The Maastricht Treaty is rather cryptic about the way in which, once the final stage of EMU has started, the ecu will replace the national currencies and become the single currency of the Union. Indeed, the entire matter seems to be dealt with by a a single provision in paragraph 4 of Art. 109 L of the Treaty, which merely instructs the Council to take, at the start of EMU, the necessary measures for the rapid introduction of the ecu as the single currency of the Member States that have entered into the Monetary Union.
However, when one examines the implications of the Treaty
provisions concerning the start of EMU, a rather clear picture of the ecu's
likely introduction process emerges and a better understanding develops
of the measures that would smoothen and speed up its implementation 1.
A. General monetary consequences of the start of EMU
1. A jump into the future : a European monetary zone
According to the Treaty, EMU will become a reality on the day when the irrevocable rates are fixed at which the ecu and the currencies of the participating Member States are convertible into each other. On that very same day, a single monetary policy, determined and managed by the European central bank will start operating for the whole of the Monetary Union.
However, a rather incongruous phenomenon will characterize the birth of the Monetary Union : it will not have a single currency, but the participating currencies will be joined by a new-comer, the ecu, which should rapidly replace its partner currencies.
This being so, it would be wrong to assume that EMU could, for some time, continue to function on the basis of the participating national currencies and their respective currency areas. Doing so would negate the monumental monetary consequences of the start of EMU. Indeed, being interchangeable at irrevocably fixed conversion rates, the ecu and the currencies of the Member States that participate in EMU actually become the various denominations of one and the same monetary reality. Just like 1 dollar is worth 10 dimes, 20 nickels and 100 cents, so will the different denominations (DM, FF, HFL, BF, etc.), in their respective fixed amounts (say, 1.95, 6.60, 2.16, 39.80, etc.) all represent the same value (in this example: 1 ecu) 2.
Admittedly, the arithmetic will not be as straightforward
as with the dollar. Nonetheless, right from the start of EMU, the national
currencies and the ecu become, in the amounts determined by the irrevocable
conversion rates, the equal value components of EMU's money supply, substitutable
for each other and managed as a whole by the ECB in the framework of its
single and comprehensive monetary - and exchange rate policies.
2. Money-creation : a multi-denominational affair
From the very beginning of the final stage of EMU, the participating Member States will make up a new, single monetary zone. For some time, this zone will function with a variety of money quantities which, under different denominations, all represent equal and substitutable values.
This being so, in each of the participating Member states, the notion "foreign currency" becomes, from a monetary point of view, irrelevant with regard to the ecu and to the other participating currencies.
Consequently, the various national commercial banking systems could very well start to proceed with money creation on a multicurrency - or rather multi-denominational - basis. Indeed, why should a DM not constitute an appropriate funding for a credit in BF granted by a Belgian bank, provided the amounts of DM and BF involved match their irrevocable bilateral conversion rate? Indeed, when this is the case, both sides of the credit/funding operation will represent identical money values and generate identical interest rates revenues (or costs) 3.
Such a development would have far reaching consequences. In the first place, the national currencies would cease to be national, as each of them becomes usable in any participating Member State. Similarly, the banking systems would lose their national base and become able to operate in the whole of the Union in any participating currency.
Moreover, commercial and financial operators would expect
their local banks to service them in any currency of the Monetary Union
under the same conditions as those applicable to their national currency.
3. The ecu : starting as an additional currency
At the start of EMU, the ecu undergoes an important, though non-disruptive change in its definition and status.
(i) from basket-ecu to currency-ecu
The ecu ceases to be defined in terms of a basket of the currencies of the twelve Member States and formally acquires the status of a regular currency4. As such, the ecu becomes, alongside the participating national currencies, a component of EMU's money supply, issued and managed by the ECB.
(ii) a non-disruptive change
In its basket definition, the ecu's value in terms of any of its component currencies, say the BF, is determined by the exchange rate evolution between the BF and the other components. If the latter appreciate/depreciate against the BF, the ecu will be worth more/less in terms of the BF.
