Euro and its Implications on Industry Ravi Ramu KPMG Bangalore

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Euro and its Implications on IndustryRavi
RamuKPMGBangalore
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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 ?

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The Timetable for Euro Implementation

• Dual legal tender period

• National bank notes remain legal tender
• No compulsion / no prohibition principle

Phase A
Phase B
Phase C
1997 1998 1999
2000 2001
2002

• ECB established
• Participating states identified

Six months later Withdrawal of national notes
and coins

• 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

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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

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Factors affecting Transition in Europe

• Operational versus strategic aspects
• Minimise costs and risks
• Maximise opportunities
• Transition period
• Companys own ability to change
• Companys 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

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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 worlds 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

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Europe and India

• European Union 15 member states and 367.8
  million citizens
• In 1997, Europe accounted for
• 22.7 of Indias exports and
• 21.3 of Indias imports
• Indias largest market
• Indias largest trading partner

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Indias Exports to European Union

• Category 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

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Benefits Expected from Euro

• Dynamic gains from one currency
• Savings in transaction costs
• Eliminates exchange rate uncertainty
• Financial market gains

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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

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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

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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

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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

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Implications for India

• Indias 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

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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

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Euros 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

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The Need to Prepare

• Areas of Attention
• Financial
• Operational
• Technological
• Legal
• Fiscal

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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

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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

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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

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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

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Euro on the Internet

• http//www.eubusiness.com
• http//www.europa.com
• http//www.euro.gov.uk
• http//www.kpmg.com