There has been an enormous amount of debate and confusion generated by this event - reflected in the fact that businesses in Britain are fairly evenly divided on whether it is a good or bad idea to join the eurozone.
The single currency has an impact on European businesses in many ways such as invoicing, data processing, accountancy, financial management, administration, and sales and marketing. The introduction of the euro removed all currency risks between the 12 member countries. This has led to increased competition among eurozone businesses.But while many UK companies with eurozone clients have benefited from cheaper transactions and reduced accounting costs, the changeover meant investment in new systems, and historical data conversion to ensure euro compliance.
Will the UK join the eurozone?
In principle the government is in favour of UK membership of the euro yet stipulates that the economic conditions must be right. The chancellor has produced five economic tests which must first be met before joining the eurozone is considered:
* Is there convergence with eurozone economies?
* Is there flexibility to adapt and cope with economic change?
* Will it encourage foreign investment?
* How will it impact on the financial services industry?
* What will be the impact on growth, stability and employment?
Trading with the eurozone
The European Union, and eurozone countries in particular, offer a huge market of potential customers and suppliers for UK firms.
For many UK businesses the euro is already a day-to-day reality. Businesses trading with eurozone countries find it easier and more beneficial to trade in euros. Accepting payments in the currency will often make the goods or services on offer much more attractive to potential eurozone customers. UK firms should also remember that by selling in the eurozone they are competing with eurozone-based businesses that will always quote prices in euros.
It is possible to quote prices in euros and accept payment in sterling but this process makes the transaction more complicated.
UK firms pricing in euros should also keep the fluctuating exchange rate in mind. If you commit to selling at a price in euros and the euro weakens against sterling before payment is received you are at currency risk. Likewise, if you agree to buy at a set euro price and the euro strengthens before payment is made it will cost more. To help avoid this, the following options are available:
* Consider increasing your prices to cover potential losses
* Add a note saying that the prices are 'correct at the time of publication, but need to be checked when placing an order'.
* Open a euro bank account which allows euro payments to be made and accepted without having to convert into sterling
* Use currency options by buying and selling euros at an agreed exchange rate
* Eliminate the risk of fluctuating exchange rates with a forward contract. These lock you into an agreed exchange rate for a transaction that will take place in the future.
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