July 1999 Issue

Speakers Examine Euro's Impact

By Philip J. Luongo Jr.

At the 1999 NYSSCPA Annual Conference, Bernard V. Garra, vice president of foreign exchange and sales for European American Bank (EAB), and Francis T. Nusspickel, of Arthur Andersen LLP, examined the impact of the euro becoming the official currency of 11 European countries.

Garra explained what the euro will mean to the world economy, detailed the timetable for its eventual role as the sole currency for participating countries, and addressed specific issues raised by the single currency.

"It will take another three years from now to achieve a fully integrated market," he said. "With a common monetary policy already in place, Euroland seeks to enhance its competitiveness by maintaining a single money and capital market as well."

He explained that currently companies are neither encouraged nor prohibited from settling wire or draft payments in euro currency. Come January 1, 2002 (dubbed "E day"), however, all wholesale and retail transactions will be made only in euro denominations. The euro will become legal tender as euro banknotes and coins are introduced. Companies will use the euro for invoicing, paying, receiving, and reporting.

After E day, Garra said, price harmonization will be one benefit of the economic and monetary union.

"This means low-cost producers will have the competitive advantage and attention will shift toward better customer service and satisfaction for differentiation," he said. "Other effects will be reduced barriers to entry, redefined market segmentation and distribution, and the rethinking of bank relationships."

Currently, 11 countries are participating in the European Economic and Monetary Union (EMU-11): Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. These countries together are comparable in population and percentage of world trade to the United States. They have a population of approximately 290 million and an 18.9 percent share in world trade while the United States has a population of approximately 267 million and an 18.3 percent share in world trade. Japan, another force in world trade, has a population of 126 million and a 10.3 percent share in world trade.

Garra gave a corporate impact analysis and explained considerations for companies with cross-border
trade relations thinking of early conversion. He later detailed the implications and legal consequences of those trade relations.

He concluded that while there is no historical precedent for this unified currency, it presents both challenges and opportunities. The deeper, more liquid foreign exchange market will provide new opportunities in a more competitive environment.

"The bottom line is that the benefits outweigh the risks," Garra said. "The euro will bring in new markets and make yesterday's impossibilities today's possibilities."

Nusspickel began with a background and history of the EMU and the euro before turning his attention to how the single currency will affect CPAs.

He detailed the tax and accounting issues companies will face with the creation of a single currency, including financial reporting requirements, accounting issues, hedge accounting, tax issues, and SEC rules and regulations.

He also commented on the state of the euro as compared to the dollar.

"The euro is still experiencing weakness against the American dollar," Nusspickel said. "It will not strengthen until the European community addresses some of the more basic issues facing their economy today. These issues include the government budget deficit in Italy and the Kosovar situation, among other things."