ECONOMIC AND MONETARY UNION - An Irish View Point

By Paul Tobin of CBS James's Street, Dublin, IRELAND, 1997

Contribution to the EDUVINET "European Monetary Union" subject

In teaching a class on the Euro and how it relates to Ireland there are nine sub-headings under which I would review the topic.

They are:

• Background
• Necessary Conditions
• The Arguments for EMU
• The Launch of EMU
• Planning and Preparation
• Precedents
• Effects on Industry
• Britain
• Preparedness

BACKGROUND

The agreement in principle to strive for Economic and Monetary Union was signed by the original six members of the EEC in the Hague in 1969. This was four years before Ireland or Britain joined the European Economic Community (EEC) along with Denmark.

The idea was to bind the various states of western Europe as closely as possible so as to eliminate the instability which had previously led to war.

From the beginning the goals of European Union were:

• low and fairly uniform interest rates among participating member states
• elimination of transaction costs and exchange rate risk for trade tourism and investment
• promotion of price stability, sound public finances and sustained low-inflation growth and consolidation and fuller development of the single market

NECESSARY CONDITIONS

In Ireland it is government policy that we will qualify to be among the first group to adopt the EURO.

This means we need to do a number of things:

• We must continue to meet the Maastricht criteria. In particular we need to keep the government deficit below 3% of Gross National Product (GNP) and ensure that our debt ratio keeps falling at a satisfactory pace
• We need to keep meeting the other Maastricht criteria, on long term interest rates, exchange rate stability and inflation
• We need to improve the working of our economy in terms of competetiveness, efficiency and flexibility.

THE ARGUMENTS FOR JOINING THE EMU

The benefits for Ireland will include

• a stable economic system not disrupted by currencies moving up and down against each other
• a reduction in foreign exchange requirements for business
• no forward cover needed to insure against unexpected exchange rate fluctuations
• higher level of economic activity· because business people here will not have to bear the cost involved in buying different currencies
• savings for Irish operators - one method of payments
• single low interest rate for Euro countries
• lower borrowings charges
• lower cost of servicing national debt
• good tight fiscal controls due to stability pact
• holiday travellers to different euro countries will save by not having to change to different currencies
• ease of comparison of prices within EU .

THE LAUNCH OF EMU

PLANNING AND PREPARATION

Since economic and monetary union will begin on 1 January 1999, preparations for the changeover to the single currency, the EURO, are intensifying and there is heightened interest about EMU right across Europe and indeed further afield.

Even though the new currency will not become available until January 2002 at the latest, planning the practicalities has already started in Ireland.

In the Civil Service all departments have appointed single currency officers and a single currency officers team (SCOT) has been set up to examine the practical implications of the changeover to the EURO and to plan for it.

For the public, a EURO week, starting 8 December 1996, has been organised. Supermarkets and pubs will display both EURO and Irish Pound prices on selected items. The conversion rate for the EURO has not yet been fixed of course, so the Euro prices being displayed will be based on a notional rate of 1 EURO = IR£0.80.

PRECEDENTS

Remember decimalisation?

In the early 1970's we moved from the imperial system whereby there were twelve pennies in a shilling and twenty shillings in a pound to the far simpler decimal system which had one hundred

pennies in a pound. Few under the age of 35 will recall what was involved, but in the immediate aftermath there was a deep seated and widespread suspicion that it was used as an excuse to push up prices.

On this occasion the tight control which the entire process of monetary union has over the economic fundamentals should provide protection against a recurrence. Nevertheless consumers are a wary group and have to be convinced about the benefits of the Euro. 'Women are more sceptical of an elite group making decisions like this, and their accountability' said one female economist working for the European Commission on the single currency project.

BRITAIN

In Britain total exports equate to about one quarter of annual GNP. In Ireland exports of goods and services amount to IR£34 billion, compared to a GNP total of IR£42 Billion. Put simply, because Ireland is so heavily reliant on trade, the option of 'staying out of the Euro' may not be an option at all.

Our reliance on the British market has also been steadily declining. In 1960, 75% of our exports went to Britain. Today the total is closer to 25%. In 1960, only 7% of our exports went to what is now called 'the rest of the EU'. Today that proportion is over 40%. If the big European economies decide to create the Euro on schedule Ireland will be in there on the first wave, whether Britain joins or not.

Last year the government commissioned an independent study, conducted by the economic and social research institute, to tease out the policy implications behind this proposition. On balance, taking the modest but real economic advantages and the political implications, that study concluded positively that Ireland's overall national interest is better served by being in rather than out of the Euro-club, irrespective of Britain's decision.

Uncertainty over Britain's intentions in relation to early membership of the EMU seems likely to persist until the British general election next year.

