The European Commission set up the Expert Group on the changeover to the single currency in May 1994 with the remit of advising the Commission on the technical preparations for introducing the single currency into the European Union. The Expert Group was also requested to initiate the preparations needed to bring about a common currency. The Expert Group consists of representatives of major sectors and sections of the community in Europe and is under the chairmanship of Mr Cees Maas (1). The Expert Group completed its interim report which was presented to EU vice-president Christophersen (2).
Recently the Expert Group has completed hearings with representatives of important sectors in the European economy, including consumers and financial institutions. These hearings served several goals: informing the various economic sectors in the EU, to learn what the contribution of these sectors could be to ensuring the smoothest possible introduction of the common currency and a listing of the bottlenecks. Viewed in this light, the recommendations and proposed solutions in the interim report are purely provisional conclusions. This applies all the more so to those subjects on which the Expert Group has explicitly said that a further exchange of ideas is indispensable. In its final report, which is now being written, the Expert Group will reach its final conclusions.
This article will, however, discuss and comment on the main problems highlighted by the Expert Group in its interim report. However, it goes without saying, that the public statements at the informal Econfin in Versailles of April on notes and coins and the most likely timetable, are strongly favoured by me.
The Expert Group has not, and will not, concerned itself with academic issues such as the optimum currency area. These issues have meanwhile become non-topics. The Maastricht Treaty is after all a reality.
The introduction of a common European currency is surrounded by uncertainty as to the main dates of the changeover process. The exact details of the time schedule entirely depend on the progress made by governments, central banks and European institutions in the field of economic and monetary integration. Gradually, therefore, the Expert Group has increasingly become aware that the introduction of a common currency is an event which will supersede anything that has happened to date in the field of monetary integration. Given the uncertainties, the Expert Group has had to formulate a number of working hypotheses to arrive at an operational approach to the assignment.
The main hypotheses derive from the Maastricht Treaty and are:
On the basis of these points of departure, the Expert Group has made a number of observations which are relevant to bringing about a single European currency. These findings can be subdivided into formal and logistic aspects.
As to the formal aspects, in the first place the main criterion for a strong European currency is sufficient economic and political convergence. The new currency has to be at least as strong as the strongest national currency, to ensure that the credibility and acceptance of this European currency is high as possible. At the end of the day it is the public at large which will be required to express its confidence in the currency. It is by this means that political objections to the new currency can be dispelled. Although the Expert Group does not regard itself as the right forum for passing an opinion on how the convergence criteria in the Maastricht Treaty should be applied, the experts point out that much will nevertheless depend on convergence for the start and the momentum of the changeover to the common new currency (3).
Second, the new European currency, which is referred to in the Maastricht Treaty as the ECU(4), from the start of phase three, will be a single currency in its own right under the guardianship of the European Central Bank (ECB). The experts further agree that there is no reason for the continued existence of the present basket currency, not even in the knowledge that not all member states will be taking part in phase three from the word go. This means that there is no reason either to create a new basket currency.
The experts are aware that the decisions to arrive at an operational ECU can only be taken once the European Council decides that the third phase of EMU can start, on the basis of the reports of the European Commission and of the European Monetary Institute (EMI). That has to be announced not later than six months prior to the start of the third phase. Moreover, there are decisions which can formally only be taken after the third phase has commenced (5). Bearing all this in mind, the Expert Group comes to the following statements relating to the logistic aspects of introducing the ECU.
Given the scale and the duration of the necessary operations, the first conclusion is that an introduction of the new European currency in all fields and in all economic sectors in a single big bang is almost technically impossible, even if it were to happen on 1 January 1999. Nevertheless, the Expert Group does not advocate a gradual introduction but is in favour of a few steps introduced one after the other in quick succession. This comes as close as possible to a single big bang, so that from a technical point of view the best and most robust possible change-over process is achieved. Moreover, the Expert Group points out that it is important that the relevant authorities provide information on their plans in the legislative and technical field at an early stage (6).
The Expert Group advocates ongoing information exchange among the relevant authorities in the private sector (7). The report recommends that working parties be formed at national level, comprising representatives from government, central banks and sections of the economic community. It is clear that the faster the authorities provide the relevant information, the faster the private sector can start making preparations.
A third point of operational importance is the time at which the banks changeover from the traditional accounting unit to the new European currency for the purpose of settling payments traffic and for internal bookkeeping systems.
The report indicates that the debates were dominated by two questions, namely when the ECB would start conducting monetary policy in the new currency and when that currency would come into circulation. According to the letter of the Maastricht Treaty, the ECB is not obliged to start operating in the new currency from day one of phase three. The ECB could continue conducting monetary policy for the time being in the various national currencies. However, the spirit of the treaty dictates that an immediate changeover would be preferable. This would also be the most desirable from the point of view of acceptance and credibility. For both the ECB and the banks, it is vital that the institutions involved should be capable of settling national and international payment transaction in the European currency. Frictions in an important transmission channel of monetary policy can thus be avoided along with any misgivings about the new currency, while banks can keep the cost of the changeover down to a minimum (8).
The Group of Experts is of the opinion that as soon as the ECB starts working with the new currency, the banks and other financial institutions will have to convert their internal bookkeeping systems entirely to the new currency. This involves around 90% of all transactions. If the new currency has not been brought into circulation at this stage the Expert Group advo-cates continuing to handle transactions with clients in the national currency, in order not to confuse them (9).
