The European Monetary System (EMS) was introduced in 1979 and was designed to create stability in the exchange rates of European currencies, in order to do this the EMS created a European Currency Unit (Ecu) made up of a composite of European currencies and designed to provide a new ‘gold standard’ for comparing the value of European currencies and a common unit of account for Europe. The key to the EMS was the Exchange Rate Mechanism (ERM) which, like the snake, set out a permissible band of fluctuation again this was plus or minus 2.25% for the majority of countries.
The ERM hit a crisis in September 1992 this has been attributed to it’s vulnerability to currency speculation, the failure of member countries to be more flexible and an overvalued German Mark.
(Artis and Lee 1997)
1.3 Maastrict treaty
Although talked about for many years before, EMU was finally given an economic, political and legal framework with the signing of the Maastricht Treaty in 1992.
EMU is to be established in three stages:
The first stage:
Economic and monetary co-operation and the development of a single market.
The second stage:
Closer co-operation to make the member countries economies more suitable for EMU.
The setting up of the European Monetary Institute (EMI) to enable national central banks such as the Bank of England and the Bundesbank in Germany to prepare for the European Central Bank (ECB).
This stage started in January 1994.
The third stage:
This is the introduction of the euro in those countries assessed to be ready the so called first wave.
The ECB is responsible for the monetary policy of these countries including interest rates.
This started on the 1st of January 1999.
(www.HM-Treasury.gov.uk)
1.4 The Entry Criteria
The Maastricht Treaty requires that the economies of the countries wishing to join have to have achieved the following levels of performance:
- Inflation must not exceeded the three best performing countries by more that 1.5% over the course of one year.
- The gross national debt must not exceed 60% of GDP
- The budget deficit must not exceed 3% of GDP
- Interest rates must not exceed the three best performing countries by more that 2% over the course of a year.
These exist to ensure stable economic conditions and some degree of convergence between the economies.
To ensure countries meet these criteria the Maastrict Treaty requires that two convergence reports are produced, one by the EMI and one by the EC. These examine whether or not the member state has fulfilled the conditions for participating in the single currency.
1.5 The Timetable
In December 1995 a European summit was held to decide the timetable of introducing the euro
This is as follows:
Spring 1998 – January 1999
Phase A. The EU decides which countries qualify to join. The European Central Bank (ECB) is set up to prepare for it’s future role.
January 1999 – January 2002 (at the latest)
Phase B. Conversion rates between currencies of qualifying countries and the euro will be legally fixed and the euro will become legal currency in those countries. The ECB will become responsible for interest rates. This is the “transitional period” where national currencies will continue to exist but will be temporary denominations of the euro. National banknotes and coins will still be used for all cash transactions.
January 2002 (at the latest) – July 2002 (at the latest)
Phase C. Euro banknotes and coins will be introduced in participating countries at the start of this phase and national currencies will cease to exist. National banknotes and coins will be withdrawn in this period. The changeover will then be complete.
(www.HM-Treasury.gov.uk)
1.6 Will the UK join?
The UK negotiated a clause in the Maastricht Treaty allowing it to decide whether or not it wishes to join EMU in the first wave. The UK Government decided not to join EMU in the first wave and if the UK decides to join later. The Government also stated it would not join if the Government and Parliament were to decide it should. As a final measure a referendum would be held to ensure full public support for such a move.
The Current UK Government has stated that it will join EMU on the basis of the following economic arguments:
Would joining EMU create better conditions for firms making long-term decisions to invest in the UK.
How would adopting the single currency affect our financial services.
Are our business cycles and economic structures compatible with Europe so that we could live comfortably with euro interest rates on a permanent basis.
If problems do emerge, is there sufficient flexibility to deal with them.
Will joining the EMU help to promote higher growth, stability and a lasting increase in jobs.
In order to prepare for future possible membership of EMU the Government has drawn up a National Changeover Plan drawing on the experiences of the “first wave” countries.
The plan involves:
Consultation with the public and private business sectors.
Planning for the need for public education.
A Government committee with representatives from every ministry and a framework of 1500 public sector workers acting as “euro co-ordinators.”
From 1st January 1999 UK firms were able to pay taxes and file accounts and other financial returns in euro.
2.0 J Sainsbury plc – an overview
The following section aims to offer, firstly an overview of J Sainsbury plc and it’s subsidiaries, describe the size and turnover of the business and the markets in which it is effective and secondly, a SWOT analysis into the euro question.
“J Sainsbury is a large organisation that is recognised nation wide and offers people high quality, value for money products that meet customers’ needs.” This is the new commitment of the company in the annual report published for 1999. In this report the Chief Executive’s review states that “the business has a clear strategy and determination to broaden its appeal, increase efficiency and substantiate its offer”. This statement means that the company wants to become more efficient and to make sure that people know that the company means business.
