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The euro and enlargement

At the Euro 2002 Conference on the euro and enlargement in Budapest last week, EU Commissioner for Economic and Monetary Affairs, Pedro Solbes highlighted the euro's progress to date, the currency's roll-out strategy and the approach recommended for EU candidate countries. Following are extracts from his address.

EMU after 30 months
The experience of the 30 months since the launch of the euro has been largely positive. I want to highlight two main successes of the euro:
First, the new economic policy framework is delivering the expected benefits. The euro area enjoyed high growth and low inflation rates in 1999-2000.

More than 2.5 million jobs were created every year and the budgetary situation continued to improve across the euro-area allowing governments to cut taxes and to start preparing for future challenges such as the ageing population. In 2001 the unpleasant combination of decelerating output growth worldwide and - until recently - accelerating inflation is proving a tough test for EU policy makers. Our economic forecasts have to be revised following the terrorist attack in the US. A full analysis of the economic consequences is still premature but we will monitor developments shortly.

However, co-ordination at EU level and the policy framework, including the Stability and Growth Pact, will help the euro area to find the appropriate policy response. Despite the economic slow-down the euro-area still enjoys today the best macroeconomic fundamentals among all developed economies and this is largely due to the positive effects of EMU and the euro. In today's globalised economy, where the transmission mechanisms of external shocks have become more complicated than in the past, nobody in Europe has any doubt that the situation would have been much more difficult for each euro-area country individually without the euro. The consequences of this, primarily externally-induced, slow-down could have been devastating without the protection and stability offered by the single currency.

Let me add here that the macroeconomic stability delivered by the euro has been to the benefit not only of the euro-area but also to that of third countries. Candidate countries as other countries with a high degree of trade and integration have benefited from the euro-induced stability.

Secondly, the euro is fostering the modernisation and reform of the European economy. The rapid integration of EU financial markets provides a concrete example. The pace of progress in this field has surprised many observers. Securities markets have become much broader and more liquid, and the euro has triggered a significant restructuring and consolidation of the financial sector in Europe. More integrated and efficient financial markets and a stronger financial sector increase savings and improve the allocation of capital, and hence increase our growth potential.

Beyond its impact on financial markets, the euro has fostered competition and reforms in product, labour and service markets. It has allowed Europe to set itself more ambitious targets for the future: to become the most competitive knowledge-driven economy in the world and... to prepare for enlargement.

These achievements are, in my view, crucial. Of course, we have much room for improvement. We need to continue with structural reforms in order to increase the potential output and make our economies even more dynamic and flexible. This is the only way to make the Union capable to sustain higher growth rates and be better equipped to face external shocks in the future.

Preparations for the changeover to the euro
But it is true that the absence of the euro notes and coins has made it difficult for Europeans and people outside Europe to grasp all the benefits of our new currency.

In some people's minds there is still a sentiment of uncertainty about the euro and this is why it is extremely important to successfully complete the cash changeover to the euro.

The distribution of over fourteen billion bank notes and fifty billion coins to over 300 million people in twelve countries accustomed to twelve different currencies is a logistical and strategic challenge unprecedented in history.

But the technical challenges must not mask the historical importance of this new milestone. The euro is more than a currency. It symbolises our goal of integration. It demonstrates that Europeans can come together with enthusiasm and firm resolve in support of an ambitious common projects. The euro is also a symbol of peace and stability. It reflects the determination of the people of Europe to share a future together. The euro is now part of the European identity.

To reap all the benefits brought by the euro, we still must work hard for the success of the cash changeover. Public authorities, the Eurosystem, the European Commission, together with all economic operators have made, and continue to make, enormous efforts to prepare for this operation.

The production of euro notes and coins is on schedule. By the end of August more than 11 billion euro banknotes and 446 billion euro coins had been produced, quantities that already cover the requirements for the launch on 1 January 2002.

All participating countries adopted detailed national changeover plans several months ago.

Frontloading operations have already started in some euro area countries. kits of euro coins will be made available to the public in mid-December. On average, a euro kit will be available for every citizen out of two over the age of four in the euro area. The adaptation of ATMs, which provide on average 70% of the public's supply of banknotes, will allow a quick transition in most participating countries. Between 85% and 100% of ATMs will distribute euros from 1 January in virtually all participating countries. In a few Member States, the ATM conversion will take about one week.

