Market in Europe
In this report, I will be addressing the implications of the European monetary union and the problems Zeus will have in developing their market in Europe. The UK and EMU When the UK decided not to join the European monetary union (EMU) in 1999, it affected UK businesses, especially those who trade within the EU. Does it matter whether sterling is in or out? For many UK Businesses, trading within the EU has become more competitive. After the introduction of the Euro, an Italian company for example, competing for a German companies business could cut 3% of costs due to their common currency, making it harder for UK business to compete.
Currently UK businesses are paying i?? 3bn per year in exchange rates, which hit small firms like Zeus the hardest. Advantages By joining the single currency, British businesses will benefit from a fixed exchange rate allowing businesses to plan and budget for future activities more accurately. Fixed exchange rates will deliver stability and increase confidence that will lead to more investment and jobs. By staying out of the Euro Britain will be at a disadvantage to competitors in the Eurozone who already trade with each other using the same currency.
The development of free trade has contributed enormously to the economic prosperity across the EU, with the strong position of the wealthier nations and helping to bring the poorer nations more stability and economic success. The introduction of a single currency removes one of the final barriers to free trade i. e. the transaction costs and the uncertainty involved in currency conversion. The removal of national currencies will encourage cross-border investment since the traditional reluctance of many investors to move their money into a currency other than their own will no longer be a factor.
Businesses across the Eurozone will therefore be able to attract more investors from other Eurozone countries, and investment will be based on the competitiveness of a business rather than its nationality. This will increase the pressure on uncompetitive businesses to improve their efficiency. An increase in cross-border mergers and acquisitions will also lead to more streamlined and efficient businesses across the Eurozone. Disadvantages Most of Britain’ international trade is carried out in US dollars, a currency against which the pound has enjoyed far more stability than has the Euro.
The fact that the pound has risen so much against the Euro since the Euro’s launch is a sign of the Euro’s weakness. Changeover to the Euro would be endured by all businesses in the UK, whether or not they trade with Eurozone countries. Most British companies, sell to local markets. These firms would still incur the costs of conversion and not see any benefit from the removal of currency transaction costs. While there would be a saving from the absence of currency transactions for exporters, these would be offset by the costs of the changeover.
There have been fears that inward investment in British based industry would suffer as a result of staying out of the Euro, the reality has been very different. In 2001 the Office of National Statistics reported that inward investment in Britain for the 2000/2001 financial year was i?? 341 billion, an increase of 36% over the previous year. The theory that a single currency will lead to the harmonisation and lowering of prices across Europe seems hard to support.
Regional differences in prices are a result of differences in levels of taxation as well as variations in labour, property and transportation costs. The cost of living in different parts of the UK varies considerably, even though all regions share the same currency. Less scrupulous retailers would use the introduction of the Euro to round-up prices, just as they did during decimalization 30 years ago. How This Effects Zeus Being part of the EMU will benefit a small company like Zeus, (see advantages above) however, there are some other factors that Zeus need to be aware of.
Promotion and packaging will also have to change. The language and content on the wrapping and will have to that of the country it is being sold in. Health and safety requirements of products would have to meet one standard rather then having to adapt products for different countries, however since Zeus currently trade mainly in the USA they would need to adapt their product to EU standards in order to trade within the community, which might be costly but beneficial. Cost of the Benefit If the UK were to join the EMU, cost increases and reductions will occur.
Change of Equipment The costs for UK businesses of abolishing the pound and substituting the euro would be massive – notes and coins would need to be replaced, along with cash registers, cash dispensing machines, accounting systems etc. The retail sector would have to undergo a complete renovation of cash systems. The costs of this changeover would affect all businesses in the UK, whether or not they trade with Europe and whether or not they will benefit. Consumers and businesses would have to pay for these costs through higher prices and taxes.
It would take years before the trivial day-to-day savings on European transactions outweighed the costs of the changeover. More Competitive Markets The Euro ensures companies will face a more integrated European market. Cross-border trade and investment will be stimulated and competition strengthened in many markets. Businesses who see foreign exchange risk and transaction costs as barriers to cross-border trade are likely to move into new markets once these ‘barriers’ are removed. New business start-ups may also be encouraged.
Transparent Price Differences It will be possible to directly compare prices for the same goods and services in different EU countries and spot the best prices. Despite the SEM, price disparities persist as a result of differential pricing policies, tax rates, transportation costs, national market structures, and perceived product values. The ability for consumers to compare prices will move prices towards the lowest market level and businesses will find it hard to maintain pricing policies by country and currency.
Treasury and Finance For many European businesses the Euro will present opportunities for long-term savings altering balance sheets, cash flow management, currency management, and corporate finance. Businesses with units operating in different currencies will be able to record and compare all accounting values, margins, costs, expenditures etc. in one currency. Such transparency may greatly assist in processes of internal planning, accounting, and benchmarking. Foreign Exchange Eurozone firms avoid the risk of exchange rate changes.
Exchange rate movements don’t impose a penalty but volatility in exchange markets and the unpredictability of rates can be costly. Many firms have opted to hedge exchange risks for long-dated transactions or included a margin in their prices to cover exchange rate movements. Under the single-currency, foreign exchange transaction costs are eliminated on internal dealings with benefits as much as 8% on the total price of industrial goods. Wage Transparency Employees will find it easier to calculate and compare wages between workers in different countries within the same company.
Transparency of wages will bring salary convergence closer to reality and increase labour mobility. Variations in salary and remuneration exist today and workers always ask ‘why are they paid that much over there when I’m paid this much here? ‘, firms can usually demonstrate difference in taxation, benefits, purchasing power etc. by country and currency. Organisations need to consider how to set fair and competitive remuneration packages in a Euro-denominated environment.
Lower Borrowing Costs
It’s axiomatic with a single currency and single central bank that there will be a single interest rate. Banks will lend in Euros and enterprises will be able to borrow from outside their countries without incurring the risk of exchange rates, reducing borrowings costs. Cost savings may be greatest in countries where Euro interest rates fall below previous rates. The introduction of the Euro should favour the development of new financing methods. Overall, firms should have more choice and flexibility in raising finance and, in many cases, will face lower costs.