One of the most important aspects of the introduction of the euro is when companies will adopt it as their internal accounting currency. A large number of companies operating on the domestic market will keep the markka as their basic currency right up to the end of the transition period. But many companies, and especially large companies operating internationally, changed their accounting, management accounting and budgeting to euro already at the beginning of 1999.

The results of a survey carried out in April this year support these conclusions. About one fifth of all Finnish businesses will do their accounting in euro this year. The responses are weighted by company net sales (see the table).

Table : In which year do you expect to start mainly using the euro in the following operations?

Source: Confederation of Finnish Industry and Employers, 1999.

Over 40 percent of industry will do their accounting in euros in 1999. Among service sector companies, however, the euro will generally be adopted as the "home currency" only at the end of the transition period. Only 7 percent of the companies in this sector will adopt the euro as their accounting currency this year.

As a general rule, the euro has been adopted as the basic accounting currency at the beginning of the transition period only in big companies. According to the results of the survey, only 10 percent of companies employing fewer than 50 persons are changing their accounting to euro.

Even in the service sector, large companies are more active with regard to the euro, as more than 40 percent of service sector companies employing over 500 persons are adopting the euro as their main accounting currency, but the weighting of these companies is relatively small.

The euro has therefore achieved a relatively strong position in Finnish companies from the very beginning. This has been partly influenced by the good euro readiness of the authorities. The timely decisions of the public administration have given a clear framework for the preparations of companies, and have also increased the credibility of the EMU and its popularity among companies. Finland’s national transition plan was published in April 1997. According to this plan, all important parts of the public administration were to be ready to receive euro-denominated reports from the beginning of the transition period. This applied to the tax administration, the customs, Statistics Finland, the Ministry of Trade and Industry, special State credit institutions, the Trade Register and the offices and departments under the Ministry of Transport and Communications.

The tax administration, for example, accepted all euro-denominated reports and notifications right from the beginning of the transition period. With regard to the supervisory notifications related to VAT, information related to company income taxation, and tax declarations, companies have been able to report in either markkas or euros from the beginning of the year. The appendices to the tax declaration should be in the same currency units as the main tax declaration.

Companies can pay their taxes in either markkas or euro. The banks make the necessary conversions of currency units to the markka-denominated accounts used by the tax administration. If the customer has agreed to have his bank statements denominated in euro, then tax returns, for example, will be shown in the account as euro.

The results of the survey give some reason for concern, however, as it is apparent that the majority of small and medium-sized enterprises (SME’s) intend to change their systems into euros only at the beginning of 2002. This will be a problem because companies may not be able to get consultative help from information technology companies in order to change their systems, because the majority of companies will all be doing the same thing.

This becomes apparent when the results of the survey are examined by numbers of companies, and it is seen that about 60 percent of companies have no intention of changing their systems into euros before the year 2002. In particular, this will be the problem with SME’s which are big enough to have complex information systems, but too small to have their own information technology personnel.

In other EMU countries the situation is still worse. A survey done by Dun & Bradstreet in April shows that Finnish companies have actually adopted the euro more rapidly than elsewhere. Only in Finland and Belgium has company eagerness to adopt the euro in their accounting systems increased in practice since last autumn.

In other euro countries, the willingness for euro-based accounting has come to an abrupt halt. There is good reason to expect, therefore, that there will be big bottlenecks in ADP services at the end of the transition period in some countries. The output data in D&B’s surveys in September 1998 and April 1999 is weighted to reflect the national distribution of businesses (see the figure).

On the other hand, even those companies which change their internal accounting into euros in good time will not get by without problems. In practice, nearly all Finnish companies keep their payroll administration in markkas, even though in other respects they have changed their accounting to euro (see the table) .

This is due to wage and salary earners wanting information about their pay, (their pay-slips), in markkas for the tax man, for example. If the basic currency of payroll administration were the euro, the majority of this information would have to be changed back into markkas.

In practice this means that companies have to rely on their internal temporary conversion systems between the markka and the euro. This problem shows very concretely that a three-year transition period is too long for companies.

The possibility must be created between payroll administration and other financial administration in companies to convert the currency unit in the following situations.

1. Wage and salary lists, travel invoices, receipts related to the specification and payment of fringe benefits and other receipts prepared for the use of accounting in payroll administration should be convertible from markkas into euro.
2. If a company invoices its jobs in euro during the transition period, then the markka information produced by payroll administration must be convertible into euro.
3. In preparing bid requests, too, companies may need payroll information which should be convertible into euro, if necessary.

Although the markka will generally be the basic unit of payroll administration accounting, usually for the whole transition period, the central associations of the Finnish labour market agreed in November, 1998 on the ground rules for payroll administration in the event of the introduction of the euro. The agreement included the following:

• Recommended that unions should agree on euro-denominated pay tariffs before the beginning of 1999
• Recommended that the authorities should use euro in informing decisions that are relevant to the payment of wages and salaries.
• Recommended that companies should report to the authorities in euro.
• Recommended that companies operating in markkas should announce net wages and salaries in euro.
• Stated that companies that have adopted the euro as their basic payroll currency must also inform the sum to be paid in markkas
• Recommended that companies that have adopted the euro as their basic payroll currency should supply the taxation information needed by wage and salary earners in markkas.

Finland’s metal and engineering industry became the first industrial sector to make an agreement based on the recommendations of the central associations at the end of 1998.

The eagerness to introduce the euro is also reflected in the fact that very many Finnish companies are widely adopting the euro as their main invoicing currency this year. In industry, the use of the euro in invoicing is very general. About one half of all companies are already mainly using the euro in purchasing and sales in 1999 (see the table).