When the word Sainsbury is used, people automatically think of the Food Company which for a while used to be the leading food retailer in the country before Tesco overtook them in the race to be the best. J Sainsbury as an organisation own five separate company’s which are; Sainsbury’s Supermarkets, Shaw’s, Sainsbury’s Bank, Savacentre and Homebase. All of these companies deal in different types of product such as wood to food. Here in detail are what the companies specialise in.
2.1 J Sainsbury supermarkets
J Sainsbury, is a food company, which is the second biggest food retailer in Britain, behind Tesco. They deal with products ranging from frozen food, fresh food and grocery produce. New ideas and ways to do things are changing all the time to keep up with the customers needs so new brands have to be launched such as Food to go which offers a hot chicken and curry bar, pies and roast meats. An increased number of new style salad bars and new packaging for salad pots have also been introduced.
Here is a table, which shows a summary of the company:
Sainsbury’s Supermarkets analysis
The supermarket has several departments within the store such as bakery, fresh meat, bread and the dessert counter. These are the areas that customers like to visit because they appeal to traditional customer’s and add value and individual service. People on the whole like to be thought of as important.
2.2 Shaw’s
Shaw’s is a subsidiary operating in the US and can actually be compared to a smaller version of Sainsbury Supermarkets because they to are food retailers, which specialise in fresh food such as fruit and vegetables. The company likes to be recognised as dealing in specialised food, which has been imported from places such as New Zealand, Chile and South Africa.
This company has just run a fresh produce campaign, which has been so successful that the directors have decided to rerun it in the summer. Other success has been the aggressive promotional activity throughout the year and the development of their own brand ranges.
Here is a table, which shows a summary of the company:
Shaw’s Analysis
2.3 Sainsbury’s Bank
The bank is proof of the demand for easy access to high quality, branded financial services. The company was only started two years ago but has attracted one million customers and the company has £1.7 billion on deposit and £1 billion of lending and commitments.
The bank continues to research and launch new products in response to the demand of customers. They have come up with new services such as a one hundred per cent fixed rate mortgage and the Merit Visa Card offering low cost borrowing and Petcare Insurance.
2.4 Homebase
Homebase is a do it yourself shop which has taken over Texas. Homebase has a reputation for quality, which is vital factor in the home enhancement market. This year Homebase has focused on World of Colour, which has enhanced its colour scheme for the painting department. Homebase has several departments such as, Paint, woodcutting, kitchens, bathrooms; garden centre and all other do it yourself products.
Here is a table, which shows a summary of the company:
2.5 Savacentre
Savacentre is a small food retailer who recently relaunched themselves from a 60:40 non-food store to an 80:20. This has worked out because the company has introduced new sections such as Celebrations for party ideas, Indulgence for beauty products and Baby and Toddler.
The integration of Savacentre complements the store format development complement programme. It is a planned move away from a hypermarket style outlet, to a very large Sainsbury’s – with its welcoming promise of friendly service and a focus on food, but with other selected offers to enhance the weekly shop.
Here is the table, which shows a summary of the company:
2.6 SWOT Analysis of J. Sainsbury
This analysis is used to summarise and explain the external threats and opportunities to J Sainsbury with firstly, UK participating in EMU and secondly, UK’s non-participation. The analysis also looks at potential opportunities and threats that would exist in both scenarios.
Joining the European Union
Strengths:
Looking first at the purchasing of produce from their suppliers, EMU would bring several advantages. Firstly, it would be easier for J Sainsbury’s to purchase from other countries within the euro zone because EMU would remove the exchange rate risks and currency conversion costs.
Secondly, EMU will fix the price of goods from Europe over the term of a contract. For example, if J Sainsbury signed a one-year contract with a French supplier for Wine and agreed to pay them in francs and the franc rose in value over this period this could destroy the profit margin. With a single currency this effect will be avoided.
The euro interest rate is intended to be more stable than the individual European currencies, which will mean J Sainsbury could develop longer term financial plans and investment strategies.
This would produce clarity of pricing between European countries, this could be used to highlight the efficiencies of UK supermarkets such as J Sainsbury and help them raise European investment
Pan-European investment would become more commonplace and money would migrate more freely, the efficiencies of J sainsbury could be successful at attracting this investment as it already has experience in operating internationally.
Weaknesses:
It will open the UK market to European competitors
Customers would be able to compare J Sainsbury prices more easily with retailers on the continent because they will all be quoting their prices in euros.
New computer and till operating systems will have to be developed to recognise the new currency. This will represent a large investment, which could prove to be wasteful if the euro fails.
Past accounts will have to be changed into the Euro currency.
Staff of J Sainsbury will have to be retrained in order to familiarise themselves with the euro. They will also have to reassure the anxieties of their customers who may feel that the currency change is used as an excuse to raise prices.
Opportunities
It will make it a lot easier for J.Sainsbury to expand into other European countries, which will create more opportunities for the company.
People could be more willing to invest in Sainsbury’s if they were in Europe.
