"I just want to be good."--Little Alex (Malcolm McDowell) in Stanley Kubrick's A Clockwork Orange.The "euro" is the name of theproposed single currency of theEuropean Community. Essentially theeuro is simply the ECU renamed, sinceECUs will be exchangeable one-for-onefor new euros. The ECU is currentlythe basis for the European MonetarySystem.
ECU stands for European CurrencyUnit, but is pronounced "EK-you", afterthe name of an old French coin with anequivalent spelling. The ECU isdefined in terms of pieces of Europeancurrencies, making it a composite, orbasket, currency in origination. Sinceits creation it has become a currencyof denomination for eurobonds and bankcertificates of deposit, among manyother uses.
It is not yet decided whether theconversion of ECUs to euros will takeplace at the market ECU value, or atthe ECU value fixed on paper(calculated from "ECU central rates").Logically market rates would be usedfor the conversion. But if centralrates are used the conversion is stillstraight forward. Suppose atconversion time the ECU trades for$1.10 in the market, while the value ofthe component currencies at ECU centralrates is $1.08. Then it is obviousthat 1 market ECU = 1.10/1.08 = 1.0185central rate ECUs. And a euro wouldcost $1.10 if euros were exchangeableone-for-one with market ECUs, or $1.08if euros were exchangeable one-for-onefor central rate ECUs. The net effectis that "ECUs" will have been replacedwith "euros".
When the European Monetary Systemwas launched on March 13, 1979, thesystem was based on average behavior ofthe participant countries of theEuropean Community. Average was good;too much departure from average wasbad. If the community average was 5percent inflation, then a country witheither 0 percent inflation or 10percent inflation would cause strainsin the system. All this economiccoordination took place through acountry's exchange rate. A country wason track just as long as its exchangerate with respect to the ECU did notdepart too much from a fixed value--theECU central rate. (Details of thismechanism may be found in Chapter 2 andChapter 22, International FinancialMarkets, 3rd edition, by J. OrlinGrabbe.) The Maastricht Treaty addedadditional criteria other than exchangerates.
The Maastricht Treaty was finallyapproved (through a subterfuge) by theremaining holdout, Denmark, in May1993. The Treaty set out three stagesof further transition to monetary unionbetween participant countries of theEuropean Community. The first stagewas to have been completed by Jan. 1,1994, and involved the elimination of"all restrictions on the movement ofcapital between Member States, andbetween Member States and thirdcountries". This goal was not actuallyachieved.
The second stage began on Jan. 1,1994, with the creation of the EuropeanMonetary Institute (EMI) in Frankfurt,Germany. The EMI was a precursor to aproposed European Central Bank, whichin the future is supposed to implementa common European monetary policy,conduct foreign exchange operations,hold reserves of member countries, andpromote smooth payment mechanisms. Thegoals of the EMI itself were moremodest. The EMI was supposed to holdthe gold and foreign exchange reserves,and oversee the operation, of theEuropean Monetary System, and topromote the use of the ECU and an ECUclearing system.
Meanwhile, the EMI is alsosupposed to monitor some other economicconvergence criteria among membercountries, which included not onlyexchange rates, but also inflation,government debt, and interest rates.To be "good", and thus to be allowed tojoined the new monetary union in 1999,countries need to have done thefollowing by end 1997:
Except for the criteria ongovernment debt, each of these againrests on the concept of an average.But meeting the criteria has led toconsiderable activity in the area ofgovernment statistics fudging. How muchfudging is allowed is up to the EMI andthe European Commission to decide.
For example, France (much like theU.S. in another context) counted acurrent pension fund "surplus" asgovernment income, thus reducing thecalculated government deficit. Ofcourse, just as in the U.S., thecurrent year's "surplus" did not takeaccount of future obligations (on whichbasis the flow of pension funds wasactually insufficient--that is, indeficit). But this hardly matters,since both France and Germany have tobe in the union, if it is to take placeat all (see history in InternationalFinancial Markets). Germany envisionsthat the new European Central Bank willconduct policy much like theBundesbank, but the French have otherideas.
The third stage is supposed tocome about on Jan. 1, 1999, at whichtime countries will irrevocably fixtheir currencies to the euro (=ECU),after which national currencies will bephased out during a transition period.During transition, the euro and thenational currency will circulate sideby side. The EMI will be dissolvedinto a European Central Bank (ECB),which will determine a common monetarypolicy. Government bonds will bedenominated in euros, and somecountries, like France, will convertexisting debt to euros. The currenthead of the central bank of theNetherlands, Wim Duisenberg, isexpected to become the first presidentof the ECB.
During a three-year transitionperiod, 1999-2002, European companieswill convert their accounts to euros.Then, in 2002, euro notes and coinswill be circulated in the differentcountries. There will, of course, bemuch bickering over the use of nationalsymbols (should the queen's head beconjoined with the body of a bird?),or whether coin sizes will fit intonational telephones and vendingmachines.
Will all this actually happen?The answer is not clear, even thisclose to the scheduled date. A criticalmass of participants is required foranything significant to take place.Luxembourg, for example, fits the billfor monetary union with no problem.But there is strong politicalopposition to the move in countrieslike the UK and Denmark. And it willbe a cold day in hell before eitherItaly or Greece meets the convergencecriteria.
Recent years have witnessed aperiod of unprecedented good willbetween nations: the fall of the BerlinWall, the dissolution of the SovietUnion, relative Middle East peace, andso on. One senses, however, that thisera of good will is rapidly coming to aclose. Looming over the horizon areconflicts between the U.S., China, andJapan, turmoil in Russia, and anotherwar in the Middle East. All these willexert their strains on the EuropeanCommunity and on monetary union.
Cologne cheap hotels The movement toward Europeanunification began with a post-World WarII desire of people like Jean Monnetand Robert Schuman to so integrate theeconomies of Germany and France thatthey could never go to war again.Early trade agreements led to exchangerate agreements, and these have evolvedinto agreements on broad economicconvergence criteria. The finalprocess of unification, of course,would be integrated defense departments--a step not currently in the offing.
One recent focus of attention hasbeen the nature of punishments to bemeted out to bad countries. At theEuropean Union (EU) meeting in Dublinin Dec. 1996, it was decided thatcountries with government deficits toolarge would not be punished in theevent of a "natural disaster" or ifgross domestic product (GDP) had anegative growth rate of more than 2percent. It was observed that amongthe 15 EU countries, there had onlybeen negative growth rates that largein 13 instances in the last 30 years(i.e. in 13 observations out of 450).
If negative GDP rates are betweennegative .75 and negative 2.00, thenEuropean finance ministers will decidewhether a country is to be punished.(There was no determination of what thepunishment will be, but public floggingof the finance minister or penaltypayments of central bank gold come tomind.)
A combination of a governmentdeficit larger than 3 percent of GDPcombined with a positive GDP growthrate, or a negative growth rate notexceeding .75 in absolute value, wouldresult in automatic punishments. Thisagreement is seen as a victory forGermany, as France wanted maximumpolitical discretion to punish or notto punish.
February 1, 1997
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