Supposing that a sufficient number of European countries meet the convergence criteria in the coming years, would practical preparation delay full Monetary Union ?
Possibly yes, since a strict observance of the Treaty of European Union and of the January 1999 deadline for Monetary Union would give as of today 4 1/2 years time to prepare the phased introduction of the Ecu as the single currency. This is inferior to the time needed to adapt all parties concerned to the future environment. However, the Treaty does not make it obligatory that from the beginning of stage 3 Ecu-bank notes and Ecu-coins are put in circulation.
The political uncertainties and the macro-economic discussions on EMU (Economic and Monetary Union) have deferred the thorough analysis of the practical implications of the move to the single currency. This work is of a "highly complex nature and justifies a lengthy period of preparation", as recently stated by the European Commission in the set-up of its official study group on the practical aspects of change-over.
The actual replacement of existing national currencies by the Ecu may appear in itself a fairly simple procedure, for in most cases it implies nothing else but the multiplication of an amount of money with a single conversion rate. However, as this operation applies to all systems and operations involved in the processing of payments, accounting and the final settlement of transactions, covering all business sectors, the necessary changes to systems and procedures lose their simplicity when business relations are becoming more complex. This is particularly true for banks, the channel through which money flows between economic agents.
In order to provide an opportunity for the private sector to examine these issues, the Association for the Monetary Union of Europe (AMUE) established in 1993-94 a working group chaired by Mr. Malcolm Levitt, Barclays Bank. It was sponsored by the European Commission, involved 16 member companies and banks and also benefited from the preliminary work of the Ecu group of the French Committee of Banking Organisation and Normalisation.
The AMUE report does not pretend to provide an exhaustive
analysis of the questions raised by the introduction of the single currency
even though it goes deep into the analysis of the practical adaptation
which will be needed in banks and firms. It wishes to draw the attention
of public authorities and the private sector to some of the most urgent
issues so that solutions may be found in time to reduce cost and duration
whilst improving the global efficiency of the change-over. The other objective
is to avoid such delays as encountered by the technical implementation
of the Schengen agreement.
1. The transition to the single currency will require substantial changes to payment, account and settlement systems of banks and companies:
1.1- the gestation period for these changes in banks might take up to 5 years
Banks are at the centre of the technical transition to the single currency. Money is their business. While the adaptation of systems and procedures in companies and for the public may be relatively easy, it affects the root of business activities in banks. This makes a successful transition for banks also a prime concern of commercial and industrial companies.
The time and cost involved in changing to the single currency may vary between banks. Those providing a relatively narrow range of services such as merchant banks face a much simpler task than large financial conglomerates like universal banks who provide a full range of services, e.g. domestic retail banking, services to merchants, international banking, credit cards, insurance, global payments and so on. Costs will also vary according to the size of the banking institution in terms of the number of outlets/offices and the number of staff.
• The types of data processing technology deployed and the number of programming modules (running into many thousands for large banks) will vary between main frames, client/servers, PCs etc. Large banks have various self-service and electronic delivery systems, e.g. automatic teller machines, self-service terminals, data services, electronic data interchange systems and point of sale systems which will need to be adjusted.
• Various central operations may also require changing (telecommunications, securities, clearing, bullion, loans, mortgages etc.) and systems supporting external relationships will be involved such as Swift, automated high value systems, automated retail payments, correspondent banking relationships and systems linked to large corporate customers.
• Many different sorts of product processing systems will need to be adjusted : customer accounting information, debit and credit cards, travel services, payment services, current and deposit account, business loans, personal loans, mortgages, securities, statement production, customer stationery, standing orders, direct debiting and others.
A large bank may have thousands of programs to support the different systems involved in its financial conglomerate activites (one major bank mentioned 35 000). Each one will need to be investigated to see what, if anything, will need to be changed and once the changes have been identified the question then arises as to whether the system has the capacity to cope: depending on the conversion factors involved (at least the number of currencies fused into a single one), the additional memory requirements could be very large indeed, i.e. it is not simply a case of the conversion rate but the field size.
From the viewpoint of a bank, the change-over has technical implications for :
• Bullion, minting (under the responsibility of national authorities), secure distribution and storage of the new currency, secure storage and withdrawal of the old currency, machine conversion.
• Computer systems including accounting systems, customer data bases, card systems (machinery and software; linkages with retail outlets), payment systems including inter-bank payments, corporate payments and cash management systems.
Initial estimates by banks suggest that adaptation costs to the single currency are not trivial but they are questioned by the European Commission (DG II) which shares our hopes that both timing and costs may be considerably reduced. Estimates vary with the size and complexity of operations by banks and companies and the flexibility of existing systems. Ultimately every firm will have to make its own assessment.
One should distinguish between :
• development costs: one-off adaptation measures related to information and data processing, conversion of payment flows, assets and liabilities denominations; for commercial and industrial companies they also involve re-valuation of stones and changes of pricelists.
