The euro is coming, and it is not something that matters only to Europeans.
The single-currency system for the European Union is less than 10 months away. Likely to be the single-biggest political and financial event on that continent in 25 years, it will have ripple effects worldwide and require a wave of technological readjustment in the corporate world, not the least among banks.
The average multinational bank-including the largest in the United States-will probably have to spend $50 million to $150 million on information technology related to the euro, according to Gartner Group Europe. Financial institutions must pay attention not just to back-office accounting but to payment systems, automated teller machines, and point of sale terminals, as well as introducing new products, training staff, and educating customers.
"This will have a big impact, even greater than year 2000," said Robert J. Baldoni, a New York-based partner of Ernst & Young. "Banks are on a tight timetable."
In this story and the next two installments, American Banker examines the technological challenges posed by the new currency and how U.S. and international banks are responding. The overarching conclusion: The euro is set to transform virtually all aspects of banks' systems and strategies.
European bankers seem to have started on euro projects early, and many consultants say they have a better understanding of the issues and are in many ways further along than their U.S. counterparts.
"Our consulting for the euro began in 1996 and accelerated in 1997," said Bill Irving, a partner in New York at Coopers & Lybrand's financial services division. "We continue to consult, although more recently our clients are likely to be from the U.S. than Europe.
"In general, the Europeans have focused on the euro at the expense of year 2000, and in the U.S. they have done the reverse."
George Thomas, senior vice president at the New York Clearing House Association, gives U.S. banks more credit.
"From what I have heard, all the major U.S. banks are well up to speed. Their European operations are gearing up for the euro."
Of course, it is not just banks that are affected. Gartner Group has said large corporations are likely to require 36 months to 48 months to fully convert their systems to the euro. It estimated the total cost of converting all of Europe's corporate information technology systems will total $150 billion to $400 billion over six years.
Multinational companies such as Daimler-Benz, International Business Machines Corp., Philips, Siemens, BMW, and Fiat have said they will make the changeover in a "big bang"-all at once at the beginning of next year.
Eighty percent of IBM's vast information technology network will be affected by the euro, said Peter Cruttenden, euro internal programs leader for IBM Europe.
"Everyone should be past the paralysis stage and on to the engagement and decision-making phase," he said."This is not a panic-stricken message but one of urgency, seriousness, and focus. This train is rolling, rolling fast" and given the preparations of the last 18 months, "there is an extreme impossibility of its being derailed."
The race to prepare for the euro is complicated by systems changes under way to cope with the advent of the year 2000, when computer programs may be unable to deal with the calendar change after Dec. 31, 1999.
Experts say the big difference between the two events is that the year 2000 problem is embedded in software and clearly requires a technical fix. For euro-compliance, as they put it, technology and business considerations go hand-in-hand.
For the euro, "anyone with a presence overseas will be heavily impacted," said Coopers & Lybrand partner Willem van Rijn. That includes "anyone who funds themselves on foreign markets or has active payments or commercial traffic with the EMU (European Monetary Union) countries."
He said many banks are not ready to handle the euro, nor have they thought through the need to establish dual accounts for receiving payments in the new currency.
"Smaller U.S. regional banks have a wide correspondent banking network and think they can rely on a package for dual currency," Mr. van Rijn said. "But they can't understand the business arrangements and fail to understand that their competitors are knocking on their customers' doors."
The big providers of global custody and corporate cash management services-led by Chase Manhattan Corp., Citicorp, and BankAmerica Corp.-are forging ahead with testing, seeing the euro as a significant business opportunity in cross-border payments.
They now know based on economic and exchange-rate criteria dictated by the 1992 Maastricht Treaty that 11 countries are likely to "make the cut" for the euro system. They can be named by the mnemonic BAFFLING-Belgium, Austria, France, Finland, Luxembourg, Ireland, Netherlands, Germany-plus the "Club Med" countries Italy, Spain, and Portugal.
The United Kingdom, Denmark, and Sweden have decided not to join for political reasons and have adopted an opt-out, opt-in clause. Greece will not qualify. After May 2, when the Council of Ministers for Economic and Financial Affairs is expected to officially certify the 11 countries, it will be full steam ahead.
