Fiat groupís approach toward the Single Currency
Over the past decade, as active members of the AMUE - Association for the Monetary Union of Europe - we have often been invited to express our opinion on the subject of the Single Currency. On such occasions - up until the Madrid Summit of December 1995 - we were compelled to speak about the ECU and, despite our willingness to use this currency, we had to point out its limits.
These limits, originated from the uncertainty of the general picture and the ignorance of the general public, this ignorance being determined also, but not only, by the lack of tangibility of the currency. Therefore we can now feel a certain satisfaction when speaking about the EURO: a currency thatís progressively taking shape in an institutional context that is now substantially defined.
At this point the process leading to the introduction of the Single Currency is irreversible even if uncertainties exist as to which States will join the EMU and when. This considered, Companies - but not only Companies, also entities such as Banks and Public Administrations - will have to prepare themselves adequately in order to assure a smooth passage to the Single Currency. This implies the need for real investments with immediate costs, that will however be counterbalanced - in our opinion - by a large amount of benefits arising from the use of the EURO in the managing of Companies.
A Task Force
Fiat Group has, over the last few months, set up a specific Task Force in order to tackle this problem. This T.F. included representatives from different managerial Areas such as: Finance, Administration, Fiscal, Legal, Information Systems. The T.F. has obviously had to consider two important factors.
- The first concerns the Calendar defined at the Madrid Summit:
- The second important factor which we have had to consider relates to the industrial and organizational structure of the Fiat Group which is based in Italy (likely "in" during the Transitional Period), but which also has companies in France and Germany too (likely "ins" at the beginning of the same Period), and in Great Britain (likely "out" by choice), not forgetting world-wide commercial and financial relationships.
Besides Fiatís Task Force has assumed that January 1st 1999 will be the beginning of the Transitional Period (Phase B) and that in the same period countries where Fiatís companies are based could join the EMU.
Incidentally we consider Phase B the most complicated for companies because the coexistence of the two currencies will cause double the work in the accounting and in the administration areas and will cause problems in the commercial management.
The choice of the currency during the transitional period
Starting from these assumptions Fiatís T.F. has given itself as a target the aim to suggest ways to approach the choice, between the national currency and the EURO. Fiatís Companies will have to make this choice while their country is joining the EMU at the beginning or during the Transitional Period.In addition, in compliance with this choice, the T.F. must think up a system to help businesses run in the best way up to December 31st 2001. This proposed system, after a few adaptations, will be that used permanently when the EURO is the Single Currency. In order to reach its targets Fiatís T.F. has carried out a survey on the firmís activities affected by the factor "currency", such as: the invoicing (towards third parties and among Fiat Companies), the accounting and the Balance sheet, the direct and the indirect taxation, the stock capital and the sharesí nominal value, the collective agreements and the payment of wages and salaries.
Three different kinds of currencies: the national currency, European currencies and non European currencies are at present involved in these activities which are performed by each and every European Fiat company ;
- firstly, there is the national currency, used in the domestic invoicing and for the relevant proceeds and payments and also for keeping the accounts and writing the Balance sheet, paying the taxes and, obviously, salaries and wages ;
- secondly there are the European Currencies used for invoicing - and relevant proceeds and payments -the trade among European Countries ;
- finally there are the non European currencies (chiefly the US Dollar and the Yen) utilized for trade with non European countries.
In all a range of about 20 currencies.
As previously mentioned we are particularly focusing our attention on the Transitional Period. As a matter of fact whether a country becomes "in" in that Phase - that is between January 1st 1999 and December 31st 2001 - the national companies must choose between staying with the national currency or adopting the EURO. Furthermore this choice must be made in a peculiar context where the actors (the general public, companies, Public Administrations, ..), although of the same country, could speak different languages as regards the currency.
So we have been considering whether or not for our Companies based in countries "in" during the Transitional Period it will be possible and indeed suitable to adopt "tout court" the EURO as the account currency, or continue working with the national currency.
