Introduction to the EURO

Sent to us by Catalina Servera Mestre and Francisca Alomar Borrás of the Govern Balear - Conselleria d'Educació, Cultura i Esports, SPAIN, 1997

English translation of the Spanish original.

Contribution to the EDUVINET "European Monetary Union" subject

TITLE OF THE DIDACTIC UNIT

INTRODUCTION TO THE EURO

To design this unit we have taken into account structural didactic aspects of the educational model established by the compulsory secondary education. (LOGSE)

0. Previous knowledge

Students must have worked, at least, the following topics:

1. European Union: principles, purposes and countries that integrate it.
2. Treaty of Maastricht: bases and repercussions.
3. Short concepts of economic terms: currencies market, exchange rates, gross domestic product, national revenue, national expense, investment, public income, inflation, etc.

1. General objectives of the unit.

The main objectives students should achieve with the unit are, mainly, the following:

1.1. To know the European monetary system (EMS)

1.2. To know the requirements to be a member of the only currency in 1999.

1.3. To know the repercussions of the introduction of the only currency.

1.4. To evaluate the effects and the impacts of the Euro in the society.

2. Contents.

2.1. Concepts.

In a general way, we state the following index of concepts able to be worked in the unit. Obviously, the development level of each concept has to be adapted to the group of participants in the experience. It will be sought especially the basic comprehension of the general and nuclear concepts.

A. The European monetary union (EMU).

B. The EC integration and the economic and monetary union.

C. The economic union.

D. The monetary union.

E. The process of the European monetary union.

F. The Euro: the European only currency

F.1. The Euro and the national denominations in the second stage.

F.2. Legal tender.

F.3. Continuity of the contracts.

G. The convergence criteria : requirements to be a member of the only currency in 1999.

H. Consequences of the European monetary Union.

H.1. Consequences for the companies.

H.2. Monetary policy .

H.3. Types of interest.

H.4. Fiscal policy.

H.5. The bank sector.

H.6. Consumers.

2.2. Procedures.

To achieve the objectives it can be helpful to do activities that permit the practice of procedures related to :

• The reading and viewing of documental sources.
• The summary of the legislation and documentation related to the economic and monetary union.
• To carry out opinion polls to different sectors (companies, stores, banks, etc).
• The analysis and tables interpretation and graphic with statistic data.
• Simulation games adopting the Euro as the unit of economic value .

2.3. Attitudes and values.

The Euro, as any phenomenon of social and economic nature, outlines dilemmas, causes effects and situations, and creates conditions that affect positive and negatively people´s lives and communities and their cultures. Naturally the unit has to provide activities that permit students become aware of these problems. We give some examples of attitude contents to develop.

• Recognition of the Euro as a phenomenon of communication among cultures, with its positive and negative aspects.
• Recognition of the Euro as an economic activator, with its positive and negative effects.
• Evaluation of the Euro in a framework of sustainable economic development.
• Recognition and valuation of the need and importance of the Euro introduction in the country.

3. Materials.

Obviously, there are a lot of materials teachers can use to reinforce the unit. We give an initial list:

• Written texts (general manuals, monographs and reports, specialized publications, booklets, etc).
• Cartographic material ( general maps).
• Calculus instruments and computer material (hardware and software).
• Simulation games.
• Questions and opinion polls models.
• Material for the evaluation of the socioeconomic impacts.

4. Activities to develop and treatment of diversity.

The complexity of the topic makes a wide range of activities. On one hand, teachers, according to the school conditionings, have to select and give priority to those considered more feasible, interesting or necessary. The activities that are listed below are simple examples. On the other hand, the variety of activities permits an adequate attention to pupils' diversity , according to their interests, expectations, aptitudes and motivations.

• Writing (free or compulsory) diaries of the activity.
• Elaboration of newspapers or informative murals.
• Carrying out surveys to important people.
• Thematic opinion polls elaboration.
• To prepare a debate or round table with experts invited specifically.
• Design of an information program addressed to different groups..
• Cartography reference.
• To do a public exhibition on the topic, with the elaborate and/or collected material.
• Preparation of a talks program by experts addressed to parents.
• Information search through data processing network.
• Cultural exchange among schools interested in the topic.

