Euro income to UK firms 'rising sharply' - but quarterly survey shows UK firms to adapt to new currency

Citation

(2000), "Euro income to UK firms 'rising sharply' - but quarterly survey shows UK firms to adapt to new currency", European Business Review, Vol. 12 No. 1. https://doi.org/10.1108/ebr.2000.05412aab.008

Euro income to UK firms 'rising sharply' - but quarterly survey shows UK firms to adapt to new currency

Keywords European monetary system, United Kingdom, Currency options

Results from KPMG Consulting's quarterly Eurocreep survey - which assesses the pattern and extent of euro usage in the UK - show that, by comparison with the position in the first quarter of 1999, euro-denominated income to UK companies from firms based in the eurozone has more than doubled (from 4 per cent to 9 per cent of income). At the same time, however, payments denominated in euro by UK firms to eurozone suppliers remained flat (6 per cent). Instead UK firms have been increasing their use of the eurozone legacy currencies with payments rising from 13 per cent to 34 per cent. According to KPMG Consulting, the reluctance of UK companies to make payments denominated in euro could indicate that they are not yet ready to use the new currency.

Leo Martin, director and the report's author, commented: "We would expect eurozone and UK companies to move at roughly the same speed in their replacement of legacy currency denominated, with euro-denominated transactions. But this survey shows a clear mismatch in balance of eurodenominated payments and income with the eurozone. The fact that UK companies are falling behind their eurozone competitors suggests that they may not be operationally ready to denominate their transactions in euro."

KPMG Consulting identifies several difficulties that UK companies may face as a result of this lack of preparedness. "Any UK company that deals with more than one eurozone country can simplify its systems and operations by switching to euro," Leo Martin continued: "Using the euro also simplifies transactions throughout the supply chain by increasing transparency. Additionally, the conversion period for the replacement of legacy currencies by euro is ticking away. UK companies that use Eurozone currencies will need to convert their operations at some stage, and the longer they leave the process, the shorter the time they will have to complete it."

The survey also looks at the value of euro-denominated domestic transactions (transactions between two firms in the UK). The domestic eurocreep index stands at just 0.23 per cent in Q2, but this figure is estimated by KPMG Consulting as equivalent to around £1.1bn of transactions. Leo Martin concluded: "While the volume of domestic transactions is comparatively small, the value of these has now broken the »1bn barrier. The euro is a currency with a huge base and it is right on the doorstep of UK companies. They cannot afford to ignore it."

The other main findings of the research included:

• •

  The total percentage of all euro-denominated transactions (domestic, import and export) by UK companies remains unchanged from the first quarter, at about 1 per cent.

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  There is still some difference between large and small companies. While the overall eurocreep index (value of euro-denominated transactions as a share of all transactions) stands at about 1 per cent for small and medium-sized companies, it now stands at around 1.5 per cent for large companies.

Though the US dollar has increased in importance from Q1 to Q2, rising from 7 per cent to 11 per cent of all transactions, the euro has increased from about 3 per cent to 6'per cent of all transactions and the use of sterling and other currencies has decreased. The report notes that, although the US dollar has become more important in trade between the UK and the rest of the world, it has declined in use in UK to eurozone trade.

Companies are still overestimating the use of the new currency. In Q1, the research found that 23 per cent of companies had either already processed at least one euro-denominated transaction, or expected to do so by the end of the second quarter. However, only 13 per cent of respondents state that they have processed at least one transaction in euro during the second quarter.

The eurocreep survey

NOP surveyed 728 companies in July and August 1999 and the sample was split as shown in Table I. This was divided into a main sample of 398 companies and a boost sample of 330 companies. The aim of the boost sample was to increase the number of companies exporting to the eurozone and the rest of the world, in order to increase the accuracy and stability of the results for these types of respondents.

To make the sample representative of the UK economy overall, weights were applied to increase the results from smaller companies (which are under represented in our sample) and reduce the weight of the larger firms (which are over represented in our sample). Large companies are deliberately over-sampled in order to ensure a sufficient robust base of large businesses which account for a small proportion of all businesses but a large proportion of transactions.

For UK-eurozone and UK-RoW transactions the sample size has been increased considerably between Q1 and Q2 as a result of the boost sample. This is to improve the reliability and stability of the data reported in this survey.

The companies were interviewed by telephone with a fax reply option. The interviewee in the company was generally the finance director or a senior finance function representative.