Euro and its Implications on Industry Ravi Ramu KPMG Bangalore

1. Euro and its Implications on IndustryRavi RamuKPMGBangalore

2. 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 ?

3. The Timetable for Euro Implementation • Dual legal tender period • National bank notes remain legal tender • No compulsion / no prohibition principle Phase A Phase B Phase C 1997 1998 1999 2000 2001 2002 • ECB established • Participating states identified Six months later Withdrawal of national notes and coins • 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

4. 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

5. 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

6. 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

7. Europe and India • European Union: 15 member states and 367.8 million citizens • In 1997, Europe accounted for: • 22.7% of India’s exports; and • 21.3% of India’s imports • India’s largest market • India’s largest trading partner

8. India’s Exports to European Union Category Items of Exports Dominant Textiles, Leather and Pearls Promising Chemicals, Footwear, Machinery, Minerals, Animal and Vegetable Products, Software Explorable Plastics, Articles of Stone and Opticals

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. The Need to Prepare • Areas of Attention • Financial • Operational • Technological • Legal • Fiscal

18. 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

19. 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

20. KPMG-Harris National Research, July 1998 • 77% 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

21. 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

22. Euro on the Internet • http://www.eubusiness.com • http://www.europa.com • http://www.euro.gov.uk • http://www.kpmg.com