Threats:
“The market becomes more transparent, as prices can be compared directly, without having to calculate foreign prices in the consumers national currency.”
Official EMU Website.(ask aaron)
“Interest rates could rise in most countries, the co-existence of free capital mobility and frequent realignments also increase the voluntary of interest rates. In order to account for these risks, interest rates are likely to rise, this has negative effects on investments and employment.” Official EMU Website.(also ask aaron)
Not joining the European Union
Strengths:
J Sainsbury will maintain the advantage a strong pound would give them on importing from Europe.
J Sainsbury will limit losses if the single currency fails.
Weaknesses:
J Sainsbury will suffer if the pound is weaker than the euro increasing the company’s costs when importing from Europe.
The cost of exchanging currency will be higher if you want to trade.
Other countries would be stronger in foreign trade and investment.
Opportunity’s:
Own Interest Rates.
Non European Union countries will be more willing to trade because there will be no trade barriers.
Threats:
We may lose potential business, customers and investors to Europe.
The company could lag behind other European company’s.
We would have to find people to trade with and find our own contacts.
The company may have trouble expanding into Europe.
3.0 Section three
Liberal Democrats
*Support an early referendum to decide whether or not to enter into Europe.
*They will accept the decisions of the voters.
*The party stated that they would sanction a move into Europe only after two conditions were met.
- The single currency must be firmly founded on the Maastrict criteria.
- Britain must meet these criteria.
Conservative
*Oppose all entry into Europe
*There are five guarantees, taken from the Conservatives Common sense revolution list of priorities. These can be found at .
*The Conservatives policy on entry into Europe can be shown best with ‘The Sterling Guarantee’.
“The Sterling Guarantee- we will oppose entry into the single currency at the next election as part of our manifesto for the next Westminster Parliament.”
Labour
*Support entry into Europe.
*Labour want to hold a referendum after the next general election, this will not be until around 2002.
*Tony Blair stated the Labour party's intentions concerning Britain entering Europe in a speech to the London Business School on 27/11/99.
“Now is the right time to make the case for Britain in Europe.”
4.0 Conclusions
We feel that Sainsbury’s would gain the most benefit from the Liberal Democrats policy concerning the issue of the participation of Britain in the Economic Monetary Union (EMU).
The main reason for this decision is that they believe in an early referendum to decide whether or not to enter into the EMU. This would be beneficial as it would mean that Sainsbury‘s would know how to prepare for inclusion or a rejection of the EMU.
Although the Liberal Democrats would be good for Sainsbury’s the Labour party holds more political strength and therefore could possibly hold more of an advantage in gaining the desired referendum.
5.0 Time table of meetings
Tuesday 12 October
- First meeting
- Discussed what each member was going to do
- All researched part one
- Andrew and Charlie looked on the internet for relevant information
- Aaron, Neil and Stuart did research in the library
- All met an hour later to discuss our findings
Tuesday 19 October
- All continued to research part one over the week
- Decided Charlie would write up part one
- Looked in the “Major Companies Of Europe 1999, Volume 4, United Kingdom, Graham & Whitside” for companies to write to,
- We chose these companies to write to
- Adidas (U.K) Ltd
- Alba PLC
- Allied – Domecq PLC
- Allsports (retail) Ltd
- Barclays PLC
- Black & Decker International
- British Airways PLC
- Cadbury Schweppes PLC
- Carlton Communication PLC
- Cellnet Ltd
- Manchester United PLC
- Virgin Atlantic Airways Ltd
- Tesco PLC
- J Sainsbury’s PLC
Tuesday 26 October
- We all jointly drafted up the questionnaire and the letter to send to each company
- Neil was to type up the letter
- Andrew was to type the questionnaire
Tuesday 2 November
- All checked the questionnaire and letter for any errors
- We decided to add stamped addressed envelopes with each letter to encourage some response.
- Brought the envelopes and the stamps
- Decided to write the stamped addressed envelopes to Neil’s house
Friday 5 November
- Added a photocopy of the assignment to each company
- Sent letters
Tuesday 16 November
- Analysed the replies which we had received
- Decided which company we were going to look at in greater depth
- We chose J Sainsbury’s
Thursday 18 November
- We decided that Stuart, Neil and Aaron would find out more information on Sainsbury’s
- Sources used were Sainsbury’s financial accounts and Sainsbury’s internet site
- Stuart, Neil and Aaron were to do part two between them.
Tuesday 23 November
- Analysed what had been done on part two
- Added a few more points
- Andrew was to do part three
- Neil was to write a brief description on Sainsbury’s
Friday 26 November
- Started to put the whole document together
- Decided Aaron would do an introduction to the assignment, Stuart would do any other outstanding parts of the assignment.
- Rang up the three main political parties central offices, for their policies on the EMU.
Wednesday 1 December
- Made all of the work one whole document
- Edited it all
Thursday 2 December
- Rechecked the document and improved its appearance
- Made any correction
- Got the document binded