The Euro is coming! European Monetary Union :
Human resource opportunities and risks
 
Steven Spencer*
 

Background

In a little over 200 days, European Monetary Union will start. In participating countries, governments will begin to redenominate their debts, companies will be able to account, pay taxes and suppliers and be paid in euro, and banks will hold customers’ account balances in euro as well as in their ‘local’ currencies (see implementation timetable in Table 1).

In just four years or so, and possibly sooner, 11 countries, with a combined population of nearly 300 million people (see Table 2), will scrap their existing currencies for ever, and a market roughly the size of the USA will become irrevocably one. There will be one central bank setting a common interest rate, and one monetary policy. With no foreign exchange risks, companies and consumers will be able to shop around the whole region for the best deals.

Of course, there are potential problems. One or two of the countries expected to join in the ‘first wave’ have laboured mightily to achieve the economic convergence criteria that will allow entry (see Table 3), and many believe that the euro may be born as a weak currency, because of the perceived ‘fudging’ of economic statistics to allow the project to happen. The financial markets are notoriously adept at upsetting the best-laid political plans (remember the UK’s ignominious exit from the European exchange rate system in 1992?) and the coming months may well see a battle of wills on a grand scale before the precise exchange rates for union are finally set at the end of this year.

There is no doubt that there are major opportunities for companies and individuals with the appetite to exploit the single market. However, the costs of transition will be substantial, and important decisions have to be made to obtain the benefits and avoid costly mistakes. In the ‘core’ areas of accounting, finance, taxation, information systems, sales and marketing, and law, most companies’ preparations are well advanced.

In the field of human resources, however, many may be unaware of or slow to react to the important issues, with potentially costly consequences. Recent studies have shown that a clear majority of companies operating in Europe are already well advanced in their ‘technical’ preparations in most of the functions listed above. But though many are becoming aware of the sensitivity of some key issues, most have not started to tackle the people implications of the dramatic changes that are about to happen, and only a quarter are treating the coming of the euro as a strategic business issue.

 

What kinds of issues to consider ?

For the HR function, there are broadly three main areas of concern: pay, benefits and conditions of employment; training and communications; and information systems.

Each of these subjects should be analysed in two ways. Firstly, according to urgency and importance. Many of the issues are tactical, for example, when to start paying employees in euros, but need to be dealt with accurately, efficiently and sympathetically. These must be considered as matters of urgency. But there are also overarching issues of strategy and policy, such as how to manage cross-border employment flows, which must be addressed to counter the threats and reap the benefits of the single currency.

Secondly, there should be a clear distinction between issues to be handled regionally, and those to be delegated to a national level. A crucial area will be pay bargaining, where there may be pressure to move away from existing national structures to a pan-European approach. It is worth remembering also, that many of the countries entering in the first wave have somewhat different reasons for doing so, and their citizens accordingly have a variety of cultural and historical perspectives on the subject, which must be taken into account in the communication process.

 

Pay administration

The euro will be unique in being a dual currency for several years. This means that new systems will be required to handle both payroll and other employee-related transactions. Companies will need to decide when to start running their payroll in euros (although, until 2002, employees may will still be able insist on local currency being deposited in their bank accounts - for all of us during this period, the byword is ‘No compulsion, no prohibition’). Salary and benefits statements as well as pay slips may need to be made consistent between countries and stated in dual currency. A particularly important aspect will be countering the psychological effect of impoverishment on employees, as smaller numbers of euros reach their bank accounts than they have been used to receiving in local currency (the euro will be worth more than one unit of local currency in all participating countries except for Ireland).

Since euros will not convert exactly into local currencies, some rounding will be inevitable, and rules have already been laid down to cover this. However, there are other implications that must be considered, including the amendment of employee benefit plans such as share option, profit-sharing and savings plans which extend across national borders and for which all existing arrangements for collecting savings or converting funds will need to be reviewed. As an extreme, the rounding of local currency amounts when converting to euros may result in sums which are outside the limits allowed by some plans.

Cross-charging for expatriates and for the provision of overseas services will have euro implications, and payment of expense reimbursements may well prove to be the first area in which action has to be taken to take account of the euro.

 

Non-pay benefits

There are opportunities and risks for employers in aspects of remuneration other than base pay. Employee benefits may in future be funded via foreign providers - the single market will mean a greater choice for the provision of insured benefits and investment funds, as the impact of EU directives in these market areas also starts to take effect. Profit-sharing will be affected by the way in which subsidiary operations’ profits are defined compared with those of other parts of the company - ease of comparison of profitability across Europe is likely to be taken up by trades unions via European Works Councils.

Pension funding is a key area for consideration. Successful economic union is expected to put downward pressure on interest rates which could lead to increased funding costs. Although not on the agenda in the short term, the eventual convergence of national taxation policies will mean that the traditional approach to portfolio diversification by investing in a range of economies will become less effective as the European economy becomes more homogeneous.

 

Expatriate pay

The single currency presents considerable challenges and threats in the area of cross-border employee mobility. Firstly, for expatriate pay administration, the single largest variable in host country pay delivery - exchange rate fluctuations - will disappear. Cost of living differentials may in fact become virtually constant over the life of a typical three-year assignment, as rates of inflation within the common currency area become tightly banded. It should therefore be possible to simplify the application of home country balance sheet pay management, either by ignoring COLA completely, or by making lump sum or fixed allowance payments instead.

It may well make sense to go further and adopt either a host country pay policy or even create a single regional pay system for intra-European assignments. A common currency will help greatly in making such arrangements more transparent to users, and a common pay structure, at either the gross or net pay level, is now a tantalising possibility.

