Euro to impact local exporters’ earnings over the long term

Ashok Kumar, Deutsche Bank regional EMU project co-ordinator, is quick to counter: "The introduction of the single currency will enhance price transparency and boost competition. This will lead to opportunities for companies that recognise the need to realign their business strategies to reflect this new environment. It will also create significant challenges for those that are not fully prepared."

It is not that exporters are unware of these factors but they feel it is still too early. They would prefer to wait and watch and learn about opportunities as they unfurl rather than leap for an unknownearly bird advantage.

"The concept is not well known. It’ll take some time before we can evaluate the consequances of the euro on our businesses," said an official of Century Textiles, a leading exporter of textiles to Europe. "We will stand to gain if the euro — as is widely expected — becomes stronger than the dollar even if our invoices are denominated in dollars," admits Shah.

Exporters feel there is no need for urgency on their part with regards to the introduction of the euro which is just a few weeks away. Though the euro comes into effect on January 1, 1999, it will be only three years later in January, 2002, that it will replace legacy currencies (the term coined for existing 11 national currencies that will eventually be replaced by euro). Till then the euro will co-exist with local currencies and that too only in book entry form.

The immediate impact of the euro on Indian exports may not be great, but what it holds in the future is uncertain. The new currency will be ushered in with a twinsense of uncertainty and apprehensions. A lot is left undefined for the future and the market to make sense of on its own, bankers feel.

The following are some of the likely future consequences that Indian firms need to address:

Impact on prices: The introduction of the euro is likely to put pressure on the prices of Indian exports to Europe, especially in sectors like textiles. "There will be a downward pressure on prices as the existing price variation within different European countries becomes apparent and obvious. This would require Indian corporates to rethink on their distribution and pricing strategy," said Kumar of Deutsche Bank. Apart from textiles and garments, India has large European regional exposure in leather, machineries, bulk drugs, and so on.

Accounting standards: The companies will have to adapt their accounting systems by including the euro as a new unit of account.

Treasury operations: "The European Monetary Union will result in significant cost savings sincecompanies will only have to hedge against one currency rather than 11 currencies," said Joe Norena, head of foreign exchange, Deutsche Bank, London. Companies will also benefit from the elimintaion of inter-country transaction costs. The disappearance of exchange rate fluctuations will make it considerably easier for companies to plan their European business operations and investments.

New business opportunities: An array of business opportunities will be thrown open with the introduction of the euro, especially for Indian software companies. The budget for Deutsche Bank’s euro conversion programme is an astounding $700 million. Software industry analysts have estimated work on modifying existing systems to adapt to the euro standards will exceed that of Y2K-related contracts.

Validity of contracts: Existing contracts with European firms whose periods last beyond 1992 will need to be reworked to suit the new environment introduced by the euro.