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Published on April 14, 2008

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Slide1:  The Introduction of the euro Christian GHYMERS Adviser in charge of information DG ECFIN, European Commission Introduction to Euro Seminar TAIEX/EC and the Hungarian Chamber of Commerce Budapest, 23 May 2006 OVERVIEW OF PRESENTATION :  OVERVIEW OF PRESENTATION Introduction: The euro area and the EMU What is EMU? Criteria for joining the euro Phases for joining the euro Main features of participation to EMU Impact upon citizens: micro and macro Charts: overview of the euro area 1960-2005 Citizen Survey The cash-changeover: lessons from the first wave Current state of preparation of enlargement of the € area Slide3:  The euro area: 12 of 25 EU countries Euro area: Germany France Italy Belgium Netherlands Luxembourg Ireland Greece Spain Portugal Austria Finland Outside euro area but in the EU: UK Denmark Sweden Malta Cyprus Czech Republic Poland Slovakia Hungary Slovenia Estonia Latvia Lithuania The euro area - key statistics (2004/5):  The euro area - key statistics (2004/5) USA Euro Area (12) Japan Population 296m 313m 128m GDP ($bn, current prices, PPP) 10,383.1 7,866.4 3,421.9 GDP per capita ($, PPP) 36,121 25,566 26,852 Per capita GDP in the USA is 1½ times that of the euro area! Unemployment rate 5.8% 8.3% 5.4% Employment rate 74% 63% 74% Population growth rate (92-02) 1.2% 0.3% 0.2% Labour force (millions, 2005) 149.3 136.4 67.8 Trade in goods & services 13% 22% 6% (% of world) GDP (% of world) 21% 16% 7% Slide5:  The euro and EMU A single currency for Europe is a long story: some precursors were Richard Coudenhove-Kalergy, (from Hungarian origin: Pan-Europa, Vienna 1927), R. Triffin (Belgian: 1947), R. Werner (Luxembourg, 1969), R. Mundell (Canadian, 1970) etc… The launch of the € on 1st of January 1999 was the most ambitious European integration process, and without historical precedent as a result of the Maastricht Treaty. Euro is part of the EMU = Economic and Monetary Union, whose third and final stage is the adoption of the euro as the “Single currency” according to the Treaty dispositions. Non-euro-area MS are also part of EMU but they got a derogation for keeping temporarily their own currencies. Slide6:  What is EMU? EMU is the logical consequence of the process of European integration which began after the Second World War; it completes the Single Market. EMU means the final step in economic integration (full first pillar of the EU) A number of attempts were made to create an EMU (the Werner plan in 1970, the EMS in 1979, and the Delors report 1989). The Delors report was institutionalised by the Maastricht Treaty (1992, ratified 1993) 3 phases: Before 1994, preparation and adaptation of national laws From 1994 to 1997 or 1999, convergence phase From 1999, introduction of a single currency among 11 MS meeting the legal and convergence conditions (4 crit.) Benefits of the euro adoption :  For a candidate: Elimination of exchange rate risks Reduction of transaction costs Increased price and cost transparency Credibility of low inflation Making the economy less vulnerable to external shocks Further reduction of country risk premia Potentially large increase in trade and investment For the EU: Catalyst for further integration contributes to stronger European identity Benefits of the euro adoption Costs of the euro adoption:  Short-term costs at micro-level (change of systems) Loss of independent monetary and exchange rate policy …especially if OCA conditions not met However: Strong existing monetary links with the euro little autonomy for monetary policy of a small and open economy even before the euro adoption Costs of the euro adoption Slide9:  Criteria for Joining the €: nominal Convergence and stability The Delors’ Report allowed for reaching a consensus and setting up the basis upon which the Maastricht Treaty was built: Nominal convergence is the key for making possible the move to a single currency and its successful economic governance for meeting its goal (job creating growth). Pre-condition of a sound € is nominal convergence and macroeconomic stability, which means that: A single currency needs an economic union (EMU) in order to reach the Community’s objectives (Art. 2 of the Treaty) The euro brings about a change of policy regime  Slide10:  EMU points to job-creating growth EMU is not a goal in itself; rather, it is one of the instruments for fulfilling the tasks of the Community, as laid down by Art. 2 of the Treaty: “sustainable and non-inflationary growth”, “a high level of employment and of social protection”, “convergence of economic performance” and “economic and social cohesion” The Single Market and EMU are two of the main instruments explicitly dedicated to fulfilling these objectives (with other tools listed in Art. 3) EMU and the euro are in fact a mean to tackle the causes of the EU poor economic performance during the 70s and 80s (macroeconomic instability) by anchoring policies Slide11:  Maastricht Convergence criteria 5 Maastricht criteria for joining the euro Price stability (annual inflation