Euro and its Implications on Industry Ravi Ramu KPMG Bangalore

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 ?

The Timetable for Euro Implementation Six months later Withdrawal of national notes and coins ECB established Participating states identified 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 Phase A Phase B Phase C National bank notes remain legal tender No compulsion / no prohibition principle Dual legal tender period

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

Factors affecting Transition in Europe Operational versus strategic aspects - Minimise costs and risks - Maximise opportunities Transition period - Company’s own ability to change - Company’s 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

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 world’s 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

Europe and India European Union: 15 member states and million citizens In 1997, Europe accounted for: % of India’s exports; and % of India’s imports India’s largest market India’s largest trading partner

India’s Exports to European Union CategoryItems of Exports DominantTextiles, Leather and Pearls PromisingChemicals, Footwear, Machinery, Minerals, Animal and Vegetable Products, Software ExplorablePlastics, Articles of Stone and Opticals

Benefits Expected from Euro Dynamic gains from one currency Savings in transaction costs Eliminates exchange rate uncertainty Financial market gains

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

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

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

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

Implications for India India’s 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

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

Euro’s 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

The Need to Prepare Areas of Attention - Financial - Operational - Technological - Legal - Fiscal

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

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

KPMG-Harris National Research, July % 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

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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