Banking on the euro.

• Author: Shephard, Simon
• Position: Impact of European monetary union on foreign companies - Includes related articles on Siemens Corp and schedule of conversion

Given any thought to the euro yet? It may be time to start considering the impact of the conversion on your banking and cash management activities.

In the past few years, much debate has centered on which European countries will become part of the European Monetary Union and whether the euro will be launched on time. But a recent survey found 80 percent of European financial and economic officials believe the EMU and euro will begin on schedule, on January 1, 1999, and this growing confidence is evident in the accelerating pace at which banks and larger multinationals are making preparations.

If your company has European operations or investments, the conversion to the euro will surely have some impact on your banking activities. Because the European governments are still formulating their policies, many banks have not finalized the services they will offer customers to enable them to take advantage of the euro. But clearly, the switch will not only reduce the need for hedging but also eliminate currency spreads in transferring excess liquidity from one European currency to another, reduce treasury settlements by 15 percent to 20 percent and decrease foreign-exchange transfer fees. Banks may continue to charge fees for international transactions even if they are in euros - for example, when transferring euros from Spain to Germany. But these costs may shrink as banks develop more efficient international payment systems.

Centralized liquidity is likely to be another important benefit of the euro, allowing a company to consolidate cash positions in different countries into a single net cash position. This will bring numerous other opportunities: reduced funding costs, improved investment returns and greater efficiencies for cross-border manufacturing and sales, especially in areas such as invoicing customers, receivables matching, credit control and paying employees and suppliers.

Also, centralized liquidity will eliminate the expense of an inflated treasury float and of monitoring national currency balances by allowing for an immediate set-off of debits and credits. In fact, when banks begin electronically consolidating transactions into a single net cash position in euros, they will be performing essentially the same function as netting centers.

VIVE LA DIFFERENCE?

Unfortunately, the euro will not match the dollar in ease of settlement. In the United States, of course, banks settle with one another using an automated clearing house system...