rate cannot be higher than the average of the three best performers +1.5%) Sustainable fiscal deficits (below 3% of GDP, with exception in case of strong recession) Sustainable public debt (below 60% of GDP or satisfactory and regularly decreasing) Financial stability (nominal interest rates below those of the three best inflation performers + 2%) Exchange rate stability (2 years at least participating in the ERM without severe tensions or devaluation with respect to central parity) The phases for new Member States towards adopting the single currency :  The phases for new Member States towards adopting the single currency Accession to the EU Adopting the treaties and the provisions on EMU (they may keep their own exchange rate regime if points to real and nominal convergence) “Pre – ins” within EMU 1. When opportune, decision to joint the Exchange Rate Mechanism (ERM II), 2. Fulfilling the convergence criteria, including participating min. 2 years in ERM II without devaluation and without severe tension Member of the euro-zone Common decision (Art.122): upon MS request, Convergence assessment by Commission and ECB, Commission proposal, Council decision Accession - phase:  Accession - phase Signature of Accession Treaty in Athens 16 April, 2003- Accession: 1 May 2004 After accession for a new member: Own monetary and exchange policy remains (but with acquis), belonging to EMU with a derogation Preparation and implementation of the convergence programme inside the Stability and Growth Pact Full participation in IGC and ECOFIN + ESCB Governing Council (where they already were observers) Treat exchange rate policy as of common concern (99.1 paragraph of the Treaty + Common Statement on ERM II) ERM II participation becomes possible (convergence reports after at least for 2 years) ERM II:  ERM II Participation voluntary but “expected” Two years in ERM II without significant tensions before adopting euro. Incompatible: free float, crawling peg, non-euro peg. Change of the exchange rate regime required for some. Standard fluctuation band of 15% (but assessment of stability with respect to 2.25% around central parity) Interventions at the margins will in principle be automatic and unlimited, but without prejudice to the ECB’s price stability objective. Co-ordinated intra-marginal intervention is possible Not a “waiting room” but a “training room” ERM II participation:  ERM II participation ERM II membership: 1 January 1999: Denmark 28 June 2004: Estonia, Lithuania, Slovenia 2 May 2005: Latvia, Malta, Cyprus 28 November: Slovakia Non-participating countries: Hungary Peg to the euro with a ±15% fluctuation band Czech Republic Managed float with euro as a reference Poland Free float (until 2000: crawling basket peg) Sweden Free float Slide16:  Main features of participation to EMU 1. Monetary policy Remains national but central banks must be independent and monetary policy must point to stability + close contacts NCB-ECB 2. Economic policies, including budgetary policies subsidiarity: responsibility of the Member States (Art. 5) however: principle of coordination (Art. 4), economic policies are “a matter of common concern”, requirement that “MS shall coordinate within the Council” and for budgetary policies, a common discipline based on agreed rules is set up (Art.101, 102,103,104, and 2 Protocols on the EDP and the SGP, except some dispositions about compulsory character of avoiding excess deficits, and consequently not submitted to sanctions). Slide17:  Main features of participation to EMU Budgetary policies: common discipline established by rules: Common accounting framework (ESA - European System of Accounts) Art 101 (prohibition of monetary financing of budget deficits), Art. 102 (prohibition of privileged access), Art. 103 (prohibition of bailing out), and Art. 104 (prohibition of excessive government deficits) complemented by Protocol on the Excessive Deficit Procedure (EDP) and by the Stability and Growth Pact (SGP). This common discipline applies to all EU Member States since Phase II (1994), except part of Art. 104 and part of the Pact (sanctions). WHY a common discipline? The single currency requires consistency between the single monetary policy and national fiscal policies Unsustainable budgetary positions would ultimately lead to lack of growth, default or debt monetisation risks i.e. a threat to growth and stability in the € area. Slide18:  Main features of participation to EMU 3. Wage development: in spite of a decentralised process with different national practices by autonomous social partners, the overall result for the euro area interferes with the policy mix (monetary and budgetary policies). To address this, the social dialogue process (1987 Art.138) evolved into the “macroeconomic dialogue” (1999) or “Köln process” (closed-door meetings of social partners with the ECB, Council and Commission). These 3 components make up the macroeconomic part of the EU’s economic governance. They interplay with the micro and structural components. A single tool, the Broad Economic Policy Guidelines, included since 2005 into the “Integrated Guidelines” ensures coherence through a