The Euro Essay Research Paper To the — страница 2

monetary policy to the European Central Bank Watson, 1997:53-60).The euro is being introduced in three phases. Phase A creates the economic and monetary union of the member nations and establishes the European Central Bank. Phase B began January 1, 1999 and ends December 31, 2001. This stage launches the euro and transfers all responsibility for member monetary policy to the European Central Bank (European Commission, 1997a). On January 1, 1999, fixed exchange rates (Table 1) were released and use of the euro began for electronic transactions. However, euro notes and coins will not be released to the public until January 2002 (Kelly, 1999). Phase C begins January 1, 2002 and during this time all national currencies must be converted to the euro and euro bank notes and coins will

be put into circulation (European Commission, 1997a). Pros and Cons of the EuroOne of the biggest advantages for member nations is the elimination of exchange rate risk. Businesses today face these risks whenever they become involved in transactions using a foreign currency whether exporting, importing or investing overseas. Though hedging techniques have been used to reduce this risk, it is estimated that the cost to small firms may be as high as two percent of their sales and purchases. Businesses in euro countries will no longer face conversion charges when conducting business in other euro countries. This, coupled with the removal of exchange rate risk, may give such firms a competitive advantage. The conversion to the euro is also expected to improve social stability,

increase foreign investment because of a stronger international recognition, create price transparency and make exporting among member nations easier.Some of the member nations have been concerned, though, about losing their autonomy and the additional costs during the transition period. Smaller companies may not be able to make the decision of when to convert to the euro as the larger companies they do business with will probably dominate (Y2K, 1998).Effects of the Euro During phase B, there will be a no compulsion / no prohibition rule that is the euro may be adopted voluntarily during this time, but it is not mandatory to do so. However, by July 1, 2002 all transactions will be exclusively in euros. Determining when to change over during the transition period will depend on

the filing requirements of each member nation. Currently, three groupings can be identified: In the total euro option, companies will use the euro for in-house accounts and financial reporting. In the partial euro option, companies in-house accounts will remain in their national currency and their financial reporting will be in the euro.  In the national currency option, companies will maintain their in-house accounts and financial reporting in the national currency up until the introduction of euro notes and coins (European Commission, 1997a). Accounting Systems During the transition period, phase B, companies will have to decide whether they plan to convert immediately to the euro or continue operating in their national currency and run a dual system for conversions

(KPMG, 1997b). Government studies have indicated that European businesses are expected to transfer accounting records to euros as soon as they are financially and technically able. Many businesses have said that they will make all accounting changes related to the euro at the beginning of 1999 because it will result in greater price transparency to clients and investors. They will also be able to avoid dealing with conversion to euro systems and expected computer problems at the start of the new millennium simultaneously. Other business owners claimed that they saw an advantage to dealing with conversion to euro systems immediately, but they were still in the process of finding funds to finance the large computer system changes that were considered to be necessary (OECD,

1998).Triangulation. To continue operations in their national currency during this transition period, a more complicated conversion process, known as triangulation, must be used when conducting business in a foreign currency. The triangulation process involves two conversion computations, rather than one. The first step is to convert the currency being used into euros. The second step is to convert the euros into the desired currency. For example, if a business wanted to convert a sale of 100 German marks into French francs, the marks must first be converted to 51.129 euros. Then the euros must be converted to 335.386 francs. Rounding must always be accurate to at least three decimal places and performed to the nearest subunit of currency (Chabot, 1999:149-151). The cost for