For example, in the sawmilling industry, the position of the krona as an invoicing currency has begun to wane rapidly. Birch pulp which was previously priced in Ecus is now of course in euro. The use of the euro in softwood pulp has also begun to become important, as the role of the dollar has diminishes.

In practice, many companies which still keep the markka as their main invoicing currency are able to operate in euro in business-to-business activities. If the number of transactions is reasonable, the invoices can be converted from markkas to euro by pocket calculator, for example.

In addition, the banks have made use of the euro fairly simple. Companies and individuals can decide at any time in the transition period when they will start using the euro in their payments. The introduction of the euro can take place at one time through the payments service, for example, as a company’s own transfer to the euro advances. The introduction of the euro in payments does not require a separate agreement to be made with the bank.

Companies or individuals can also change payment accounts into euro during the transition period. In this case, all information affecting the account will be sent to the customer in euro. This is well-justified, especially after a company’s accounting has been changed into euro. The conversion of an account into euro during the transition period happens by making an agreement with the bank. The account agreement and its terms and conditions will remain the same.

In the service sector, the use of the euro in invoicing is considerably less common. This is understandable since these companies generally work only in the home country serving "markka customers". However, double pricing has become quite common in retail trading in Finland during the spring. It is estimated that, in one third of Finland’s grocery stores, double pricing of products is widespread.

Retail stores have voluntarily begun to double price their goods and to educate their customers in the use of the euro. Therefore, it is extremely unlikely that there will be any need for tight regulation during the transition period.

In spring 1999, Finland’s retail goods stores began to make wide use of the euro sticker. 115,000 stickers were printed and the idea is to spread them throughout the 30,000 sales outlets during the transition period.

Each store gives its promise, through the sticker, that it will use the official rate when converting markkas into euro. The store staff have been trained to answer customers’ questions about euro or at least to give written information. The stores with the stickers also promise to always double price their goods in posters that advertise special offers, in discount coupons, the final sums of cash registers and in prices displayed in windows.

The introduction of the euro in the transition period and the many technical questions related to it are significant. Even more important, from the standpoint of industry, is to estimate how the EMU affects the competitive position of industry in the long term.

The benefits of EMU resulting from the simplification of foreign trade and the stabilisation of interest rates are indisputable, and there is no reason to stress them here. However, especially for Finnish companies, the euro highlights certain risks.

The main risk factor of the EMU relates to the repetition of inflation and devaluation in the Finnish economy. The question is how can an economy get rid of this model which in the context of EMU would lead to an unbearable situation.

Statistics show indisputably that since the sixties, labour costs have risen in Finland nearly without exception more rapidly than in competitor countries. The cat and mouse chase between pay and prices raised the cost level, led to export difficulties and a deficit in the balance of payments. Finland became used to correcting the situation by weakening the external value of the markka (devaluation).

The situation is best shown by the fact that in the 1960’s one German mark was less than one Finnish markka. Now the German mark is worth over three Finnish markkas. If we had had a common currency with Germany over the last forty years, our inflation behaviour should have been decisively different.

We can take hope from the fact that wage and salary increases have been moderate in recent years. Moreover, the central associations of the labour unions agreed in a joint communique in 1998 that inflation would be kept low by means of the present collective bargaining system.

Another problem concerns cyclical changes, which have been very volatile and somewhat out of step with the changes in other EU countries. This was affected mostly by the bilateral trade with the Soviet Union which was responsible for about one fifth of Finland’s exports. In addition, the cycle-sensitive forest industry held a large share of Finland’s exports. It has also been estimated that attempts to stabilise economic development with active foreign exchange policies also played a role in aggravating cyclical changes.

The above mentioned factors do not depict the current situation in Finland, so that there is good reason to suppose that cyclical variations will not deviate from the EU norms as much as before. nevertheless, this risk should not be underestimated. The dependency of the Finnish economy on the EU countries is smaller than average. The share of EU trade in the GDP was only 35 percent in 1997, which is clearly less than in other small countries, with the exception of Greece.

In order that problems can be managed, it should be possible to adapt wages, salaries and other labour costs to variations in the business cycle. This pre-supposes that wages and salaries will be increasingly determined on a company or workplace basis. In fact, many Finnish companies intend to increasingly apply profit-related pay methods.

About 50 percent of industrial employees are currently paid profit bonuses. In magnitude, this is on average about 5 percent of annual earnings. In many cases, however, the application of profit bonuses is difficult due to the strictly binding nature of the collective wage and salary agreements and also because sector-specific minimum wage and salary levels are often set in practice at the extreme edge of companies’ ability to pay.

Indeed, the aim is to make the system more flexible by applying the so-called local agreement model. The making of a local agreement means that it is possible to deviate from the provisions of collective agreements if a matter is agreed upon locally. If no agreement is made, then the current collective agreement will be applied. The idea is thus to offer a local "opt-out" possibility with the unanimous decision of both parties.

The local agreement model is nothing new in itself. It was created and brought into use in the 1993-94 round of agreements. The option of making local agreements that deviated from the norm in terms of working hours and holiday pay was written into many collective wage and salary agreements. In the Finnish metal and engineering sector, the local agreement model can also be experimentally applied to wages and salaries.

The spread of local agreements into the wages and salaries field requires no legislative change. It is a question of the willingness of labour organisations to simply write into the annually negotiated collective agreements a provision giving wider scope for the local agreement option. In addition, the spread of local agreements requires more measures in companies to increase the mutual trust between company management and other employees.

06-06-1999