Simulations show that the majority of population will have received euro banknotes from banks by the fifth day of January. If you add to this that retailers have committed to give change exclusively in euros as from 1 January 2002, we estimate that the bulk of cash transactions will be made in euro by the end of the first two weeks of 2002.

As the deadline approaches, the issues raised by the preparations become very specific and technical and cover matters as varied as cash storage and transport to the setting of pricing policies in euros. Some of these matters are extremely important to the success of the operation. I will mention two of them.

First, we need to be attentive to the logistical problems facing retailers. Together with banks, they will play a key role in placing the euro in circulation and in withdrawing domestic currencies from circulation. They must assess carefully their cash-float requirements for the dual circulation period.

Depending on the country and the sector, the cash float needed will be two to ten times larger than normal. Therefore it is in the interest of retailers to participate in the sub-frontloading operations. Participating in frontloading is a preventive measure to limit problems at checkouts, such as very long queues, during the dual circulation period. I have raised this matter to the attention of Ministers and asked them to provide retailers with more information and if necessary, incentives to induce them to participate in frontloading.

We must also heed the concerns being voiced by consumers at possible price rises at the time of the switchover to the euro. Clear rules for the conversion of prices from national currency to the euro exist but it is possible that producers and retailers will round up their prices. The public authorities and consumer associations must be on their guard to ensure that this does not happen in too many cases. The Commission has proposed or taken action designed to minimise the risk of price increases:

• first, we have pressed strongly for more widespread application of dual pricing before and during the dual circulation period, this being the perfect instrument allowing consumers to check price stability;

• second, prompted by the Commission, the European associations of retailers, SMEs and consumers signed an agreement whereby they undertake to ensure that their prices will remain stable overall during changeover. This agreement has been transposed at national level in several Member States;

• third, following a Commission's suggestion, most participating Member States have committed themselves that the conversion into euro of public tariffs and administered prices will be neutral or rounded in favour of the consumer;

• lastly, I have suggested that the Ministers of the Eurogroup should carefully monitor price developments in the early weeks of 2002 in order to be able to reassure consumers.

Overall, I am convinced that the changeover to the euro will have virtually no effect on prices. I am also convinced that in the medium term, it will strengthen competition and thus restrain price increases.

In the final run up to the E-day, communication efforts are being intensified. As you all know, the ECB revealed a few days ago the specific design and security features of the euro banknotes, in order to allow all persons handling cash to protect themselves against the risk of counterfeiting. Information campaigns run by Member States and the Commission are also stepping up and will peak in December.

The introduction of the euro notes and coins is primarily a European event. At the same time, it is of great importance to the rest of the world and of course to our close neighbours and especially our future members.

The emergence of the euro as an international currency has allowed many of our partner countries in the world to re-denominate their external trade in the single currency.

They have also been able to tap new sources of finance via the newly integrated euro financial markets, as evidenced by the massive issuance of international bonds denominated in euro, notably by sovereign borrowers in this region.

Obviously, these channels of transmission are playing with more intensity in our closest partners, the candidate countries in this region. It is for this reason that the euro changeover will affect the daily lives of a large number of citizens in your countries. The Commission within the remit of its responsibilities has already from last year made a special effort to inform candidate countries on the relevant aspects of the changeover.

Our delegations have produced written and audio-visual material, liase with the appropriate authorities in your countries to ensure correct and adequate in formation flow and Commission officials are very active in conferences focusing on this important event. Already last year the Commission dedicated El million out of the E32 million euro-communication budget to third country information actions. This conference, targeting multiplier groups like the media and key officials marks the last step of our efforts to familiarise your citizens and business with the euro. Together with the ECB which has made the necessary arrangements for front-loading euros to your banking system a special effort will be made in this last quarter of this year and early next year to make all of you who deal or travel frequently in Europe feel at ease with the euro.

The euro and enlargement
This brings me now to the third part of my presentation, the articulation between EMU and enlargement. The accession of new Member States to the Union will inevitably imply an enlargement of the euro zone in the future. The existing euro area of 12 countries is only a first step.