• operational costs: related to the implementation of the change-over. They are minimal in case of a "big bang", but can be substantial in the case of an extended "dual-currency" period.
Not surprisingly, the most complex and therefore most costly adaptation would take place in the major universal banks with a very large customer base. Some of Europe's largest banks have come to the conclusion that the once-for-all development costs for their own institution could be in the order of Ecu 100-150 million stretched over a period of approximately 5 years. An extended dual-currency period could add an extra Ecu 75 million per annum for the necessity to keep national currencies in operation.
Thus their preference is clearly for a transition path which minimizes cost by a "big bang" for interbank payments, cheques and transfers ("monnaie scripturale") and a period of dual currency for bullion ("monnaie fiduciaire") as short as possible. These cost estimates must be viewed with caution since they result from a number of hypothesis which may very well be modified when the scenarios are officially clarified.
Given the close integration of existing domestic banking systems, it will be essential that all banks in countries participating in the single monetary zone are able to plan according to a common timetable if potentially disastrous breakdowns in the banking system are to be avoided.
Failure to build flexibility into all systems development now could involve substantial costs later, together with the risk of being at a competitive disadvantage. Indeed banks will be intensively called upon for advice by their customers when the transition comes closer, and this will be a unique opportunity for these banks to visit companies and to develop their market-share : when the decimalisation process took place in the United Kingdom, some 24 000 explanatory meetings were organised by banks involving some 600 000 people. Also customers will naturally ask for speedy and efficient ecu/national currency operations as soon as the process starts.
These adaptation costs should be counter-balanced by the expected benefits from the single currency and from agreed policies aiming to price stability. Besides the already mentioned benefits from a more integrated and growing financial market, the single European currency will also render administrative systems more efficient, reduce the complexity of accounting systems, increase money market liquidity and improve transparency.
A single currency will also reduce systemic risks and inefficiencies in the European payment system. At the same time, the technical adjustment can be a challenge for technological innovation.
It should also be considered that the single currency will reinforce the European Union's influence in international relations, particularly vis-à vis the USA and Japan.
These considerations and others induce the banking community
to play an active role in supporting the objective of EMU, whether as members
of the Ecu Banking Association, or as members of the Association for the
Monetary Union of Europe.
1.2- for industrial and commercial companies the duration and cost of the preparation will be significantly lower
For industrial and commercial companies, the transition to the single currency will affect the recording of stocks and flows.
For companies the re-denomination of assets applies not only to financial securities but also to physical capital. In general, this may imply a simple operation when the conversion rate is applied to book-value. But in some cases cost-control systems may also
require that stocks of raw materials and merchandise are also physically re-named. This is particularly obvious in retailing firms, where all price labels need to be changed, but in no way is this the only case.
A particularly tidious solution for the transition would be a long dual-currency period, for it would oblige companies to dual pricing - even if they could avoid it. This can be costly and time consuming.
However, some companies may choose dual pricing voluntarily,
either because the change-over implies a sharp change in numerical measurements,
or because it may improve their competitiveness (greater transparency in
the single market).
Payments and cash handling
Flow issues are related to payments, accounting and cash management. The efficiency of payments by companies will to a large extent depend on the successful adaptation by banks. In big companies computerized financial systems may encounter some of the same problems as banks, although at a reduced scale. Several companies have, however, reported that they expect efficiency gains and anticipate closing a number (up to half) of regional bank accounts.
As for cash-handling businesses, the situation is somewhat more complicated. A protracted dual-currency phase for notes and coins may require two separate cash circuits - one in Ecu and one in national currency. This could involve dual cashiers' functions, separate cash ledgers and price lists (including dual automated price-readers in supermarkets etc.) Coin machines would also need to be adjusted (pay phones, cash dispensers, vending machines and postal franking machines).
In this respect it is important that the new Ecu notes (and perhaps coins will also) be of standard Union-wide dimensions and weight, although this probably means that no coins or notes from the "old" national currencies can be handled together with the new Ecu.
Physical cash handling behind the retail point of sale will be more time-consuming during the dual-currency period, but as the volume of currency 'tokens' will not change - just the number of piles into which they need to be sorted - the issue will not be a serious one. As the Ecu coins and notes will all be new sizes, all automated currency sorting equipment will either have to be renewed or recalibrated.
From an accounting viewpoint, the most important requirement is consistency in applying the same accounting rules, methods or procedures in each similar case. A high degree of homogenisation in the regulatory framework is therefore needed.
All management information systems will need to be amended, including internal record, general ledgers, asset and liability monitoring, administrative systems (e.g. pay rolling, accounts payable, profitability of performance) financial management (including risk and exposure management) and statutory reporting.
A clear separation must be made between transactions occurring before and after Ecu Day in order to avoid disorder and confusion in accounting departments, particularly if the company's financial year does not coincide with Ecu Day. All outstanding items (transactions, balances, items in transit etc.) will need to be converted into Ecu.
