House of Commons - Treasury

Select Committee on Treasury Eighth Report

V. PREPARING FOR THE EURO

Preparations for the Launch of the Euro

44. We received a number of written memoranda from organisations describing their preparations for the launch of Stage Three of EMU on 1 January 1999. The London International Financial Futures and Options Exchange (LIFFE) described in detail the "significant changes [made] to its product range in the conversion process which took place in January 1999".[232] The International Underwriting Association of London said that its "electronic trading systems have been adapted to receive premiums in euro since October 1998 and will be fully prepared for the high volumes of European and other business which will switch to the euro from the legacy currencies over the next year or so".[233] The Society of British Aerospace Companies Ltd said that "BAE Systems and other leading UK aerospace companies were largely well prepared for the introduction of the euro".[234] Vauxhall Motors Ltd argued that "it is essential for companies to prepare to handle the euro, whether or not the UK finally enters the European Monetary Union" and provided details of its preparations, which "began as early as 1998".[235] In oral evidence, Mr Wolfson, of Next plc, and Mr Williams, of Canford Group plc, argued that "it was up to businesses to prepare [for the launch of the euro] themselves" and Mr Wolfson continued "it was just another currency. In fact, we were dealing in euros before the euro was launched".[236] Those UK businesses which needed to be ready for the launch of the euro in 1999 were, by and large, prepared.

Use of the Euro in the UK

45. There is a sharp division between a small number of predominantly City and multinational UK firms which are already using the euro in aspects of their business activities, and the vast majority of firms, consumers and public sector bodies which have had little or no contact with the euro. ICI Group told us that "each of the Group's businesses have traded in the new currency as required, and each met the corporate objective of being able to manage its affairs in euros by the time the new currency was launched".[237] The Society of Motor Manufacturers and Traders said that "the relative volume of trade and business transactions in euros in 1999 was small. However, for a minority of companies, trade in euros has been particularly important".[238] The Chemical Industries Association had surveyed its members and found that "70 per cent ... indicated they were already conducting business in euros ... [and] a very small number ... had raised capital in euros, albeit in comparatively small amounts".[239] British Invisibles reported that the advent of the euro resulted in "a jump in the value of bonds issued [by London's international bond market], reaching a new record of £1,000 billion in 1999, nearly half of which were denominated in euros", and also told us of changes in the foreign exchange and derivatives markets.[240] Corus wrote that "several business units report in euro, with a translation into sterling later on",[241] and Mr Cushnaghan said in oral evidence that the majority of Nissan's European group was "already converted and is already trading in euros and reporting in euros. Our only conversion at the moment is financial reporting, which frankly is not a cost; it is merely a transaction".[242]

46. In contrast, the Forum for Private Business reported data from a survey of its own member firms that "only 32.5 per cent of SME respondents were involved with exporting at all" so that "the great majority (two-thirds) are likely to see no reason to be involved in the development of a 'euro' strategy, as their trading is essentially internal to the UK".[243] The Federation of Small Businesses confirmed this view, stating that "less than five per cent of our membership" trades in the Eurozone.[244] The Treasury's Second National Changeover Plan found that "if the financial sector is excluded, euro use in the UK ... is currently low" and reported a KPMG estimate that "about 1% of all UK transactions and a neglible amount for those carried out between UK firms" made use of the euro.[245]

47. There is evidence that use of the euro by UK firms, including SMEs, trading in the euro-11 area is gradually increasing, however, through a process described by fishing tackle manufacturers House of Hardy: "On the procurement side of our business one of our raw material suppliers now insists on selling to us in euros. On the sales side one of our customers, whose head office is in France, was considering cancelling contracts with us towards the end of last year because of the increased value of sterling (as he saw it). As we were able to match the value of income from him in euros with our purchases from the raw material supplier mentioned above we agreed to supply this customer in euros".[246] The British Chambers of Commerce also supplied us with evidence of "euro-creep". A recent survey conducted by the organisation showed that 18 per cent of its members had made payments in euros to suppliers based in the rest of the EU and 17 per cent had received payments in euro from customers in the same region.[247]

