The EURO: The countdown has begun

Sent to us by Pierre Kessler of Rectorat de l'Académie de Strasbourg - Service Technologies Nouvelles et Innovation, FRANCE, 1997

(English translation of the French original by Fiona Bartley, CBS James's Street, Dublin, IRELAND)

Contribution to the EDUVINET "European Monetary Union" subject

The cost to the European Union of operating 14 different currencies comes to a total of between 100 and 165 thousand francs. The wheels, therefore, of the largest project at the end of this century, have been set in motion; Europe will operate one single currency by the year 2002, at the latest. This project is but one of our first steps on the difficult road to political union.
Despite consultations with the people and on-going work, the 'Eurosceptics' have not put down arms; now that the actual countdown has begun, there are concerns that last-minute fears or a 'euro-apathy' may lead to a misunderstanding of the advantages a united Europe brings.

A brief history .....

Without returning to the Treaty of Rome or the Europe of Six, we discover the conviction, at the root of the Common Market's creation, that an enlargement of the european economic territory is a basis for european prosperity. Everything, thus, depends on this project: to establish a market open to a kind of competition which allows businesses to develop truly european strategies. First, the free circulation of goods was assured and agricultural markets organised. Since then, the opening-up of the market has extended to banks and assurances regarding the free movement of people and capital within Europe, in existence since July 1st, 1990. Finally, the numerous obstacles to competition which persist (tarif-free borders, the policies of public purchasing, national monopolies) should be progressively lifted: this is the sense of the single market of 1993. In such a context, continuing to operate separate national currencies becomes absurd.

Stage one: the European Monetary System

March 13, 1979, sees the entry of the EMS, creating the ECU, a currency calculated each day according to the variations in the exchange rate of each individual component currency. The value of the currency is determined in relation to other currencies inside the 'Money Serpent', respecting the floor and ceiling levels, and with a fluctuation corridor of 2,25%, increased to 15% in 1993. As soon as one currency begins to reach its ceiling or floor level, the Central Bank must intervene to defend it, by either buying or selling its national currency for cash.
The EMS was created to compensate for the difficulties of the International Monetary System, but it has not solved the problem of speculation on currencies as proved by the peripeties of 1995 .

The Maastricht Treaty and Economic and Monetary Union

On February 7th, 1992, the signing of the Maastricht Treaty paves the way for the European Union, born on January 1st, 1993, and composed of two wings: the Political Union and the Economic and Monetary Union (EMU). The European Monetary Institute (EMI), precursor of the European Central Bank, is launched on January 1st 1994, but holds no powers in the area of monetary policy-making.

The objective of the EMU is to replace individual national currencies with a single currency - the euro - printed by an independant central European bank. The creation of the euro presupposes a sufficient convergence amongst the economies of the member states, and also, naturally, a convergence in their economic and monetary policies.

In December 1995, the European Council launches the single currency. The schedule for its circulation is fixed, in three phases:

1. Start of 1998: a first group of countries designated by the European Council enters the monetary union. A minimum number is not a requirement; those states who meet the criteria will automatically qualify for the Union by January 1st 1999, at the latest (the United Kingdom will only join the EMU at a time of its own choosing).
   
   
2. January 1st 1999: the rates of exchange between national currencies and the euro are determined, and fixed irreversibly. The euro is used in monetary transactions by cheque or bank order; a new EMS regulates the relation between the euro zone and those countries not yet in the monetary union.
   
   
3. By 2002 at the latest, the new currency is launched on the market in both note and coin. On July 1st 2002, the euro becomes the standard for all payments.

The advantages of a monetary union:

1. A true single market: no single market without a single currency!! It is expected that the single currency will bring about price transparency, the disappearance of transaction costs and the risks of exchange. The suppression of exchange fees and costs associated with bank transfers would represent some 15 million euro to the economy.
   
   
2. An end to monetary turbulence within the EMS and the emergence of a vast monetary and financial market for the euro, representing a far more serious attraction for foreign investors, thanks to low interest rates and the guarantee of stability. No more competitive devaluations.
   
   
3. An increased autonomy in the face of the dollar and the yen and more balanced international monetary relationships. Currently, the yoyo effect of the dollar rebounds on different countries in a different manner, depending on circumstances. With a single currency, the effect would be identical through-out Europe. Furthermore, the exchange rate mechanism would provide a useful tool in the fight against competitors (not a dream scenario for the Germans!). NB: It is not necessarily a question of greater stability, rather a different gathering of strength, the intention being to make of the euro a currency of international reserve.
   
   
4. Accelerated economic growth.

The loss of sovereignty: a red herring

The argument against european monetary union on the basis of losing sovereignty has often been put forward, but does not seem realistic once the facts have been put on the table. Since its creation in 1979, the EMS has imposed a tight, constrictive monetary policy on member states. Moreover, the central position of the Deutschmark within the EMS means that, in the words of the British Minister of Finance himself, any sense of British sovereignty lasts exactly ten minutes after a Bundesbank decision! The margin for manoeuvre in the area of monetary policy for member states has been very tight now for quite some time. Rather than being compelled to follow the policies of the Bundesbank, as has been a characteristic of the EMS, it would be better to share monetary sovereignty on a community level. In fact, the question still under examination is how to implement this shared sovereignty.