As long as the currencies that compose the ecu's basket can fluctuate against each other, the ecu's exchange rate cannot be stable. A contrario, when the exchange rates between the components are fixed, the ecu's value in terms of each of them becomes automatically fixed as well.
This fact, combined with the Treaty provision that the change-over from basket-ecu to currency-ecu "shall by itself, not modify the external value of the Ecu" will ensure the continuity of the ecu's exchange rates 5..
Indeed, under this provision, the conversion rates of the participating currencies in ecu, irrevocably fixed on starting day of EMU, must be identical to the exchange rates of these currencies in terms of the basket-ecu prevailing on the last day of the latter's existence. In other words, if on the starting day of EMU, the Belgian franc's conversion rate is, say, 39.80 BF to the currency-ecu, then 39.80 will also have been the Belgian franc's last available basket-ecu rate of the transition stage.
If need be, this example also illustrates that assets
and liabilities in ecu accrued at the time when the ecu existed in its
basket-format, are going to be valued on a 1 to 1 basis against the ecu
in its currency format.
B. A central role for the ecu at the starting date of EMU
1. About principles and realities
Right from the starting date of EMU, the participating Member States will constitute a Monetary Union in which their currencies and the ecu have become, in principle, the perfectly substitutable components of the Union's money supply.
In reality, this will not be the case. What is more, it should not even be the case:
(i) why it will not be the case
There are numerous reasons. Just to quote a few: in all Member States residents are not allowed to use anything but the national currency for a variety of transactions; not many banks offer as of yet multicurrency accounts to their customers; the various payment systems (transfers, checks, credit and debit cards) are national currency-based and the use of another currency involves additional costs and delays; the international links between the national systems are also expensive and slow. As a result, commercial operators in the participating countries, especially at the retail levels will not readily volunteer to price their goods in a variety of currencies and will be even less inclined, given the costs and delays involved, to accept these currencies in payment.
(ii) why it should not be the case
It would seem hardly justified to expect the banks to
commit the necessary financial means for the purpose of allowing their
customers to use, on an equal footing, all the national currencies when,
shortly thereafter, the national denominations will be replaced by the
2. An innate central role for the ecu
The obvious way to proceed is to introduce, right from the start of EMU, the ecu as the "base" currency of the ESCB and of the banking systems of the participating Member states. In other words, all the assets and liabilities in the participating currencies of these institutions - including those in their own national currency - would be converted into ecu at the irrevocably fixed conversion rates and booked as such.
Consequently, the national banking systems would cease to deal among each other in any of the currencies of the countries that participate in EMU. Such operations would be ecu-denominated and executed in ecu. However, when dealing with their non-bank customers 7 banks would issue account-statements both in ecu and in the national currency of the account holder (or any other participating currency of his choice). But all deposits in a participating currency would be registered in the books of the banks for their equal-value amount in ecu. Equally, all payment orders given in a participating currency by customers would be handled in ecu by the banks involved: the payer's ecu account would be debited for the equal-value amount in ecu, the transfer operation between banks would be in ecu, the payee would be credited in ecu in the books of his bank. However, he would receive a credit-statement denominated both in ecu and the currency denomination of the payment order.
As for the ECB, it would, from the very beginning of EMU, conduct its single monetary policy by means of ecu-denominated instruments in the framework of an ecu-based money market. On the exchange markets, its interventions vis-a-vis third currencies would, of course, also be done in ecu 8.
The immediate adoption by the ECB and the banking sector of the ecu as the single denominator for the "deposit-money" of EMU, would spontaneously lead to similar initiatives in other sectors. Multinationals, financial institutions, export-import oriented companies would certainly rush to adopt the ecu for their accounting and payment procedures. Banks and companies in third countries would similarly be attracted. In each of the participating countries, the practice of "dual pricing" would extend to an ever larger share of the goods and service markets and the public at large would get used to "think" both in ecu and in their national currency.
