This is the first of a series on the euro, paying particular attention to the prospects for, and consequences of, UK entry. These articles will focus on practical preparations, not politics. Some mention of the political situation will be necessary while we wait for the referendum date to be announced, but the purpose of these articles is to enable you to understand how your business is preparing for the euro, giving practical and pragmatic guidance about how best to do so. Throughout these articles I will make reference to some worthy information sources. Because these articles will be read by people with a wide variety of understandings of euro and its impacts I will not always detail that which is covered in these publications. So arm yourself with the following: A copy of the government's conversion plan, available at http://www.euro.gov.uk/ The latest edition of the Bank of England's quarterly publication "Practical Issues arising from the euro", available at http://www.bankofengland.co.uk/euro/piq.htm You do not need to read these in detail to follow my articles but they will be useful sources of reference. I hope you will find these articles useful. I welcome feedback to [email protected]. John Turner. WHERE ARE WE TODAY ON EURO? Let's start this first article with a brief recap on where the UK stands in relation to euro. The government believes the euro would be good for Britain, but only as long as certain tests are passed. These 'five economic tests' were set out by Gordon Brown in 1997 and have remained unchanged since. They are detailed on the government's website - http://www.euro.gov.uk/ - and are intended to ensure that the UK economy is not damaged by entry into the euro. The government has committed to applying these tests and publishing the results by July this year. Recent studies have concluded that the tests are probably passed already (as always with economics there is some uncertainty) but until the government declares them as passed the referendum will not go ahead. I expect this to happen early this year, possibly in March. Once the tests are declared passed a referendum will follow, probably this Autumn. If a 'yes' vote is received then it is likely we would join the euro on 1st May 2004. A two year 'transition period' would then begin (explained below) and our entry would be completed by the end of May 2006, just in time for the latest date on which the government can call a general election. By sticking to this timetable the government avoids the euro becoming an election issue. THE CONSEQUENCES OF THIS TIMETABLE In terms of preparations for the euro the key dates are: Joining date (which I believe will be 1 May 2004) End of transition (1 May 2006) Completion of conversion (31 May 2006) Each of these dates has a significance in terms of what needs to be completed in time. Let's study them in more detail: JOINING DATE (1 MAY 2004) At joining date the official currency of the UK becomes the euro. Sterling becomes a 'non-decimal sub denomination of the euro' - in other words, Sterling can still be used but its relationship to the euro is fixed ('the conversion rate') and hence there is no longer any foreign exchange between Sterling and euro. The 'transition period' begins. The international money markets will cease using Sterling from joining date. All foreign exchange and global finance will be in euro. Sterling Gilts will be 'redenominated' into euro (i.e. the principal value is converted from the existing Sterling figure to the equivalent euro figure) and all UK equities will convert to euro prices (again, by applying the official conversion rate). However, the retail worlds will continue to use Sterling. There will be no UK euro notes and coins, and continental euro notes and coins will not be legal tender in the UK (though shops and other businesses may choose to accept them if they wish). A period of 'no compulsion, no prohibition' will begin, during which a customer cannot be forced to operate in euro but neither can they be prevented from doing so. In practice, most businesses will continue to operate in Sterling throughout the transition period. Only those with European parents or with the majority of their business already in euro will convert quickly. On the street the only visible difference will be the fixing of the Sterling/euro exchange rate in currency conversion businesses. The finance sector will see a duality of use. The wholesale markets and a few businesses will be operating exclusively in euro, and the retail markets and most businesses will be operating in Sterling. The finance sector will be obliged to convert between the two to suit customers' needs (and, incidentally, cannot charge for doing so). That means being able to offer both euro and Sterling denominated accounts, cards, etc., and being able to credit a Sterling payment to a euro account (and vice versa). Sterling denominated accounts must show specific euro equivalents and euro denominated accounts must show the same Sterling equivalents. Debit and credit card receipts must show both denominations. It can be seen that a massive amount of systems work is necessary to ensure that this is possible in time. If entry date is to be 1 May 2004, this work needs already to be underway. END OF TRANSITION (1 MAY 2006) At the end of transition, UK euro notes and coins are issued and continental euro notes and coins become legal tender in the UK. The period of 'no compulsion, no prohibition' ends and everyone is forced to convert their bank accounts and other financial instruments to euro. Cash machines issue euro notes only. Retailers are urged to give change only in euro. Sterling notes and coins are still acceptable for two more months but will be withdrawn by the banks until everyone is operating in the euro. Dual denomination display continues. COMPLETION OF CONVERSION (31 MAY 2006) Sterling notes and coins cease to be legal tender and the dual denomination display period ends. Everyone is operating solely in the euro. CONSEQUENCES OF THE TIMETABLE In future articles I will cover in more detail some of the consequences of the conversion timetable, particularly as they apply to the finance sector. Here are just a few to be thinking about: What are the stages of preparing for the euro, and, if joining date is going to be 1 May 2004, what should I have done by now? Is it worth building new systems capable of dual denomination operation just for a two year operating period, or can we emulate it somehow? It looks like I need to invest heavily to prepare for the euro and I can't even charge for making Sterling/euro conversions. Is euro preparation just a massive cost or can I benefit from it? ABOUT THE AUTHOR John Turner is Solving's principal euro consultant, with over 23 years' experience in business and technology consultancy in the financial services industry. He specialises in providing business and systems strategy assistance and has a particular interest in the euro, having lead nearly thirty assignments with organisations varying from small departments to major multinational banks. He speaks at conferences discussing issues related to the financial services industry and is often quoted in the press and industry journals. [email protected] Solving aem Limited is a majority owned subsidiary of Solving International SA, the France-based strategy, organisations and performance improvement consultancy. Founded in 1980, Solving International has 19 offices globally, works with 30% of Europe's 200 largest companies and has grown its revenue by over 35% per annum over the last five years. It performs over 500 consulting assignments per annum in more than 20 countries and between 1998 and 2001: in 70% of strategy and business development assignments, its client's market share subsequently rose by 15% - 30% in 70% of performance improvement / earnings enhancement assignments, its client's profitability consequently rose by 40% - 100% Solving aem Limited recently became a member of the Management Consultancies Association. Solving aem Limited