The first of January, 1999 is the first day in the rest of Europe’s life. It is the day the Economic and Monetary Union goes live, with long-term implications for UK consultancies exporting to any of the 11 initial member countries (see table).
The UK will not join the “euro-zone” before the end of the Government’s present term in 2002. Even then, it would only join after a referendum.
However, every UK group that has financial dealings with an EMU member country – be it a client, overseas office, alliance partner or supplier – could be required to deal in the union’s currency, the euro, from day one.
From 1 January, the euro will be used as an alternative to EMU-members’ national currencies for non-cash transactions, though any contract drawn up before that date cannot legally be translated into euro terms without consent from both parties.
By 1 July 2002 national currencies will cease to exist altogether within the euro-zone. Design groups exporting to the euro-zone are therefore advised to become euro-compliant, ideally by the New Year.
“The euro will definitely be an issue, but not a massive one. It’s just another currency and needs to be accounted in just the same way as the Deutschmark or the franc. Any group already [paying or invoicing in] foreign currencies will merely need to adapt their accounting system to account for the euro and set up a euro bank account,” says CLK.MPL finance director Tony Walford. Whether the flow of currency is between a UK consultancy and an overseas office, client, supplier or alliance partner makes no difference.
The flow of euros works in exactly the same way as for any other foreign currency. And until euro-zone currencies are phased out altogether, it will be up to the businesses in each UK/euro-zone transaction to decide whether to use euros or a national currency.
Many groups dealing in a foreign currency for the first time are likely to find their accounting system is sophisticated enough to cope, says Landor Associates European operations finance director Tim Ellett.
“If you don’t have the software you could initially convert euro values into sterling and put those into your accounting system. But as the euro becomes widespread you will need to make changes to your software,” adds Ellett.
It is difficult to predict how quickly European clients will adopt the euro and how flexible they will be about paying UK consultancies in sterling.
“As things stand, most overseas clients tend to allow consultancies to invoice in sterling. We very rarely invoice in anything but sterling. But, under the euro, I suspect clients will start invoicing more and more in euros,” says Landor Associates senior marketing executive Adrian Day, who spoke at a seminar on the euro at The Design Show last month.
Ian Cochrane of Ticegroup, a management consultant to the design industry, advises UK consultancies to try to invoice euro-zone clients in sterling for as long as possible. “Design groups are small businesses and can’t afford to take exchange rate risks [associated with payment for overseas projects] unnecessarily,” he says.
The risk arises from changes to the exchange rate in the period between agreeing a price for a project and its payment.
If a UK consultancy agrees a price with an overseas client in its national currency and the price of sterling rises during the course of the project, its fee effectively goes down. While a fall in sterling would mean an effective rise in the fee, Cochrane points out that design groups are not in the business of financial speculation.
If a euro-zone group does not want to be paid in sterling, it should ask to be paid in euros rather than the client’s national currency, says Landor’s Ellett.
This is because the exchange rates of euro-zone countries will be fixed irrevocably against the euro on 1 January 1999, making it more stable than their national currencies and reducing the exchange rate risk, says Ellett. At current exchange rates, the euro (comprising 100 cents) is likely to be worth about 70 pence when it is introduced.
It is also easier to deal in one foreign currency, the euro, than a number of euro-zone national currencies, adds Ellett.
For CLK.MPL’s Walford the ability to deal in euros from day one is essential. “Come January, if you can’t quote for a job in euros when asked, you’ll be out of business,” he says. Walford will be mailing existing clients to inform them the consultancy is euro-compliant.
But Landor’s Day says overseas clients choose UK consultancies because they really want them and are not concerned with the currency issue. “Our policy, come the euro, will be to invoice in sterling, but we are ready for the euro and can discuss and negotiate each separate contract if we need to. Because we are actually an American company, all our money is eventually converted into dollars anyway,” says Day.
Industry consensus suggests Landor is approaching the euro in the right way, preparing for the eventuality and waiting to see the course nature takes. Any group not making the few necessary preparations required could, in time, get caught out.
Timetable for introduction of the euro
January 1999 – 31 December 2001: Transition period. National currencies will be used for all cash transactions, but euros will start to be used for non-cash payments.
January 2002 – 30 June 2002: The dual circulation period. Cash transactions will be in either national currencies or euros (or both), with most non-cash payments in euros.
July 2002 onwards: The single currency. National currencies will cease to exist within the euro-zone.