Demand for retail-payment instruments in ecu (payment cards, electronic purses) would rapidly increase as all those operating within the single market would be more at ease in dealing in ecu when abroad rather than in the various "local currency" denominations.
The issue of ecu banknotes and coins should also be undertaken
at that stage, followed by the rapid withdrawal of the national denominations
once a significant amount of fiduciary money in ecu has been put into circulation.
C. The helpful contribution of the basket-ecu
If EMU is to start with the ecu as its "base" currency then, clearly, all the necessary preparations need to be completed during the transition period.
This is no mean task. For its part, the European Monetary Institute is committed, under quite explicit Treaty provisions, to do exactly that, i.e. to deliver an operational ECB to its Governing Council on the starting day of EMU. The commercial banks have no similar obligation. But provided they know how the authorities are planning to proceed with the introduction of the ecu, they will have every incentive, for purely competitive reasons, to be ready in time 9.
To that end, the ecu in its present basket definition represents the ideal means10. .Focus should be on the development of the commercial uses of the ecu (i.e. pricing, invoicing, payment), especially for transborder transactions within the single market and beyond (Eastern Europe, ACP countries). Member States could facilitate progress by allowing those of their residents, who voluntarily wish to do so, to use the ecu in some areas which, so far, are the exclusive preserve of their national currencies 11.
But the central role will go to the banks. Indeed, unless
they adapt their accounting and payment instruments (transfers, cheques,
payment cards) to an ecu viewed as the "national" currency of an "ecu-land"
of European dimension, its commercial use will remain inhibited 12.
But, on the other hand, the transition period will allow the banks to proceed
with these adjustments - which they have to undertake anyway -, in a more
gradual, piecemeal, cost-effective way and with less competitive stress
than would be the case if they were to undertake them after EMU has started.
The answer to the question "is there a simple way to introduce the ecu as the single currency?" is of course "no"!
But, there are many complicated ways to do so. The approach outlined in this paper is certainly among the least complicated while remaining closely in line with the Treaty's resolve for a rapid introduction of the ecu.
By proposing that the ESCB and the banking sector both adopt the ecu as their "base" currency right from the start of EMU, the leading role in these matters of money is given, quite naturally, to those who create it.
More specifically, this approach would convincingly, signal to the markets and to the public at large that,
- firstly, EMU is there to stay;
- secondly, by becoming the common denominator of EMU's money supply, the ecu is poised to replace rapidly the national currency denominations in all their remaining uses as well;
- and thirdly, the transition stage to EMU is to be fully used, as it should, to prepare for this event.
This being so, the present situation calls for clarification. Admittedly, "at the latest by 31 December 1996, the EMI shall specify the regulatory, organisational and logicical framework necessary for the ESCB to perform its tasks in the third stage". But the ESCB cannot operate in a void. The monetary framework in which it will conduct its single monetary policy needs to be in place as well. Consequently, it is essential that money- and financial market operators know, as soon as possible, how the authorities will proceed to substitute the ecu for the national currencies.
Both the EMI and the European Commission have a Treaty-imposed duty in this respect.
Since its creation on January 1, 1994, the EMI has taken further the work already accomplished by its predecessor, the Committee of EEC Central Bank Governors, in "preparing the instruments and procedures necessary for carrying out a single monetary policy in the third stage".
The Commission, for its part, has recently set-up a technical Group with the mandate to study and advise on the practical steps involved in moving to the single currency and pertaining, for instance, to the legal aspects of the introduction of the ecu, the changes within the banking industry, the practical consequences for firms and corporations as well as for the public at large. The Group, in which the EMI participates as an observer, will complete an advisory report by the end of 1994.
Considering the length of the preparation-time needed
by the banking sector, it is of the utmost importance that, following this
report and the preparations by the EMI, a sufficiently clear and politically-endorsed
blueprint of the ecu's introduction as the single currency becomes available.