However, it is worth bearing in mind that many important factors are not changing. Taxes and social security charges will not converge in the near future. Even though the finance ministers of the EU reached an accord last November to dismantle ‘unfair competition’ in the taxation of expatriates, this looks unlikely to happen within the next five years, and there will continue to be regional differences in prices of housing, consumer goods and services etc.

Thus, even with a single ‘regional’ pay structure, there will be large differences in the take-home value and purchasing power of equivalent salaries in different countries. In fact, the problems will be exacerbated by the ease with which participants will be able to compare the relative value of their net pay. But for companies wishing to achieve greater homogeneity and mobility within their workforce, the euro is on balance a major plus.

Cost-modelling of expatriate versus local employment costs will also be greatly assisted and it will profit companies to introduce stricter rules for justifying expatriate moves to ensure labour mobility is used to best effect.

 

Pay harmonisation for local employees

From 1999 there will be increasingly greater transparency of pay and benefit values between employees in different countries. Many companies will be required to adopt dual-currency payslips during the interim period between their adopting the euro and its exclusive use in 2002.

It will become simple for employees in each country to compare their terms and conditions to those of their European counterparts (notwithstanding the complexities of different tax and social security systems). Unions have made clear their intention to seek trans-national bargaining and have already established Europe-wide bodies. No country will be immune from these developments and it is widely expected that multinational companies will be under pressure to harmonise terms and conditions between their employees in different countries as a result of the new transparency together with cross-border union activities.

The outcome of this could be :

Greater comparability of cross-border pay may also tempt more workers at all levels to seek opportunities in neighbouring economies. Where distances are commutable on a daily basis (for example, Antwerp/Rotterdam or Dusseldorf/Eindhoven), or even where a worker can leave his/her family at home and return each weekend, the increasing certainty of the value of one country’s pay package in another could increase the catchment areas for labour considerably.

Thus there will be an increasingly complex set of dynamics governing pay, such as the smoothing of pay levels across traditional borders, whilst perhaps emphasising regional differentials within national boundaries, which will directly impact employment policy setting, and which will, for example, make good quality data about market pay levels even more important.

Companies’ senior managers will also welcome the ability to compare labour costs between regions with certainty, when making key decisions on siting or relocating company operations.

 

Contractual issues

All contracts, including those with employees, suppliers and customers, will continue in principle to be valid, with any local currency monetary amounts specified being deemed to be replaced by the equivalent number of euros at the finally agreed conversion rates. However, all contracts should be reviewed for their detailed implications, and, in particular, to address situations where exchange rates other than those that will be implemented are implied or explicitly provided for. Contracts between the euro-zone and non-participating countries will continue to need to specify the exchange rates to be used. In addition, amounts which in local currencies are round figures may need to be expressed in equivalently rounded amounts of euros.

It is likely that all employee contracts and related material such as employee handbooks will need to be reviewed.

 

Information systems

Obviously, payrolls will need to be updated to reflect the need to work in dual currencies for a certain period. In addition, however, most HR information systems are quite extensive users of currency information, and are particularly complicated because of the amount of historical information held. Although employment histories should not be ‘re-written’, the need to be able to analyse trends (such as the cost impact of the advent of the euro itself) means that a free conversion against historical data in local currencies is an important need.

 

Customer service

Companies will need to be able to handle all their customers’ concerns about the euro. Employees dealing directly with customers will be at the forefront of the ‘need to know’, and will need the support of a well-prepared billing and customer information strategy to cope with the currency change.

Other short-term implications for customers include :

 

Employee training and communication

The implications for customers are mirrored by implications for employee training. Any employees who deal with customers need familiarisation, and also those dealing with suppliers, subcontractors, governmental agencies etc. It may be desirable to extend availability of the training to the company’s own subcontractors and suppliers in order to ensure an orderly supply chain.

Early activities may include an identification of needs, an assessment of the internal capability of the company to provide training and a plan for involving employees in the design of the training. Almost certainly, any training will need to be tailored to the application.

At the very least, every company should plan for a communication exercise aimed at all employees who may encounter the euro (likely to be a large proportion of the workforce) covering: - what is happening, what is and is not changing, employees’ rights and their obligations. It should not be forgotten either that those same employees are also customers and will need to be communicated to in that vein.

The euro will impact on virtually every aspect of a company’s operations. Because of this, it is likely that, without good coordination, the flow of information to employees (and customers) will be irregular, unstructured and unintelligible, and therefore ineffective in meeting its objective. The HR function must take a central role in planning and executing the euro-information campaign.

 

Cultural issues

The launch of the euro on 1 January 1999 will in effect divide Europe into two camps, the "in’s" and the "out’s". Any company with employees across that divide will need to anticipate the implications for one-company messages. At the same time, there is likely to be a rising pressure for harmonisation of HR practices across the board, not just pay. The EU Social Chapter already implies this, but the growing political will to ensure that monetary union is a success implies that employers will encounter greater and greater pressure to conform to a "European" model rather than an "Anglo-Saxon" model of management. Despite the efforts of the UK government, it seems likely that the French/German approach to employment terms and conditions, reward and the employee-employer relationship will continue to make the running for the future development of the EU.

 

Why is the euro so urgent ?

 

 

30-04-1998

 

Annex
Table 1

Timetable for Implementing The euro In First Wave Participating Countries

March 1998 Publication of eligible countries’ economic indicators for 1997
 
2&3 May 1998 European Prime Ministers decide first wave participating countries and indicative exchange rates

1 January 1999 Exchange rates irrevocably fixed; participating countries free to use the euro and/or national currencies for non-cash transactions

1 January 2002 euro notes and coins introduced; used alongside national (at the latest) currencies during changeover period

1 July 2002 National currencies no longer legal tender and disappear; all (at the latest) future transactions, value storage and recordkeeping in euro

 

 

  * Director HR Consulting. Department Tax Consultants, Ernst & Young Brussels steve.spencer@EY.be


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