5. Procedures and evaluation criteria.

The evaluation of the results of the unit development has to include, not only whether students have achieved and in what degree the mentioned objectives, but also the evaluation of the activities development and of the own didactic unit to make the relevant and useful changes for a future application. You will also evaluate other aspects such as: the degree of the educational community collaboration, of other sectors or institutions, etc. Apart from others, the instruments for the evaluation can be:

• Didactic questionnaires and topic tests of concepts and procedures achievement.
• (Pre-activity and post-activity) questionnaires on the attitudes and the previous and adquired students´ knowledge.
• Qualitative evaluation of the materials elaborated by the students and of the degree of implication and participation of each one of them in the accomplishment of the activities.
• Quantification of the attendants to the activities organized by pupils.
• Questionnaires for the participants (pupils and teachers).

The evaluation criteria will be defined by the experience activators on the basis of the objectives to achieve. Some examples of evaluation criteria are:

1. Objective number 1: To obtain this objective means that pupils are able to understand the European Monetary System.
2. Objective number 2: To obtain this objective means that pupils know the convergence criteria, the existence of stages for the Euro introduction and the Euro management.
3. Objective number 3: To obtain this objective means that pupils are able to explain the usefulness of the only currency in the international market and intra EU, to know the Euro different bills and coins and their daily use.
4. Objective number 4: To obtain this objective means that pupils are able to understand the effects in the occupational market and the socioeconomic environment.

An example of contents from paragraph H:

Consequences of the EMU (European Monetary Union).

The EMU (European Monetary Union) will cause institutional changes that imply economic policy changes. The new fiscal and monetary policies affect the financial markets performance, trade unions, companies, and the other economic agents.

H.1. Consequences for the companies.

The Euro will be an opportunity to reactivate the European economy, to reinforce the competition of the European companies and to give greater monetary power to Europe.

Commercial area:

• While the only currency is not introduced, the positive effects of the only market will be limited: so, the competition will be progressive.
• The Euro will match prices, and the consumers will not need to buy abroad in order to save.
• The companies will have to adapt their commercial strategies.

Financial area:

• The costs from currency conversion to all the internal transactions of the only currency area will disappear. The change risk will be limited to the transactions between the Euro and the rest.
• The Euro will be a stable currency, since an independent central bank and a good management of the public finances will give it a greater guarantee. Furthermore, it will attract the world saving and will permit that the companies could benefit from a lower interest.

Countable area:

• It is necessary to be prepared in the computer field.
• The agreement on the exchange rates will represent change benefits or losses on the currencies treated in a countable way, according to the given value.

H.2. Monetary policy .

The maneuver degree will be reduced to adopt independent policies, since the European countries will not have either economic or budgetary independence,.

H.3. Interest rates.

Interest rates must be standardized, though there could be differences according to the efficiency level of the respective capital markets and of the given financial assets risk.

H.4. Fiscal policy.

Fiscal policy will be limited by the market. The Governments will lose autonomy to finance their budget deficits, and their capacity of imposing different taxes will be reduced while the production factors earn in mobility . The public deficit financing will be limited by the central authority.

H.5 The bank sector.

The European Monetary Union has the objective to create an only currency in an area where, nowadays, there are different currencies in circulation. An only currency implies an only monetary policy and, consequently, a BCE (European Central Bank) that marks the guidelines. The ESCB ( European System of Central Banks) will be the executor arm, and the principal objective of both is the stability of prices.

When the Euro begins operating , the market, which the financial entities will work in, will offer greater possibilities of business, but also a strong competitive pressure.

The level of efficiency and productivity requirement will reach the maximum levels. The ways the banks and Spanish saving banks rely on to arrive to the Euro in adequate conditions are not many, according to the opinion of the experts, and the solution must include the necessary power or their specialization.

In the case of the Spanish saving banks, it is recommended to impel the fusions between different Comunidad Autónoma saving banks, while for the banks some concentration among entities could be done, especially in the medium-sized ones. Some banks could also disappear, since not all of them will be able to match up to the imminent challenges. It will be necessary, in opinion of different sectors, to establish strategic alliances among large entities to develop specific activities of the banking business.

a. Consequences of the only currency in the banking sector.