The second step in the changeover process for the banks involves the withdrawal of the national currency, some time after the new coins and bank notes have been brought into circulation. At that point the bank's clients, too, will transfer to the new currency. The time between the two steps should not be more than six months at the most. A longer period would entail high administrative charges and the risk of loss of credibility and social acceptance. Timely decision-making, for one thing on the production of new coins and notes, will be a major contribution to shortening the changeover period. The working assumption of January 1999 could be realized if at the Cannes Summit strong political signals are given on this starting date and declarations of countries that they will implement economic programmes in order to be ready on that date. Is is important to acknowledge that a decision to start on 1.1.97, or a very late announcement of the starting date will imply an other type of changeover scenario.
Fourth and last, all existing contracts, either in the national currency of the participating countries or in the basket ECU, will have to be converted to the new European currency as soon as phase three has become a reality (10). A situation has to be avoided in which contracts are offered for early redemption. The Expert Group recommends that special clauses be included in new loan contracts. Nonetheless, the experts consider a legislative arrangement at national level indispensable.
These conclusions prompt the following other remarks.
The changeover to the common European currency will have a major impact on the daily lives of consumers in the countries participating in phase three of EMU. National currencies will disappear, while the European currency will become legal tender. Prices, as well as valuations of assets and debts, will be in the new currency, which will mean that the actual numeric value will be frequently much lower as a result of the higher intrinsic value of the ECU. It is consequently of utmost importance that the public at large should be well-prepared and well-informed beforehand about the repercussions of the changeover.
A lot of attention must also be paid to the distinction between the present basket ECU, which certainly cannot be regarded as one of the strongest European currencies, and the new European currency which, according to the Treaty, bears the same name. The new ECU will be a currency with an indissolubly fixed exchange rate in relation to the Dmark, assuming that Germany will be one of the participants from the word go. Moreover, the independent ECB will act as guardian of the internal and external value of the new ECU.
Right from the start measures will have to be taken to ensure that this European currency is just as stable, and remains as stable, as the Dmark. This is why it is absolutely imperative for the entry criteria for phase three EMU to be strictly applied. Hopefully, this will remove the powerful resistance that Germany would appear to have to giving up the Dmark. In France, too, greater opposition is currently becoming apparent.
The report explicitly says that the physical introduction of the new currency should take place not later than six months after the ECB has begun conducting its monetary policy in ECUs (11). In the Treaty itself no period is referred to (12). A short changeover period has been adopted because a long or even undefined period would seriously impair EMU's credibility and thus the willingness to accept it among the public at large and politicians. This might encourage markets to verify how irrevocably irrevocably fixed exchange rates are, which could unleash undesirable speculation. It may also produce a situation in which the strongest national currency (read: the Dmark) ousts the other currencies. In that case it is difficult to imagine what inducement there will be to introduce the ECU. The need for the ECU may diminish too, if it turns out that survival of all national currencies at fixed exchange rates does not create a problem. The endeavour to achieve the shortest possible changeover period would help to prevent a situation of this kind occurring. Moreover, this would substantially alleviate the expense to financial institutions and companies arising from the changeover.
Hence decisions have to be taken right now as to the design of the new coins and notes and the production of these has to be tackled quickly. Normally, the design and production phase for a uniform European bank note would take 4½ to 5½ years. A note in which national symbols are incorporated as well would soon require an extra 2 years. Most time of all is needed for making the new coins. Production in a two-shift system would take about 5 years.
The number of coins in the twelve countries of the old EU is 78 billion, the number of bank notes 17 billion.
As regards production time, there are opportunities enough for reducing this; moreover, the design time can be considerably shortened as well, especially if one takes the decision on a common note. The production quantity could be geared provisionally to the needs of the two biggest countries, Germany and France. What's more the changeover could be facilitated by encouraging electronic methods of payment.
As to the cost aspect, steps in any event need to be taken to prevent this facet coming to dominate in the private sector. This would diminish the willingness to prepare for phase three in good time. Informing the private sector about important plans and decisions of the relevant authorities in the European Union at the earliest possible opportunity is just as crucial for the same reason.
People need to know that the inevitable costs of the changeover to the ECU are the price one pays for investing in the future, an investment that will lead to greater competitive edge, more employment and increased prosperity for everyone.
Lastly, it should be pointed out that despite the uncertain data, the economic actors can nevertheless prepare themselves for EMU at relatively low expense. This can be done by incorporating into the process of technological and product innovation a facility for the ECU (think of coin-operated machines, cash registers, software etc.). If this is done as part of the normal replacement investment, it is expected that costs can be kept down.
(1) Dr. ing. C. Maas was Treasurer General at the Ministry of Finance and is currently a member of the Executive Board of the ING Group.
(2) The preparation of the changeover to the single European currency (Interim Report)', submitted to the European Commission, 20 January 1995.
(3) The Group warns that an interpretation that deviates from the letter and the spirit of Maastricht will have major negative effects. Thus financial markets will have difficulty in assessing progress while the position of the future European currency will be impaired in advance.
(4) This ECU is different to the current ECU which is a basket currency.
(5) Take, for instance, the introduction and issuance of the new currency.
(6) Examples which spring to mind are further information on the technical specifications of the new coins and notes, the moment at which they will be brought into circulation and the time when the ECB will start conducting monetary policy in the new currency.
(7) The main reference here is to institutions in the financial domain, but also to manufacturers' and consumer organisations.
(8) No double bookkeeping or expensive temporary systems.
(9) This means that clients depositing money with the bank are given confirmation in the national currency. In the bank's bookkeeping system the national currency will be immediately converted into the European currency. At the end of the process, clients will be sent statements giving all transactions in the national currency. The amount in the new common currency will be given under the balance on the account at a fixed exchange rate, of course.
(10) This is only necessary for the nominal value, not for other conditions referred to in the contract, such as interest rate and duration.
(11) This will be at the earliest at the start of phase three, but may be some time after it.
(12) Article 109L4 uses the term 'rapid introduction'.