Considering that at that moment the national currency will be bound to the EURO by means of a fixed and irrevocable exchange rate and that the majority of the deals are settled through the banks, we have concluded that the EURO could be the account currency for our companies. However this decision in favour of the EURO depends on several factors, both inside and outside the companies, that represent the "conditio sine qua non" for such a choice.
To this subject weíll come back later, while now we would like to explain that the choice of the EURO would mean, above all the invoicing of domestic deals in EURO - or, more correctly, "EURO equal to Italian Lire ...." or "EURO equal to other national currency ...." - in order to avoid any problems for our customers that, on the contrary, will continue to work with the national currency.
At the same time Fiat Group is going to ask its suppliers to be invoiced in EURO or in "EURO equal Italian Lire" or an other national currency. On this subject itís obvious that all companies - medium and small ones included - must carry out the investments connected to the "Single Currency", in order to avoid lack of preparation.
The Task Forceís conclusions
Going back to our, Fiat Group has decided to use the EURO for the "intercompany" transactions, chiefly among the "in" countries, in this way making the "netting" system we now already use even easier Likewise the EURO could be progressively used for the trade with countries outside Europe - in place of the US Dollar, for instance - provided that it is well enough known, and then agreed by our counterparts. In any case the EURO could be the reference currency - with "Italian Lire ... equal to EURO ..." - even when it may be necessary to continue using the national currency, for such things as the payment of salaries and wages and, perhaps, of the taxes.
This comprehensive use of the EURO should produce in our companies the "critical mass" in order to keep the accounts directly in the same currency (avoiding parallel accounting) and in order to draw up the Balance Sheet in EURO too. This is also true as regards the Consolidated Balance Sheet, now written in Italian Lire with conversion in ECU.
Obviously the choice of the EURO must be absolutely "neutral", as regards the charges to companies, with respect to the dealing in the national currency. Therefore this choice takes for granted that the above mentioned problems will already have been solved.
The first type of problem relates to the need for clear rules concerning the legal status of the EURO not just in Europe but worldwide. More precisely from 2002 these rules must guarantee the continuity and enforcement of trade and financial contracts drawn up in the "old" national currencies. Going back to the national situation, we would like to highlight an Italian example where, at present, the Civil Code doesnít allow accounts to be kept and companyís capital to be expressed in any other currency except the lira.
Similar problems also exist in other countries. Considering as always all the countries involved, the relevant Revenue Authorities should be ready to accept tax returns and payments in EURO from the moment they join the EMU. All these problems must obviously be tackled and solved by each country involved in the changeover under the strict control of Bruxelles that will guarantee a uniform and harmonious approach.
This control should take into account the delicate matter of the conversion into EURO of the Balance Sheets drawn up in national currency at the original value. Here abnormal appreciation could occur above all in the countries characterized by high rates of inflation. Therefore it is indispensable that the National Administrations work together in order to allow a neutral fiscal conversion also by means of specific legislations.
A constant dialogue and a specific legislation
We advise a constant dialogue between industries, national Governments and the European Authorities. Particularly important in this context is the contribution by Confindustria and UNICE. As far as Italy is concerned the creation of the "Coordination Committee" in the Treasury Department has been of utmost importance in order to guarantee a smooth passage toward the Single Currency. If the Governments and Public Administrations must resolve the institutional problems, industry must sort out the technical and organizational side of things also by means of a specific training program for employees.
The use of the EURO from the beginning of the Transitional Period will be heavily conditioned by the fact that all informatic systems will have to be updated. This need unfortunately will coincide with the coming of the new Century which itself will call for a new dating system.
Among the factors that will determine the feasibility of the adoption of the EURO in the Transitional Period we have not mentioned the Banking system because we are sure that, when necessary, it will be equiped with the instruments in order to assure a complete and successful use of the EURO. And the above, taking into account the difficulties the Banks will have in resolving problems and the large investments required for the transition.
In any case, the present uncertainties concerning "when" our country will join the Monetary Union must not constitute an alibi for "no action" in the sense that this could be extremely dangerous and damaging.