The introduction of the only currency and the implementation of the ECB (European Centra1 Bank) on January, the first 1999 will mean the centralization of the EC monetary policy . All the currencies except the pound sterling and the Danish krone, that will be able to choose to remain out of the EMU (European Monetary Union), must align their monetary policies with the monetary policy that the ECB (European Central Bank) dictates, which will define the EU monetary policy , with the principal objective of maintaining the prices stability. The treaty of Maastricht stipulates also that the state members will consider their economic policies as a matter of common interest and will coordinate them in the heart of the Council. The rest of the EU countries that are not incorporated into the third stage of the EMU must pay a high cost, and will have to keep a much stronger economic and monetary self-discipline to attempt to get in on the only currency.

1. Monetary policy .

The margins of the 15% have shown to be effective in the objective of the exchange rates stability. The decision of the Twelve allowed each country to begin an adjustment process of its monetary policy to their particular economic situation, without undervalueing the European convergence. It is evident that the Banco de España will lose autonomous performance capacity on interest and change rates. But this performance degree has already been reduced outstandingly by the growing globalization of domestic economies and by the need of European convergence.

If Spain joins the EMU, the issuing institute must delegate the definition and execution of the monetary policy to the ECB, but the experts indicate that this will be a free transfer, since in practice who dictates the guidelines is the Bundesbank.

2. Change policy.

The Banco de España does not have now full powers and the markets offer a strong counterweight. The Government is who formulates the change policy and who chooses the parities of the peseta, depreciating or appraising it, within the European Monetary System.

The issuing institute, up to now, can graduate the currency appraisal or devaluation. In the European Monetary Union the Government and the Banco de España will lose powers in favor of the Council of Economy and Finance Ministers and also in favor of the future European Central Bank.

3. The control of foreign currency reserves.

Even though the Law of Autonomy of the Banco de España gives full legal authority to keep and manage the official reserves, from 1999, a part of its currencies will be transferred to the European Central Bank, which will be in charge of its management. The ECB council government will decide, in function of the initial dimension of the Euro area, the exact quantity to be transferred ( assets contribution designated in currencies from non-members countries and in gold). This transfer has the objective to endow the ECB of assets able to be used in change policy operations to intervene in the foreign currencies market. The not transferred reserves will be kept in the national banks under the alertness of the ECB.

One must remark that the operations surpassing a given volume will require the previous approval of the ECB. The Banco de España will supervise the Spanish financial entities, but the ECB will contribute to good management of the labor through the close collaboration among the different European supervisors.

4. Investment.

Concerning the investment banks, there will be changes in the companies financing, in the funds management, in the stock investments, in debt emissions and in the monetary markets operations.

5. Stock market.

On one hand, the Euro will speed up the European stock market, eliminating the exchanging risk and the inflation differentials. The intraeuropean investors will no longer be concerned about the fluctuation risks of currencies that are members of the European Monetary Union.

On the other hand, the competition among the European operators will be increased, once eliminated large part of the costs of studies in the different markets. Thus, the transnational investment of the institutional operators will grow up, especially the investment funds and the private investors will be more interested in investing abroad.

6. Investment Funds.

The opening of the capital markets does not affect too much to the collective investment institutions: the effects will be noted much more in the financial groups whom they belong to (banks and saving banks, basically). They will be who make an adjustment effort to the Euro.

7. Competition.

An increase in the competition among Spanish agents is expected. On the contrary, a spectacular increase of the foreign institutions presence is not expected, since one must take into account that the funds marketing is virtually lock and stock in banks and savings banks , which have vast commercial nets to invest their assets. Thus, they let little space to operate for the foreign agents that have no nets.

8. Profitability.

The reduction of interest rates will cause that the profitability offered by the FIAMM stops being interesting for the investors, above all for the Spanish ones, accustomed in the last years to obtain yields of about two digits from these products.
It is also expected a transfer of capital towards other products able to obtain higher profitability, as the variable revenue funds.
If one has into account the FIAMM manage more than eight million of pesetas, almost 60% of the fund volume, the change will have many consequences, for the agents as well as for the participating people.
The search of higher profitability will also help the international funds height, as well as Spanish and foreign entities.