How do we go from the enlargement of the EU to the enlargement of the euro zone? The EU institutions and the candidate countries are working together to make this possible. On the Commission's side:

1. First, we have clarified the path that will eventually lead candidate countries to the adoption of the euro. In this way, we have eliminated uncertainty, and candidate countries have started their preparations for participation in EMU.

One issue that has been extensively debated is the exchange rate strategy that should be followed in the run-up to accession and EMU. Before accession there are no constraints from the Union side on the exchange rate policy the candidate country may follow. The candidate country should ensure that it adopts a policy that suits its own economic conditions and is consistent with its other main policies. This approach was endorsed by Heads of States and Governments in Nice, setting out the path for future monetary integration in the EU.

Upon accession, the new member States will enter the EU and will participate in QEMU with the status of Member States with a derogation from adopting the euro.

This is the same status that Greece for example had until June 2000. This status will be granted in the Accession Treaties. At that point, there will be some obligations. The new Member States will have to treat their exchange rate policy as a matter of common concern and they are expected to join the exchange rate mechanism, the ERM2.

Once the new Member States reach a high degree of sustainable nominal convergence, which means fulfilling all Treaty convergence criteria, including at least two year participation in the ERM-2, in a sustainable manner, they can adopt the euro. The equal treatment principle, will be applied in full to the candidate countries.

2. We are also ensuring that the "sequencing" towards economic and monetary integration is right, by encouraging and monitoring progress towards the fulfilment of the Copenhagen economic criteria.

These criteria require candidate countries to be functioning market economies, able to cope with competitive pressures and market forces within the Union, by the time of accession.

I have had the opportunity to stress this point previously, but I will relentlessly continue to do so: l firmly believe that in the transition countries, implementing the economic reforms required for accession to the EU is the most proper way to prepare for EMU participation.

Candidate countries should not try to meet the convergence criteria prematurely. In the run-up to accession, the candidates should concentrate primarily on furthering (the process of structural and economic reform leading to strong, well-functioning market economies. This also requires build-up of the appropriate administrative and institutional capacity. In so doing, candidates will also increase their future capacity to grow, and to grow faster than the EU average, which will be the only way to close the high income gap with current Member States.

This is why the Commission attaches great importance to the annual Regular Reports on progress towards Membership. The 2001 reports will be adopted in exactly two-months time, on 13 November. As to the fulfilment of the economic criteria, even though it is too early to speculate what our detailed conclusions will be, it is clear that with progress being observed over a number of consecutive years and with negotiations advancing at a steady pace, the horizon for accession is shortening.

In the area of economic reform at least, many candidate countries are making the right decisions so as to benefit from the "window of opportunity" for accession that was set out in Nice. Beyond the measurement of individual progress, however, we need to build the process of economic policy co-operation with the candidate countries to contribute to this successful, progressive integration in the EU and, ultimately, in the euro area. This leads me to the final point.

3. We are now actively engaging the candidate countries in a broad multilateral economic policy dialogue with the EU, in order to prepare them for economic policy co-ordination in EMU.

Candidate countries are participating in the pre-accession fiscal surveillance, which is similar to surveillance procedures for Member States. They are presenting to the Commission medium-term pre-accession economic programmes, which serve as a basis for a high-level economic policy dialogue with Member States. A first meeting of senior officials, under the Swedish Presidency, has shown that this formula is the right one to contribute to the preparation of the candidate countries for accession. In addition, the Commission will also make an assessment, for the ECOFlN, of macroeconomic and financial stability in the candidate countries.

Let me say a few words to conclude.

The euro is already proving its worth within the European Union. It is not surprising that prospective candidates should want to join as soon as possible. However, it is essential that joining the euro is not seen as an end in itself. The ultimate objective is a full and successful economic integration. By the time the accession of the first new Member States takes place, the euro will have been in circulation for some years. The procedures and practices of economic policy co-ordination will be further developed, the euro's market reputation will be more firmly established.

It is the stated intention of most future Members States to adopt the euro as soon as possible after accession and a successful euro will certainly increase this desire. The existing Member States and the candidate countries have a common interest to pursue policies which are mutually supportive and which lead to a successful economic and monetary union and a stable euro.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
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