On Jan. 1, the 11 currencies would merge into the new euro and become the medium for book-entry transactions of capital markets, government agencies, and wholesale corporate payments.
Government and corporate bonds, listed futures, and options will all be redenominated, and stocks will be quoted, priced, and settled in euro.
During the three-year changeover phase, use of the euro will be encouraged alongside national currencies.
The European Currency Unit, or ECU, a benchmark in place since 1979 that was to play a part in the transition to the European Monetary Union, will also be replaced by the euro.
The European Banking Federation estimated in 1996 that the changeover to the euro will cost the industry somewhere between $8.7 billion and $10.9 billion, and now it is expected that the total could increase by as much as 50%.
"Banks are typically spending three to five times as much as they are on year 2000," said Nick Jones, research director of Gartner Group Europe.
But there is no difference in priority or necessity.
"I know of some large European banks that are more behind than they should be" on the year 2000, Mr. Jones said. "That is because they've been concentrating on the euro."
They have been doing that because the business opportunities of "playing at the pan-European level" are seen as so compelling.
As with the year-2000 conundrum, bankers must pay attention to basics such as creating organizational awareness, doing business impact analyses, translating these into strategic and technology projects, and encouraging action. It is all complicated by a shortage of technology employees. Mr. Jones sees a 50,000-person shortfall in the United Kingdom alone.
"A euro project is more difficult than anything undertaken before," he said. "Even now there is a degree of uncertainty that makes planning difficult. Often banks fall behind on scenario-based planning and some of these scenarios need to be updated.
"Year 2000 is easier for a bank because it can put its finger on the things to change. It is much harder to plan when you can't be certain what is ahead."
Most U.S. financial organizations are conducting their euro projects in Europe, where they have people who understand the technicalities, regulations, and political environments that vary by country.
They will be dealing with a new regulatory body, the European Central Bank in Frankfurt. It will take over from the European Monetary Institute, which was formed in 1994 and will be liquidated. The central bank directors will be designated in June. The president is likely to be the current Dutch head of the EMI, Wim Duisenberg.
From next year, the European Central Bank will be operating in the euro and new issues of public debt will be so denominated.
"One of my concerns is that the European Central Bank will not automatically inherit the credibility of the Bundesbank," said Alan Blinder of Princeton University, the former vice chairman of the Federal Reserve Board. "That will be a primary concern of the ECB and likely to lead to tighter monetary policy."
With the European Central Bank "accountable to no national government, it is going to be the most independent central bank in the world," Mr. Blinder said.
On Jan. 1, 2002, euro bank notes and coins will be introduced to the public and all the technical processes should be completed. Six months later, individual European currencies will retire, leaving the euro as the only valid currency. The European Union is likely to be the largest economic and currency bloc in the world.
The monetary union has led to a new pan-European payment system linking domestic networks. The Trans-European Automated Real-Time Gross-Settlement Express Transfer System, or Target, has been set up to bring the benefits of risk reduction and settlement efficiency to cross-border transactions in euro.
There are more than 25 systems in the European Union countries that handle large-value payments, comparable with those in the United States' Chips and Fed Wire networks. They are expected to consolidate, leaving a few dominant national payment systems such as Chaps Euro, the U.K. banks' entry point into Target.
Another, the ECU Banking Association, is a 50-bank system being upgraded to switch to euro payment settlements beginning in January 1999. The EBA views its proposed same-day value system as complementary to Target.
The introduction of the euro will affect U.S. correspondent banks in Europe and will have an impact on U.S. corporations purchasing from and supplying products to Europe. From 1999 to 2002, multinational companies' enterprise systems will have to be "bilingual" for both the euro and local currencies.
Gartner Group has been talking about the euro with European banks for two years and some have been running euro projects that long, said Mr. Jones.
"Apart from a few exceptions, European banks have been worried about it longer than U.S. banks," he added. Although he said American interest has doubled in the past six months, one or two U.S. banks have been especially farsighted, seeing in euro "an opportunity to offer a pan-European structure."