Preparations for UK Membership of the Euro

48. Some witnesses expressed broad confidence that they would be prepared for UK membership of Stage Three of EMU, were a decision to join taken.[248] Shell International Ltd wrote that "in terms of systems and equipment, it is not thought that the implementation of the euro will cause any significant problems. The major issue remains the manner and timing of any potential handover and the issues of staff training, public education and working capital requirements".[249] Corus said "entry of the UK into Stage Three of EMU is not expected to cause problems, because the systems and expertise to deal with this are available in our company".[250] The International Underwriting Association of London said that it was already "operating simultaneously in the euro zone, the dollar zone and the sterling zone".[251]

49. The British Chambers of Commerce's survey showed that only 16 per cent of its members had "already made the majority of the preparations that would be needed" for UK membership of Stage Three during the next Parliament; 31 per cent had made some preparations; and 51 per cent had made no preparations at all.[252] A number of witnesses shared the concerns of the Federation of Small Businesses that, given the uncertainty about whether or not the UK might join Stage Three in future, "the business community cannot make any long-term investment decisions in regard to the single currency and it is not surprising that small businesses in particular are unwilling to consider the potential impact that the euro could have on their business, let along actually make any preparations for it".[253] Ms Lea, in oral evidence, did not envisage firms which had yet to prepare for possible UK membership of Stage Three of EMU "lifting a finger until they have got a definite date" of entry.[254] Mr Sweeney thought that "ideally" banks would wish to prepare for possible UK entry, and particularly the transitional period when both sterling and euro would be legal currency in the UK, before the decision to join was taken, but "it would be very difficult for banks to justify to their shareholders expenditure of £1 billion plus ... before they are pretty confident that it is actually going to be needed because the Government is going to take a decision to go in".[255] The BBA's written evidence described how banks mostly process euro transactions on paper at the moment and said that investment would be required to automate systems if the UK joined Stage Three.[256] The Economic Secretary, however, perceived "no evidence of anything other than continuing progress".[257] It is clear that many small- and medium-sized firms are waiting for the Government to decide before preparing for possible UK membership of the single currency.

The National Changeover Plans

50. The Government has published two National Changeover Plans since Stage Three of EMU was launched, following a recommendation of our 1998 Report,[258] the first in February 1999 and the second in March 2000. The first National Changeover Plan was "a consultative document", which represented "a snapshot of where preparations stand today on the practical aspects of possible UK entry; [and] a summary of issues identified, conclusions reached and work to be done".[259] The second Plan was intended to "provide a framework against which organisations can plan, to provide a picture of what the different phases of a changeover might look like, to facilitate dialogue on changeover planning issues as well as to report on progress".[260] It is noticeable that the Second Outline National Changeover Plan focuses on the preparations which the public sector could undertake for possible UK membership of Stage Three of EMU, rather than on private sector preparations, which were a focus of the first Plan.

51. Witnesses expressed a broad range of views about the usefulness of the National Changeover Plans. Ms Barker thought that the Plans had provided "helpful information" which enabled businesses to have a "better understanding of what would be required" during the changeover process, but speculated that business preparations for possible UK membership of the single currency had slowed because the Plans showed how far off was the introduction of euro notes and coins, even if a decision to join was made early in the next Parliament.[261] The British Retail Consortium welcomed the Plans in general but criticised the latest one for giving "little indication of the size, cost and urgency of preparing for the euro".[262] Mr Cushnaghan described the Plans as "not terribly relevant to us because we have been driven by the commercial world".[263] The Forum for Private Business had "found very little evidence to suggest that SME owner/managers have read the document".[264] The Business and Accounting Software Development Association (BASDA) said that the Plans "demonstrate that the Government is aware of most of the issues" but argued that "its proposals for how the work should be tackled and the amount of money which will be required by the public sector, demonstrate a complete lack of understanding of the complexities of the task involved".[265]

52. An important aspect of the Changeover Plans is an illustrative timetable for the steps that would need to be taken from the Government's decision to recommend joining Stage Three to the withdrawal of sterling as a unit of currency.[266] It is envisaged that the whole transitional period would span between 34 and 40 months. The Economic Secretary told us that the timetable was "a result of the discussions that we have had with a number of bodies, both public and private sector, to map out what seemed realistic" and she said that she had received no representations that the timescale was either too long or too short.[267] Most witnesses questioned about the timetable were content for there to be a transitional period of around 40 months.[268] Mr Williams, of Canford Group plc, thought that "it could be done a lot quicker than 40 months. Inevitably there are going to be a large number of businesses who leave it until the last minute".[269] BASDA concluded that the "proposed UK transition period is likely to be inadequate" without greater Government commitment, including extra funding, to public sector changeover issues.[270]