May 2001
Euro Conversion Could
Cause Tax and Trade Crisis
An Interview
with Mike Parker of CODA Financial
Question: Why
should U.S. companies be concerned about the euro?
Mike Parker: The stakes
for U.S. companies, especially those with European operations, are huge. Right
now, the United States does about a trillion dollars worth of trade annually with
the countries of the European Monetary Union. That’s twice as much as we trade
with Canada, and three times U.S. trade with Japan. Of the 15 countries in the
European Monetary Union, 12 are adopting the euro. Only Denmark, Sweden, and the
United Kingdom are holding out. The euro will make it easier for U.S. companies
to sell products, source products, and raise capital in Europe, but only if companies
are fully prepared for dealing in euros, which most aren’t.
Q: Countries
adopted the euro in 1999. Why is there suddenly a problem threatening us three
years later?
Parker: After countries adopted the euro, they faced the
enormous logistics problem of eliminating all their coins and bills and replacing
them with the new euro coins and bills. So, even though they legally adopted the
euro as their currency and began using it for many business transactions, they
held off using it for most retail transactions. To get ready for the full conversion
in 2002, the euro countries have begun minting some 50 billion coins and printing
some 14 billion notes. Beginning on January 1, 2002, the legacy currencies such
as the French franc and the German mark will disappear completely.
Q: What’s
the worst-case scenario for a U.S. company doing business in Europe that isn’t
“euro ready” by January 1, 2002?
Parker: The worst case is that the company
won’t be recognized as a going business. Companies with operations in the euro
zone will have to do their bookkeeping in euros. It will be virtually impossible,
not to mention illegal, to do business in the old currencies. In addition, in
some countries, firms that don’t do their accounting in euros will be hit with
stiff tax penalties. Noncompliant companies could even be put out of business.
For an analogy, imagine what would happen if a Malaysian company set up business
in the United States and tried to pay all its bills, including payroll and taxes,
in Malaysian currency? It wouldn’t survive.
Q: How likely is that worst-case
scenario?
Parker: Surprisingly likely for small and mid-size U.S. companies
with operations in Europe. Large multinational companies are mostly ready to deal
in euros, but most small and mid-size companies—even those operating within the
European Monetary Union—don’t recognize that there’s a problem. The level of complacency
is frightening. For instance, a recent survey of such companies in the euro zone
found that just 25 percent claim they are ready to operate in euros and another
25 percent think they can wait until the very last minute to make changes. You
can be sure that the percentages amongst U.S. companies are even worse.
Q:
Why is getting ready for the euro more of a challenge than getting ready to deal
in any other foreign currency?
Parker: The European Commission has set
up rather complicated rules with a lot of arcane details to cover conversions
to the euro. For example, one rule requires conversion rates to contain six significant
figures. They can’t simply be rounded off. A lot of software isn’t designed to
carry six figures. Another problem is that all conversions have to be in euros.
For example, you will no longer be able to convert francs directly into marks.
You’ll have to convert the francs to euros first, and then to marks. Similarly,
if you want to go the other way, it will have to be from marks to euros to francs.
Q: Where could a CFO, controller, or treasurer expect to see problems?
Parker: If you have operations in the euro zone or are doing business
with euro countries, failure to become euro compliant will cause problems throughout
your operations—in marketing, distribution, financial, supply chain, manufacturing,
pricing, marketing analysis, and so on. You will wake up on January 2, 2002, and
discover that all of your bank balances and payments in the euro zone have been
converted to euros. Different countries are offering grace periods in which their
old bills and coins will still be accepted, but most of these grace periods are
for just a few months. You’ll still be able to exchange them at banks for euros
until July 2002, but they won’t be good for commerce. They will no longer be legal
tender. Here are some other practical issues:
Companies will need to
be able to invoice customers in euros from January 1, 2002. If you have an
accounts-payable balance owing to a vendor in marks on December 31, 2001, you
will have to convert it to euros according to the correct rules and pay the vendor
in euros when the account becomes due in 2002. If a customer owes you in
marks on December 31, 2001, you will be paid in euros in 2002. You will need
to convert all your accounts-payable and accounts-receivable open items outstanding
on December 31, 2001, to euros. The conversion will have to be done correctly
according to the rules for conversion, otherwise the cash amounts when received
will not reconcile. For a company that has many customers or vendors, resolving
this issue alone could be a nightmare. Q: Is there any business advantage
to dealing in euros?
Parker: Being able to deal in a single foreign currency,
the euro, is a big advantage for U.S. companies. In fact, some U.S. companies
are already doing it. Dealing in a single currency instead of a dozen different
ones makes it a lot easier to balance accounts at the end of the day. Also, dealing
in a single currency leaves companies less exposed to exchange risks. A single
currency makes sourcing a lot easier. You can compare everything in terms of euros.
In some European countries, U.S. companies have found it very expensive to raise
capital locally for their operations. They got around the problem by raising money
in dollars and changing it into the local currency. Now, they can raise whatever
money they need in euros.
Q : What should companies do to prepare for the
euro?
Parker: First, companies should determine whether or not their software
is euro compliant. If it isn’t, they should evaluate their risks and plan ahead.
Small companies with modest operations in Europe can probably still install new
software in time to meet the deadline. But mid-size or larger companies may struggle
to be ready in time. They should quickly install new software and, at the same
time, develop contingency plans for dealing with compliance problems. This kind
of conversion takes time. Typically, companies spend several months planning the
conversion and then implement it in stages. It is very important that companies
ensure that the financial software they have or that they are proposing to implement
has been audited and accredited as complying with the relevant standards. The
Business and Accounting Software Developers Association (www.basda.com)
maintains a list of vendors whose software has been accredited. It is a relatively
short list with some surprising omissions.
On January 1, 2002, when a dozen
European nations start conducting their business transactions in euros, many North
American companies will discover that they cannot comply with European demands
to transact business and pay taxes in euros. These companies’ European operations
could effectively be shut down. In this interview conducted by New Jersey-based
marketing communications firm Issues, Inc., Mike Parker, COO of CODA Financials
(www.coda.com), explains why the euro is not
just another foreign currency and what companies should do to avoid potential
losses. 