The problem for Major, as we in Ireland see it, is simple. A majority of British businesses want Sterling to participate in EMU, particularly big trading businesses that have supported the Tory cause. But a likely majority within both the Conservative Party at Westminister and the Conservative Party generally have no stomach for a single currency and would prefer to retain economic sovereignity. However it is sometimes forgotten that a majority of British Parliamentarians from all political parties favour a stronger union with Europe. A decision in relation to participation in EMU should be easier to take for Major than for his Irish counterpart John Bruton.

The Dublin Summit, 13. 14 December 1996 will, among other things, try to establish a new exchange rate mechanism. This is of crucial importance to Ireland as it will dictate the relationship between the Euro and Sterling should we enter and the British decide to stay out.

Some relationship between the Euro and Sterling should be worked out. There is already talk of a 15% band between the new currency and Sterling. Some link between the two is critical for Ireland. Ireland is more dependent on trade in the Sterling area than any other country in the EU. Some adjustment mechanism has to be put in place whereby if we are caught in currency crossfires or competitive devaluations, a transfer fund is available in the event of serious economic upheaval because we won't have any other instruments to deal with it .

EFFECTS ON INDUSTRY

The position of the Food, Drink and Tobacco Federation is that they believe that there are quite a large number of vulnerabilities for this sector. A higher proportion of food exports goes to Britain than from any other sector. The average Sterling rate in 1993 was 96 pence, but the average rate this year is going to be 104 pence. The EURO is likely to advance against Sterling if Britain does not come in. If this were to continue then year in year out you will be losing 2-3% of competitiveness because of Sterling's weakening.

Small firms

There is an argument that we should preserve our links with Britain, as they appear to be staying out. Really the argument is about the balance of our dependence on our British trade. Sterling is going to stay out in the short term. Traditionally Sterling slid downwards against the Deutschmark. So it is likely to slide against the EURO. Then the British government will be the decision makers as to when we do join EMU.

With Europe expanding to the east, small businesses are going to be under more and more competition. The rules have not been agreed about how those countries are going to join monetary union and any transition period that is granted to them is going to be detrimental to the Irish competitive situation. And that presents a major threat to the future of the Irish Food industry.

Irish Distillers

EMU will greatly simplify the export business this industry has throughout Europe and make things a lot easier by removing the currency risk from exporting. During the three year transition period between national currencies and the single currency, Irish Distillers expects to be transacting business in two currencies, Irish Punts and the Euro.

Industry in General

A big problem with EMU is that, along with the Social Charter, it will most benefit countries like Germany, Holland and France. By raising our production costs to be more in line with theirs, our only advantage of having a cheaper cost base will be gone. We still have the problem of being the furthest away from our markets, with the attendant cost of air and sea freight.

Recognition of transport and currency costs between here and Britain has led some industrialists to move manufacturing to England. Costs can be much lower there and overall the British economy is cheaper to operate in. Should Ireland race into EMU without Britain, the imbalance may well be intolerable for many Irish companies.

PREPAREDNESS

A national survey commissioned by the Chamber of Commerce of Ireland shows that few Irish companies are prepared, few believe they know enough to begin preparations for the new currency and few believe the government is consulting enough with business. The good news is that the transition will be gradual. From January 1999 it will be possible to open a bank account in euros and January 2002 is the deadline for the first EURO notes to appear. Some retailers are already promising to have a dual pricing system in place, to familiarise consumers with the EURO. Even so, the cultural change involved in getting people to talk in euros rather than pounds is daunting. Years after imperial weights disappeared from consumer packaging, imperial measurements are still in everyday use. The scales in maternity hospitals may be metric, but few new parents talk about the weight of their newborn in Kilos.

TO SUM UP

1967 EU leaders agree to the gradual introduction of a single currency

1979 The European Monetary System (EMS) established to provide stability in exchange rates

1992 Maastricht Treaty

1994 European Monetary Institute established to prepare the ground work for the single currency

1999 Values of the currencies will be interlocked

2002 EURO notes and coins in general circulation

SOME QUESTIONS AND DISCUSSION POINTS

• What were the conditions set down in the Maastricht Treaty for a country to be eligable to become a member of the EMU?
• If the UK does not join what are the implications for Ireland?
• What happens if Ireland suffers a severe economic setback in the future?
• What will happen if Ireland stays out?
• What are the benefits for Ireland in joining the EMU?
• Will a single currency solve the unemployment problem?
• High spending may keep Ireland out of the EMU. Discuss
• Will we lose control over our economic policy?
• How will joining affect prices in the shops?
• Why should an 18 year old Irish person be interested in a decision that will be taken by politicians at the end of the day.
• "Our starting point is that the EMU is about to become a reality that will radically change the business landscape in Ireland and in Europe" (John Travers, Chief Executive of Forfas). Discuss.
• How do you think other European countries feel about the EMU and what do you think are their hopes and fears?