9. Commissions.

The greater competition and the profitability search will imply a reduction of the commissions that the investment funds charge the investors. It is expected a decrease of management and deposit commissions.
Moreover, it would be produced a gradual increase in the commissions refund and, even, the appearance of subscription commissions in some funds that seldom exist, in practice, at the moment.

10. Legislation.

Spanish and European collective investment are waiting for the second Guideline of investment services (stopped for years in the Commission by the disagreements among the member countries) and of the fiscal refund.
The Guideline must establish and harmonize new types of funds, as the funds fund or the deposit funds, but these two processes are out of the European Monetary Union.

11. Problems of the only currency: the cost of its introduction.

The introduction of the European Monetary Union implies a series of problems: increased adjustment costs, decrease of profits margins, technological development, appearance of new forms of business,...
The most relevant effects of the European Monetary Union for the entities come from the greater competitive pressure that the Euro implies for the banking sector.
The banking employers have been claiming for a long time that the State defrays the costs that the only currency coming into force will imply for the financial entities. The CECA( State Boxes Federation of Savings Banks) has also demanded fiscal benefits.
For the time being, the transition costs is one of the high-priority problems to solve: the banking federation of the European Union reports that 54% of the total cost of the Euro introduction will concerns to technology ( in fact, the people working with computers will have to work the hardest with the only currency introduction), followed by the marketing and public relationships (15%) and staff training(10%) departments.

12. Aspects of the commercial banks that will be affected by the only currency introduction:

• They will have to introduce decimal numbers in the countable systems.
• They will create a payments system for all the Euro area: the TARGET, which is a great interconnected liquidation system in real time; the interconnection will be named in Euros, though the national currencies are in circulation during the next three years.
• With the European Monetary Union there will be a greater offer of products and services , the competition will be increased and also the pressure on the brokers margins .
• The experts wait a strong increase in fusions and banking procurements, while other sectors say that there will be technological alliances only among entities.

The European Central Bank and the European System of Central Banks.

At the second stage of the Union it is created the European Monetary Institute , the European Central Bank forerunner. The Council of theEuropean Monetary Institute is administered and managed by a Council formed by a president and the governors of the national central banks. The Treaty of Maastricht establishes its duties: to reinforce the cooperation between the national central banks, to reinforce the coordination of the State members monetary policies, to supervise the EMS operation, to hold conferences on matters that are responsibility of the national central banks and that affect the entities and financial markets stability, to assume the functions and projects of the European Fund of Monetary Cooperation, and to make the Euro use easier, supervising its development. The European Bank will assume the monetary policy authority: it will state interest rates, will look after the Euro stability, will supervise the credit/loan entities. Furthermore, the State members must transfer a great deal of their reserves control as an effective intervention instrument.

The European Central Bank duties are:

• to maintain the stability of prices (as the main objective ),
• to define the monetary policy in the Euro area,
• to keep and manage the official reserves,
• to accomplish foreign exchange operations,
• to promote the good operation of the payments system,
• to contribute to the supervision of the credit entities and to the financial system stability.

The European System of Central Banks ) will be formed by the national central banks and by the European Central Bank.

Within this plan, the Banco de España will have say in the governing organs, even though its influence capacity will depend on the vote proportion that goes to it and on the formulation adopted to validate the decisionmaking (by simple or qualified majority).
In conclusion, it is evident that banks must redefine their dimensions for a greater competition, their geographical area and the customers sectors that want to serve.

H.6 Consumers

Consumers must get used to a new monetary standard that provides difficulties and advantages:

• the market will be more effective; companies and consumers will not be affected by change rates.
• occupation will be encouraged
• the costs due to the existence of several coins will disappear.
• the international stability will be reinforced
• the common monetary sovereignty of the state members will consolidate.

The ranking of the economy, without tensions in the change markets, will favor the development of exchanges and will facilitate an increase of saving and of investment.

At the same time, the stability of the prices must imply a decrease of interest rates, all these things favoring an adequate environment for increase and creation of employment.

Source: CENTRE BALEARS EUROPA

Bibliography

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