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The Euro It's No Small Change

January 1, 1999
Related Topics: Global Business Issues, Featured Article
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Over the next few weeks, we’ll witness the introduction of a new single currency in Europe: the euro. While most managers at multinational companies appear to recognize the impact the euro will have on the mechanics of their global HR systems, they must take care not to overlook the strategic HR opportunities that the introduction of the euro represents.

A recent survey by Arthur Andersen’s Human Capital Services practice in London revealed that HR directors and professionals from major European multinational companies believe that, on the whole, companies are not actively considering the strategic opportunities that the single currency may offer in HR management terms. In fact, 51 percent of more than 40 survey respondents believe the European Economic and Monetary Union (EMU) could offer their companies strategic HR opportunities. But only 31 percent of the companies have any specific HR-related EMU strategy in place to take advantage of them.

When does the change take place? The introduction of monetary unification is not intended to happen instantly. On January 4, however, the euro becomes a currency in its own right. The exchange rates of the 11 states (Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal and Spain) participating in the first wave are irrevocably fixed to the euro. And the European Central Bank (ECB) assumes responsibility for the monetary policy of these member states. Then the first six months of 2002 will see the mandatory replacement of national notes and coins with the euro.

Companies are well aware that the introduction of the currency provides considerable challenges for their financial and IT departments. Steps are also being taken to update computer systems and accounting procedures. The transition period also represents operational problems across all business functions from procurement and marketing to legal and taxation issues. The euro will also influence how businesses operate and how they deploy resources.

Which are the best strategies to deal with the changes is still an unresolved question at this stage. With the general introduction of the currency still three years away—and the success of the euro still unknown—HR strategy remains a function of corporate strategy. And this, in turn, will be affected by the move toward European market unification. As companies speculate and react to changes in the European marketplace in the years ahead, opportunities to introduce major changes in HR strategy will arise. It’s vital you’re aware of them.

Communicate changes.
The immediate role of the HR professional of a multinational company is to ensure that current, correct information is communicated to employees and pensioners. Rainer Goldammer, director of human resources and administration for 3M Europe, says the company distributed a brochure several months ago called "3M and the Euro—A Guide for 3M Employees." He explains, "This approach was made in response to employees’ concerns about how the euro would affect them personally in terms of the way they will be paid, the benefits they’ll receive and how it will affect the business they do." Goldammer believes providing employees with this information hasn’t only relaxed their concerns, but it has enabled them to do better business because they can educate clients on euro-related issues.

Upgrade payroll.
Companies also should be rapidly upgrading their payroll systems to accommodate the introduction of the euro so they’re capable of delivering compensation and providing social security benefits in dual currencies. The earlier this is introduced, the more comfortable employees are going to feel when the euro reaches mandatory introduction.

Managers should also consider adopting changes in their pension systems and administration, particularly in countries where employers are more reliant on their own company plans than the state welfare system. Other less immediate changes might require some action in the future when market forces come into play.

Watch for mobility shifts.
The past few years have seen a dramatic increase in the movement of labor within Europe. As compensation reported in a single currency lends itself to a greater degree of comparability, we should see an increase in pan-European mobility. This will enable companies to respond more quickly to business needs, particularly as Europe moves toward a single market. A number of factors—such as differences in tax, social security systems and cost of living adjustments, as well as language and cultural barriers—may prevent a flood of movement. 3M’s Brussels-based Goldammer adds, "When we talk about the influence on strategies, that all remains to be seen. I believe, in the end, as part of the total development we’re seeing in Europe, there’ll be an impact on the mobility of people. It will all just be easier when you have the same money."

Compensation may converge.
Increase in the transparency of compensation across countries will likely cause downward pressure on expatriate assignment costs. Salaries and cost-of-living allowances in euros will provide a more accurate indicator of assignment costs. This may require a review of current expatriate policies to align with market forces. Undoubtedly still governed by market forces, it’s widely believed pay levels will eventually begin to converge—particularly among more senior-level employees—as Europe moves toward a single market.

One major distinction between EMU countries is the nature of the social partnership between employees, employers and governments. In countries such as Austria, Belgium and Germany, for example, the political and economic systems are shaped by collective negotiations over pay and work-related matters. It’s anticipated that collective bargaining through unions will be more effective at the lower end of pay levels. Consequently, it could be some time before any evidence of pay convergence is seen.

Furthermore, comparing gross income numbers for negotiations would seem unreasonable given the varying cross-border treatment of income tax, social security and pension provisions. These factors alone will ensure that convergence of pay will really only follow other changes toward European unification.

Although some of these changes may be some time away, the introduction of the euro will surely cause a vast number of unknown challenges. Change will inevitably take place, for better or worse. It’s vital that companies recognize the potential of these changes, and view them as strategic opportunities they can act on.

Global Workforce, January 1999, Vol. 4, No. 1, pp. 12-13.

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