Which nations would form the first group for monetary union?

In theory, those nations having satisfied the five criteria of "convergence", fixed by the Maastricht treaty would be in the first group. It is unthinkable that France and Germany would not be amongst those nations, yet these two countries are a long way from meeting the Maastricht criteria satisfactorily. The criteria are stringent and follow a liberal orthodox line, liable to bring about a shake-up in these times of weak growth and mass unemployment:

• The currencies must respect the normal margins of fluctuation set by the EMS for a minimum of two years.
  
  
• Inflation must not exceed 1,5% - the average for the three countries lowest in infaltion; this would eliminate Spain and Great Britain.
  
  
• The budget deficit must not exceed 3% of GDP: France and Austria are now out.
  
  
• Public debt must not exceed 60% of GDP: Sweden, Denmark Belgium, Ireland, the Netherlands and France are eliminated on this score.
  
  
• Long-term interest rates must not exceed 2%, the rate of the three member states with the lowest inflation rates.

Whichever way we look at the possibilities, it is unlikely that Greece, Portugal or Italy would participate in the first group, because of their large national debt. Even Germany is not excluded, and currently only Luxembourg could adequately satisfy all conditions.

Should the criteria then be reviewed? The deadlines changed? Significantly, the German term for a revision of the Maastricht terms says it all: << Aufweichen >> = 'softening'. Yet it remains unlikely that the dates will be changed. As regards a 'softer' interpretation of the criteria for convergence, the Treaty itself forsees certain 'margins of appreciation' which in themselves will prove useful.

In any case, a number of declarations have been submitted insisting that the economy in depth will be considered, and its tendencies, rather than the mere figures themselves. That remains to be seen ... Meantime, we can all grind our teeth in anticipation of the eurosceptics move to demand the deadlines be brought back, under pretext that the Treaty itself will not be respected, to the letter.

After monetary union: the growth and stability pact

The supposed 'stability' budget pact was adopted Friday December 13, 1996, in Dublin by the ministers for finance of the European Union countries. It became absolutely indispensable due to the absence of a common political desire: the member states would keep a certain autonomy, in policies regarding revenue and fiscality, for example. A durable budgetary discipline would then have to be respected.

The pact would incorporate, from January1st 1999 onwards, public finances for states participating in the EMU, and would aim, in the short term, to limit budgetary deficits to a maximum of 3% of GDP, and in the medium term, to achieve a more or less balanced set of public finances.

Dissuasive in nature, the stability pact lays out certain penalties: a deposit of between 0,2% and 0,5% of GDP could become a fine if the situation is not kept in balance, except in unusual circumstances, for example, a deep recession.

There are many unanswered questions:

• What would be the exchange rates for the currencies of the first group? Cf. the furore caused by President Valery Giscard d'Estaing of a 7franc euro.
  
  
• What would be the relation between the euro and those currencies which are either 'out' or due to join in the second group?
  
  
• What would be the relation between the euro and the dollar or the yen?
  
  
• How do we round things off at the moment of currency changeover? Sizeable sums of money are involved here.

In conclusion

We must not fall into the trap of complete optimism: the single European currency system in itself will pose its own problems - problems of adaptation for everyone. But where would we be, were the project abandoned now, at this stage? The resulting loss of confidence would be catastrophic, speculation immediately restarted.
Problem spots remain, different in each country: in Germany, the sense of attachment to the mark, symbol of stability and economic growth; in France, the question of sovereignty, coupled with a sense of hostility towards a foreign vote. Within the member states, two pressures coexist - a rise in nationalist sentiment together with a push towards a faster enlargement of the European Community.

Ignorance, pure and simple, gives rise to the fears which exist in this regard. There is a profound lack of understanding of european institutions and their system of operation, also, quite simply, an ignorance of the history involved. Let us hope that the communication campaign will bring a real and effective contribution towards the construction of Europe.

"The metamorphosis is incomplete, we are neither pupa nor butterfly, we are still in the chrysalis. The decisive effort remains to be made." Edgar Morin

A little nostalgia ...

The 'Quotidien' of Paris, 11 april 1983 : "20 years of currency control"

<< The table below shows (...) that France is the most severe of countries in the area of currency control:
When leaving their country, Australians can take out circa 27,000 Ffr per journey, the Spanish 4,200 Ffr per journey ... Germans, Belgians and Britains may leave the country with whatever currency amount they choose.

15 April 1983: Jacques Delors announces the lifting of restrictions in currency control by the end of 1983.

For further information:

Either await the outcome of the new communication campaign, begun on January 1st 1997, which cannot fail to bring results, or, amongst a great number of other works, consult "Towards a Better Understanding of Maastricht", Francois Descheenmaekere, Editions d'Organisation.