• Conversion of all financial systems :
i) Computerised systems : provided that all the ground work has been completed in advance, this should be relatively easy at the change-over date with a "big bang" approach, since all the master data would be updated overnight with the conversion rates.
However, because of human resource limitations, some organisations will not be able to convert information overnight and therefore in practice companies will need to be able to continue processing transactions and paperwork denominated in the old national currency after the Ecu Day, whether there is a "big bang" or a dual-currency scenario.
ii) Manual systems : in this case the change-over would be a much more time-consuming operation. The "big bang" approach would cause the most problems given the limited time-scale.
• All database will have to be converted into Ecu.
This includes stock listings, sales orders, catalogues, price lists, ledger balances. Historical data will also need to be converted as a comparison between current and at least the previous year is required.
Treasury management implications
From a treasury point of view, the practical issues raised by the move to the single currency could be solved or strongly facilitated by an appropriate legislation.
• The reduction in currency transactions will reduce credit exposures of companies and the remaining credit exposure is likely to be concentrated with a smaller number of high-quality banks in order to reap the efficiency gains from the single currency. Companies will negotiate charges/services with a single pan-European bank and these services could include pooling/sweeping of funds to enable central cash management.
• Regarding systems, the conversion should be easy, providing it is sufficiently prepared in advance.
• With the abolition of currency and interest rates fluctuations
within the Monetary Union, treasury management will focus on economic risk,
as EMU is unlikely to eliminate all differences in the economic performances
of the various regions of the European Community.
1.3- the adaptation costs will be minimized if preparations are started at an early date.
Indeed the change-over will take time to penetrate mentalities. Also the early adaptation of new systems could often be realized at low cost so that the effective change-over would only entail minimal transformations when the time comes for it.
This would solve some of the present "chicken & egg" dilemma : wait until the environment is certain (and run the risk of being late after competitors) or invest now (with the risk of EMU never taking place).
Adaptation costs will be once-for-all and will be largely
outweighed by the long-term and durable benefits expected from the change-over.
(Please refer to the report "A strategy for the ecu" published for the
AMUE by Kogan Page, London, and to "one market, one money" published by
the European Commission).
2. The choice between scenarios has important implications for the changes which need to be planned and their costs. The transition leaves the door open to a number of possibilities:
• a "big bang" when the Ecu immediately and completely replaces the national currency and other means of payment. This may be impossible for several years because of the logistical issues associated with the replacement of a huge volume of notes and coins.
• or the Ecu co-exists with national currency in the case of some forms of payment, i.e. a "dual-currency " approach. Such transition requires the duplication of payment processing, accounting, settlement and cash holdings and possibly dual pricing in shops although it provides a gradual familiarisation period. This dual-currency option could significantly raise the cost of converting bank computer systems if compared to "big bang" option;
• variations and combinations of the above, e.g. "big
bang" for inter-bank payments only, while customers may choose which currency
to use. A "big bang" for notes and coins will be very difficult for logistical
reasons so that it is possible to envisage a "scriptural big bang" only;
this means that Ecu-denominated notes and coins co-exist with national
currencies for a period, whereas all other means of payment would be Ecu-denominated.
3. To ensure a smooth, efficient and effective introduction of the single currency it is suggested that:
• a clear scenario is identified and chosen as soon as possible by Public Authorities;
• the necessary legislation is put in place in good time so that all concerned have a common under-standing of the timetable which they must plan and of the indispensable continuity of financial contracts involving interest payment in national currency or in "basket-ecu";
• the characteristics of future coins and bank notes are decided at an early stage; indeed the cost of adaptation of all machines would be reduced if the new specifications could be respected when new machines are manufactured;
• there is close co-operation between the European and national authorities concerned not only with one another, but also with all economic agents in the private sector, such as banks, manufacturers, retailers, consumers, everyone handling large volumes of money such as transport and telephone authorities, and with the executive functions of government such as taxation and Social Security administration;
• consultative bodies are established at European and national level drawing together all public and private parties concerned. The Association for the Monetary Union of Europe welcomes the recent creation of such a task force by the European Commission which is to report by the end 1994;
• a substantial programme of information for the general public and industry at large, properly resourced, is put in place so that the change-over is understood and well-accepted by ordinary citizens. Indeed one may be astonished that so many efforts were made by governments to obtain the signature and then the ratification of the Treaty on European Union, while so little is now being done to explain the advantages of the healthy policies underlying the convergence criteria of the Treaty, or to invite an early preparation to the change-over.
Indeed it is essential that by phase III of EMU, the Ecu is accepted by the population as the stable and good currency, and that the man in the street recognizes the soundness of the intellectual effort to which he will be invited when compelled to divide every price by the Ecu exchange rate. At that time this effort should not be understood as another "Brussels bureaucratic initiative" but rather as a matter of common interest.
Much remains to be done so that the Ecu becomes the single currency of Europe but the validity of the objective has not changed, and if convergence and political will happen to meet the 1997-99 deadline, then the technical preparation should also meet the date.