On January 1, 1999, the euro became the official currency of 11 of the 15 European Union (EU) member states participating in the European Economic and Monetary Union (EMU).

These countries are responsible for a large share of world trade — and may be essential to your bottom line. Unfortunately, many small and medium-size U.S. companies are unprepared for the euro, or unfamiliar with its financial and legal impact. To help you, we’ve answered many of the questions you’ll need to know.

Who Are the Euro Participants and Will More Countries Join?

Referred to as Euroland, the Euroarea or the Eurozone, euro participants include Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

Remaining EU members, such as Denmark, Sweden and the United Kingdom, may join at a later date. Greece, although willing to participate now, was temporarily denied Euroland membership because it did not meet the strict economic criteria.

Many other European countries have asked to join the EU. Should all Eastern and Western European countries eventually become members over the next several decades, the EU’s population would swell to approximately 850 to 900 million consumers. And, as these countries are admitted, many will wish to adopt the euro as their official currency.

How Is the Euro Phased In?

During the three-year transitional period, January 1, 1999 through December 31, 2001, businesses are free to use either the euro or the national currency unit for non-cash transactions. On January 1, 2002, euro notes and coins will be made available. Participants’ national currency units will be gradually withdrawn and will cease to exist as of July 1, 2002, resulting in the euro as their only legal currency.

Although euro notes and coins will not be available until 2002, political pressure is already building for their earlier use.

How Does the Euro Affect Financial Obligations?

The International Chamber of Commerce (ICC), the recognized world business organization based in Paris, has published euro guidelines relating to international commercial practices, including transactions under the UCP 500 (www. iccwbo.org/). According to the ICC’s report on the euro’s impact, the European single currency “shall not have the effect of altering, discharging or excusing performance under any instrument subject to ICC Rules.”

The report spells out currencies to use for letters of credit (L/Cs) on contracts existing before, during and after the transitional period. For details, refer to the ICC webpage: www.iccwbo.org/Commissions/Banking/Impact_of_euro.htm.

The ICC also recommends that you add language to your L/Cs to ensure they are subject to the Uniform Customs and Practices for Documentary Credits that concerns euros. To determine what’s best for you, consult with your banker and/or lawyer.

What Costs and Challenges Exist?

With the advent of the euro, many U.S. companies will need to invest in new software, training, consulting, dual documentation systems, etc., to deal effectively with two currency denominations.

The euro also could bring calculation problems. Official conversion rates have six significant figures, which could make calculations complex. Rounding off could pose problems. And, prices that end in “9” to achieve a psychological advantage will be lost when converted.

But, more importantly, consumers will more likely perceive the 11 euro participant markets as one, forcing local companies into greater competition. As a result, Eurozone companies will more aggressively pursue local marketshare at the expense of non-euro participants, including U.S. exporters.

What Are the Euro’s Benefits?

As the level of financial integration among EU members increases, intra-EU trade barriers will decrease. For many U.S. companies, exporting to one, larger single market and transacting in dollars or euros is less complex than exporting to several markets with different rules, regulations, and currencies. And, to some extent, this may counter the advances of more aggressive European companies. Furthermore, utilizing a single currency means the elimination of exchange rate uncertainty. And that’s not all.

According to a European Commission, transaction costs related to the existence of different currencies in the EU amounted to approximately 0.5% of gross domestic product (GDP). Other studies have estimated this cost closer to 1%.

These savings, combined with greater macroeconomic stability and reduced governmental deficits, are anticipated to result in economically stronger euro participant economies. In turn, this is expected to result in greater imports from the United States.

According to an International Monetary Fund study, the impact of the euro on participating member economies will be an increase GDP growth of .2% in the year 2000, .9% in 2001, 1% in 2002, 1.1% in 2003, and 2.9% in 2010. The economies of non-European G-7 and developing countries are predicted to grow by .1% and .2%, respectively, in 2003.

On-Line Resources

To convert euros into dollars, or other currencies, click on CNN’s Euro Conversion Calculator (cnnfn.com worldbiz/europe/9812/29/calculator/). For answers regarding business and legal questions, visit Monetary Union For Business, a website by the Association for the Monetary Union of Europe (www.eubusiness. com/emu/euroamue.htm).

Other must-see sites include: ENUNet, a site run by a London-based organization comprised of academicians and politicians (www.euro-emu.co.uk); The European Central Bank (www.ecb.int); the official euro site of the European Commission (www. europa.eu.int/euro/html/home5.html?lang=5); and Dossier Euro (www.strategic-road.com/dossiers/eurofr.htm).

Contact Us for More Details

For more information on the euro or how we can help you achieve your international goals, contact your Treasury client manager.

This article appeared in January 1999. (NB)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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