The banknote that Europe built - European single currency

HR Magazine, Oct, 1998 by Stephenie Overman

The historic launch of a single currency, further cementing the European Union as a common market, may seem like a far away event with little consequence at home. But the adoption of a single currency in Europe may directly affect companies in the United States.

Expatriate packages will become simpler, salary comparisons will be more "transparent" and recruiting may become more competitive and pan-European.

Starting Jan. 1, human resource professionals at multinationals with operations in Europe will step into that uncharted territory. That's when the next step to create the Economic and Monetary Union (EMU) takes place, as 11 countries begin to phase out their local currencies and replace them with the euro. The transition will be completed by July 2002.

"Americans are not yet quite aware of how important this is. It's a dramatic change," says Alain Johnson, employee benefits director at Price Waterhouse Coopers in Paris. "The euro will be one of three major currencies in the world, after the dollar and the yen." The New York-based accounting and consulting finn has offices in all 11 EMU countries.

Hard currency won't be introduced until 2002, but businesses can use euros in electronic transactions starting next year. During the three-year transition period, companies with operations in the member countries can conduct business in euros as long as they also convert them into the local currency. Experts say companies that are prepared to deal with dual currencies immediately will gain a competitive edge.

The 11 member states include Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece failed to meet the economic criteria required to join the single currency. Denmark, Sweden and the United Kingdom are not participating at this time.

The introduction of a single currency so far has been viewed as a political issue, rather than a business one. U.S. multinational companies are just beginning to realize the competitive advantage of quickly adopting the euro, but few are considering the daily human resource ramifications.

That's where HR comes into play. HR managers at multinational companies - or those at companies considering an expansion into the EMU - may need to adopt a pan-European HR policy. Doing so could help their companies become more competitive in a market that has a combined $6 trillion gross domestic product, a population of 291 million and per capita income of $21,000.

Currently, the introduction of the euro isn't being recognized as something that influences HR policy, says Klaus Mittorp, head of corporate compensation and benefits at Deutsche Bank in Frankfurt, Germany.

Deutsche Bank, in conjunction with Towers Perrin, a New York management consulting firm, surveyed 100 large companies, including U.S. companies that have operations in more than one EMU country, about their preparation for the new currency.

"When we asked companies whether they were in the process of changing business strategy in relation to the introduction of the euro, lots of people [40 percent] said yes," Mittorp says. "When we asked whether they were adjusting HR strategy, the number saying yes was a lot smaller [22 percent]. HR strategy is wailing behind."

That's a big mistake, he says.

Becoming euro compliant will require new procedures for compensation, payroll administration and recruiting efforts. Strategically, HR managers will have to shift their focus from a national one to a pan-European one.

"At its simplest, the EMU will affect payroll, pensions and benefits arrangements in member states that join," the Deutsche Bank-Towers Perrin study states. "At its most complicated we may be looking at the start of a process which will eventually harmonize pay rates across the continent, usher in pan-European pay negotiations and even create the circumstances in which production facilities are relocated to take advantage of, or insure against, 'EMU effects.'"

COMP AND CIRCUMSTANCE

So how should HR managers with international activities prepare for the currency change? Johnson stresses that HR first must communicate to employees located in the member nations how the currency change will affect them directly.

That entails open and honest communication about discrepancies in compensation amounts when the employer starts denominating paychecks in euros.

"Many employees are concerned that salaries will go up or down, that they will not get paid in the same way as in the past," Johnson observes. "Employers are being encouraged to show double entries on the same pay statement" to offset these worries.

While that may be a burdensome task for payroll administrators, it would help foster understanding among workers about changes in pay.

"That way, somebody in Spain or Italy who is used to a lot of zeros won't go into shock when they disappear," explains Tony Broomhead, senior international consultant at Watson Wyatt Worldwide in Chicago.

3M Corp. is adopting this strategy, says Linda Obertin, supervisor of the Total Compensation Resource Center in St. Paul, Minn. "We will be doing some double entries in accounting to make sure we are recording all the rates accurately," she says. 3M has sales offices in all 11 member countries and manufacturing facilities in every one except Portugal.