As part of our 25th-anniversary celebrations, we take a look from the bank perspective at how the introduction of the single European currency has impacted cash management in Europe.
In a speech by the vice-president of the European Central Bank during a visit to the US in January 2000, Christian Noyer referred to the advent of the euro speeding up the process of integration and innovation in the euro area domestic financial market with increasing international use of the single European currency as an investment and financing currency encouraging further restructuring of the euro area financial system.
According to Jan Dirk van Beusekom, Head of Strategic Marketing at BNP Paribas Cash Management, Trade Solutions and Factoring, the replacement of multiple currencies with a single European currency has streamlined financial operations for businesses that previously had to deal with multiple currencies, exchange rates and foreign transaction fees.
“However, while FX, reporting and process risks might have decreased there are still some challenges that corporates face in managing cash across Europe,” he says. “While the euro is used by most EU member states, there are some countries that have not yet adopted the currency which means companies operating in both eurozone and non-eurozone countries still have to deal with multiple currencies and exchange rate fluctuations.”
The launch of the euro induced major changes to how financial institutions conduct business with their corporate clients and their treasury departments in terms of centralisation, reduced complexity and increased efficiency says Christof Hofmann, Head of Corporate Cash Management at Deutsche Bank.
“The installation of a single European currency – combined with the introduction of SEPA and harmonisation of associated payments – has made it possible to serve all EUR/SEPA countries from one central location, therefore reducing local account structures,” he explains.
This has also been a driver for establishing more centralised in-house banking structures in Europe, enabling corporates to introduce virtual account solutions.
The harmonisation and simplification of cross-border payments across Europe has seen pricing of European flows decrease significantly. “Moreover, the euro has become stronger and can now better compete against the hegemony of the US dollar,” says Philippe Penichou, Managing Director Global Head of Sales Wholesale Payments & Cash Management at Societe Generale.
He notes that since SWIFT GPI is designed for currency corridors, the importance of the euro in the cross-border payments area was a powerful incentive for banks to have the single European currency as one of the main currency pairs.
“Instant payment has also been deployed across continental Europe with the same rules, which explains the quick adoption of this instrument by the market,” adds Penichou. “While banks get challenged by new players in the industry such as big tech and fintechs, the adoption of the single European currency has helped them to resist, pushed them to innovate, and as a result, has enabled corporate clients to access better and more homogenous cash management solutions in Europe.”
Croatia adopted the euro from the start of this year and Bulgaria plans to join the eurozone in January 2025.
“It is ironic that while the late adopters go ‘all in’, the early adopters still require specific formats and standards for tax, social security and salary payments, for example,” says van Beusekom.
The result of this is that corporates can create a payment factory with a single euro account and make all their euro payments from that account – including payments to the Baltic states and Croatia – whilst the payment factory would still need a separate account in Italy to make tax payments in euro to the Italian tax authorities.
van Beusekom observes that the same issue affects cash pooling. With the euro, companies can manage their cash concentration structures more easily, which has led to more efficient cash management and cost savings yet even in Europe and with the euro not everything is possible in all countries. The major disruptor here is local regulation and in particular tax law, which is not unified across the EU.
“But although there are some remaining challenges, the introduction of the euro has undoubtedly made the cash management process easier for corporates operating across Europe,” he concludes. “The adoption of a single currency has reduced administrative costs, simplified accounting processes, and improved financial transparency.”
