What if the euro doesn't work?

We haven't even said hello yet. But what will happen if we have to say au revoir, auf Wiedersehen and arrivederci to the euro? Will your employees and accounting systems be prepared?

Old King Kohl is gone. Enter Gerhard Schroeder, an ex-Communist, to the head of reunified Europe - four months before EMU. With him comes a Social Democratic party whose stated goal is eliminating unemployment. His lead policy maker, Oskar Lafontaine, is expected to take the minister of finance role from Theo Waigel. Lafontaine's track record is unknown.

In addition to the German situation, EMU is threatened by the skirmishes taking place on the frontier. The only questions remaining with the emerging market crisis is how bad it will get (by the way, it will get worse) and how far it will spread (it will spread from Southeast Asia deep into Latin America and Eastern Europe). The timing of the crisis could not have been more perfect to put a dent in EMU. The full impact of slowing emerging market growth and low-cost products hitting European markets should begin in earnest Q498, on the eve of the conversion.

This raises the question, what if EMU fails? EMU will definitely succeed if it keeps its member economies stimulated. Remember "It's the economy, stupid," President Clinton's 1992 battle cry? Europe is no different.

Of course, EMU will fail if the economic fortune of one particular European state differs widely from the needs of Europe as a whole. But minor differences can be handled like local recessions in the U.S., by Keynesian policy designed to surgically stimulate geographic market segments. After the Cold War, when Connecticut, Texas and Southern California were decimated by base and military contractor closings, the country invested money in those states, building new office parks and providing retraining programs. But Europe differs, for the central government cannot make large transfer payments across European borders indefinitely. Therefore, local country governments will have to embark on deficit spending or raising taxes for increases in fiscal spending.

The Maastricht Treaty outlines a series of penalties for countries transgressing on the deficit spending rules. These include strong "luxury taxes" paid to Brussels on the deficit amount. The chances of these taxes actually being paid by countries in fiscal distress is minute. Also, European countries have three choices on whom to tax to raise money: the voting populace (small chance); domestic corporations (larger chance); or foreign-owned corporations (high chance). For U.S. corporations, the taxman cometh.

Large-scale economic divergence is not unheard of. Norway isn't a part of the EU for one reason: oil. Norway is a major North Sea oil producer and stayed out of the EU because of social policy - it didn't want to give foreigners access to its welfare state, which is extremely generous.

What potential divergences exist in member countries? On the surface, there are few. Bad weather would affect the more agrarian states, such as Portugal and Ireland, more than, for example, Germany. A major increase in oil price would affect industrial states - Germany and Italy - more than Spain. Blight on the grape crop would affect France more than any other state. The impact of the Southeast Asian crisis will affect countries with more international trade - Italy, Germany and France - more than it will Austria or Spain.

What ensures that the EMU will weather these storms is the countries' political commitment to the EMU. And that is called into question until the German coalition of more left-leaning parties is formed and displays its agenda. Until then, the probability of EMU success has moved from 0.9 to 0.8, leaving a 20 percent chance of failure.

The question then becomes what should a company do to reverse-engineer its EMU plans? To analyze this, look at the impact on these factors: customers and suppliers, employees, investors and competitors.

Backing Up, Backing Out

First, issues with customers and suppliers come down largely to payment capabilities in the short-term. Companies must have systems that can back out of EMU billing and euro coin and bill acceptance. Most important is the ability to figure out whether euros accepted for payment are French euros, German euros, Spanish euros, etc. This allows a company to recreate past records should EMU fail. If a company is triangulating its payments and receivables, this data will exist as part of the triangulation matrix.

Second, it's worth the time to have in place an employee education program outline that addresses the impact of euro-unwinding on employees' personal circumstances as well as on the business. Were the euro to unwind, it would harm European capital markets, political situations, etc., causing tremendous confusion. Confusion translates into far lower productivity.

Third, investors will want to know the impact of an unwound euro on the business and the market segment. The company that provides a full and complete impact analysis will be ahead of the game in answering analyst questions and on planning and budgeting for necessary process change.

Last, the impact on competitors should be known, or at least explored, to identify any potential opportunities. For example, it's well known that several large European multinationals (Siemens, Philips, Daimler) have spent a tremendous amount of money making their systems compliant. Were the euro to unwind, they'd be at a competitive disadvantage tactically as their system conversion would take far more time. U.S. companies, notoriously late in preparing for euro, would reap the benefit of their lack of preparation by not having to change. Every cloud has a silver lining!

Euro is not a done deal. The uncertainty in the German political scene with the ouster of Helmut Kohl and the potential impact of the emerging meltdown on all markets make the possibility of European recession more real. It also calls into question Europe's ability to respond in concert. U.S. companies should take time to ensure that the systems and procedures being put in place to address EMU are reversible. If not, companies must make them so.

Mr. Macdonald is with the financial advisory service of the World Research Advisory in Reston, Va. You can reach him at [phone] or craig_macdonald @worldresearch.com.