Impact of the Euro

In 1997 total exports from the 11 countries adopting the Euro were 25% higher than US exports and double those of Japan

By year 2010, 30% of world exports will be invoiced in Euro Euro to attain status of an international:

- vehicle currency- investment currency- provider of strong liquidity

70% of world’s exchange reserves are in terms of the US Dollar- Euro is going to displace it in a significant way

Dollar-Euro parity to emerge stable in course of time- this will strengthen and stabilise exchange rates in the world

Europe and India European Union: 15 member states and 367.8

million citizens

In 1997, Europe accounted for:- 22.7% of India’s exports; and- 21.3% of India’s imports

India’s largest market

India’s largest trading partner

India’s Exports to European UnionCategory Items of Exports

Dominant Textiles, Leather and Pearls

Promising Chemicals, Footwear, Machinery, Minerals, Animal and Vegetable Products, Software

Explorable Plastics, Articles of Stone and Opticals

Benefits Expected from Euro

Dynamic gains from one currency

Savings in transaction costs

Eliminates exchange rate uncertainty

Financial market gains

Dynamic Gains from One Currency

Reduced exchange rate uncertainty on trade and investment would lead to improved capital productivity

Reduction in exchange rate risk premiums yield higher output growth

Savings in Transaction Costs

Elimination of costs involved in switching from one currency to the other

Inconvenience and costs of keeping accounts in several currencies disappear

Adds price transparency to goods and services across borders

Encourages market integration and strengthens competition

Cuts expenses and delays connected with cross-border bank payments

Larger financial market leads to lower transaction and insurance costs

Eliminates Exchange Risk Uncertainty

Once Euro is introduced:

-Only unexpected movements in exchange rates cause uncertainty

-Only misalignments which cannot easily be insured through futures and forward contracts need to be smoothened

Financial Market Gains

Single currency obviates the need for keeping open foreign exchange positions in multiple currencies

Participants can trade and invest in all the EMU countries without currency risk

Implications for India

India’s exports to the EMU are relative price elastic-Any cost reduction and quality improvements would invoke significant positive quantity response

Strong Euro leads to cheaper Indian imports in Europe

Unutilised quotas against one country can be setoff against another country

Generalised Scheme of Preferences lead to creation of transparency in tariff setting

Saving in intra-EMU banking transaction costs Lesser documentation Strict uniform product-standardisation code to be

adhered to

Areas of Concern for India

Lack of market confidence might lead to a volatile Euro in the initial period and hence exports to EMU might reduce

Mismatch between demand and preference structure in the EMU and composition of Indian exports

Euro’s Effect on Capital Inflows to India

Official loans and grants-Long term adjustment tasks facing EU states will lead to slowdown

Private capital flows-Investor friendly environment will promote capital inflow

External commercial borrowings-Broader, deeper and more liquid Euro-financial markets are going to offer cheaper finances

-Additional scope for increased Euro-denominated borrowings to cover existing exposure

The Need to Prepare

Areas of Attention

- Financial

- Operational

- Technological

- Legal

- Fiscal

The Need to Prepare

During the transition period, firms exporting to and importing from EMU have the option to deal or not deal in the Euro

Euro will be the only legal tender in the region from 1 July 2002

Many EMU firms have indicated target dates for their suppliers to be Euro-compliant

Competitive edge for Indian companies dealing in Euro

Exporters will hurry to invoice in the Euro Importers will try to delay the changeover Exporters might need to change pricing labels and

packaging

Action Plan for Indian Industry

Define the strategic position towards the EMU Explore market opportunities ensuring continued

success Prepare staff, organisation, and Information

Technology systems to deal with the EMU challenge Discover areas for cost reduction and process

redesign Think not just in terms of minimising cost and risks;

but also maximising opportunities Manage the Euro project successfully

KPMG-Harris National Research, July 1998

77% of US CFOs expect benefits from Euro, mainly:-transaction costs will be reduced and simplified-exposure to currency fluctuation will be reduced-intra-European trade will be easier

72% of US CFOs are currently reviewing the effects of the Euro

52% of US CFOs indicate they have a strategy for dealing with Euro conversion

US CFOs are confident that strategy will be executed within two years

US companies are taking a short term approach to operational requirements rather than developing new markets and supplier relationships within the EMU

Are You Ready ?

Pricing across Europe Risks/benefits Accounting procedures Banking arrangements International financial strategy International business procedures Market/product opportunities Strategic planning procedures Corporate structure

Euro on the Internet

http://www.eubusiness.com

http://www.europa.com

http://www.euro.gov.uk

http://www.kpmg.com