If this is the case, competition between banks and customer-pressure will
contribute to ensure that the Treaty's goal will be rapidly achieved.
(1) Main Treaty references : Articles 3a(2); 105a(1); 109f(3); 109l(4) and (5); Article 52 of ECB Protocol; Article 2 and 12 of EMI Protocol.
(2) In line with international practice, the fixed conversion rates will actually be expressed in "six figure" numbers. However, when they are used to convert an amount or price from one currency into another, the outcome will, of course, be rounded to the smallest sub-unit (Pfennig in DM, centime in FF, penny in UKL, etc...).
(3)An analogy exists already today in the ecu money market. Indeed, a certain number of "last resort" commercial banks make up the difference between supply and demand in the ecu deposit market. They do so by lending or borrowing ecu as the case may be, and subsequently fund themselves in the twelve currencies that make up its basket. It is clear that any of these currencies could be used for that purpose if the exchange rates between the ecu's component currencies were fixed once and forever.
(4) The relevant Treaty provisions - Art. 109 G, 109L(4) and (5) - do not allow for the interpretation that the basket-ecu would continue to exist, incorporating the currency-ecu as one of its components.
(5)This provision is identical to that of para 2.3 of the Resolution of the European Council (Brussels 1978) which ensured that, on the day of the revision of the ecu's composition, the exchange rates of the "new" basket-ecu in terms of its component currencies were identical to those of the "obsolete" basket.
(6) This assessment does not contradict the need to make, as of now, retail cross-border payments more efficient and cost-transparent.
(7) The non-Union banks would also fall into this category. But it is to be expected that, for simplicity's sake, they would soon start to deal exclusively in ecu.
(8) At this point, a few words of clarification on the "legal tender" status of the ecu at the beginning of EMU. In practically all Member States, banknotes and coins (in fact, "official" money) are the only forms of money that creditors cannot refuse to accept in payment. Though most payments are actually made in "deposit" money, the latter's acceptance is seen to rest on the possibility to exchange anytime, at par and without cost, any amount of "deposit" money into banknotes. Consequently, some might argue that the ecu cannot play a significant role in EMU as long as it lacks the quality of "legal tender" i.e. until ecu banknotes and coins are issued. Any such argument would overlook the fact that, in the approach suggested above, ecu "deposit" money could be re-denominated, at will, in the "deposit" money of any participating country. Consequently, even if ecu banknotes and coins did not exist, ecu "deposit" money would, in terms of "legal tender", be exactly in the same situation - though indirectly - as any national "deposit" currency: it would be exchangeable, without cost, into "equal value" national currency banknotes.
9) The objection is sometimes made that preparations can only start when one knows the exact starting date of EMU and the identity of its participants. This view amounts to a proposal to initiate the preparations for the single currency after EMU has started! In fact, we know with certainty that EMU will start between 1997 and January, 1, 1999, at the latest. We also know that all Member States, the UK and Denmark excepted, are committed to participate in EMU at the earliest opportunity. Consequently, preparing for 1997 will not be a wasted effort, even if the actual starting date is later and if some do not join at the beginning. For the latter, their preparation will allow them to take part in the growing ecu market, even before their own currency joins EMU.
(10) Though the value of the basket-ecu in terms of its component currencies is, by definition, subject to variation, the Treaty guarantees the continuity of the ecu. That is to say : first, an ecu is an ecu and second, at the start of EMU there will be no "kink" between the basket-ecu's value at that time and the irrevocably fixed conversion rates of the currency ecu.
(11) See the Commission White Paper on the legal obstacles to the use of the ecu.
(12) The precedent set by the "large value" ecu clearing
system operated by EBA-BIS-SWIFT is revealing : the development of the
financial use of the ecu could not have taken place without the existence
of a truly transnational ecu-based transfer, netting and payment system.