coordination process with “surveillance” procedures, including an “Excessive Deficit Procedure” (EDP) and a “Stability and Growth Pact” (SGP). The Actors of Economic Governance in EMU:  The Actors of Economic Governance in EMU Member States: Manage their own fiscal policy under reinforced cooperation and coordination within EMU Economic and Financial Committee (2 repres.per MS, ECB, EC): Main body dealing with economic governance, gathering both monetary and fiscal authorities, prepares all ECOFIN decisions ECOFIN Council: Define the broad guidelines for economic policy Decide on policy proposals by the Commission Eurogroup: Informal grouping of Ministers of Economy and Finance of the euro area European Commission, DG ECFIN: Monitors and assesses national economic policies Policy proposals and recommendations to ECOFIN European Parliament: Hearings of ECB, of Presidency of Eurogroup, of Presidency of ECOFIN, of EFC, Opinions on BEPG, on EG, on Monetary Policy, on EC communications… European Social Partners (federations of employers and employees) Autonomous Opinions, participation in Macroeconomic Dialogue with ECB, ECOFIN, EC Synthesis of Economic Governance in EMU:  Synthesis of Economic Governance in EMU ECB European Council 12 national Economic Policies Euro Group + ECOFIN Integrated Guidelines (Art.99:BEPG + 128:EG) 1 Monetary policy Art. 105-113 Fiscal policy: Excessive Deficit Procedure + Stability and Growth Pact Structural policy Cardiff process + Lisbon agenda Employment policy Luxembourg process + Lisbon agenda Economic & Financial Committee + Economic Policy Committee (25 MS +ECB+NCB+EC) initial conversion rates Art. 123 COORDINATION & surveillance Art. 4, 98-104 Social Partners Macroeconomic Dialogue: Cologne process European Commission European Parliament ESC Slide21:  Euro and its effects upon citizens The citizen is directly affected by the euro and the EMU. The euro has two faces: the micro aspects and the macro ones. Microeconomic face of the euro (the most visible for people) No more transaction costs for exchanging currencies and supporting exchange-rate fluctuations and speculations, Better transparency of prices accross countries, feeling of common European identity (external impact of the €) For firms (but affecting people) more competition, more efficiency, less managing costs (no exchange-rate risks, better predictability) less credit costs (less risk premium in interest rates, more efficient banking sector) + reinforces the place of Europe in the world (survey) Slide22:  Euro and its effects upon citizens 2. Macroeconomic face: change of policy regime The euro does affect employment and growth through policies. More important for the citizen welfare but less visible (except the ECB interest rate debate) and citizens insufficiently prepared since it requires understanding the “EU economic governance” which is not properly done by most Member State authorities. The euro contributes to an essential systemic progress: a better stability framework than before with an independant monetary policy pursuing price stability first, combined with a common rules of fiscal discipline ensuring national fiscal sustainability (the 2 main necessary conditions for sustainable growth and employment) Furthermore, this new regime embodied the collegial decision- making which had been progressively tested in the preparatory period since the EMS; both the ECB and the ECOFIN Council work by building consensus as a « federal college » Slide23:  Euro and its effects upon citizens 2. Macroeconomic face: change of policy regime Citizens must also be clearly informed that a single currency without budgetary discipline and adequate structural reforms could put growth and jobs at risk, missing its role and its purpose... Slide24:  The Economic governance in EMU The change of regime is the fact to centralize monetary policy in the hands of an independent single central bank whose priority is price stability, while strengthening national responsibilities for all the other policies at national or local levels (decentralized) but under a coordination principle (BEPG) and a Budgetary discipline by using specific tools (EDP and SGP). However, this change of regime is risky if necessary reforms and common fiscal discipline are not undertaken fully (risk of “one-size-fits-all” of EMU and risk of populism). Slide25:  Overview of the €-area Members from 1960 to 2005 The effects of the creation of the € have to be seen from a long-term perspective and taken on board its convergence effects for meeting the criteria in advance. The following charts gives this overview for the basic macroeconomic indicators: inflation, nominal interest rates differentials, budget deficits, growth and job-creation making clear the € corresponds to a better macroeconomic stability and convergence Inflation Convergence: 12 Euro area Annual % increases:  Inflation Convergence: 12 Euro area Annual % increases Long term interest rate convergence (10 years bonds) Annual rate in % :  Long term interest rate convergence (10 years bonds) Annual rate in % Budgetary Deficits % of GDP :  Budgetary Deficits % of GDP Euro-area:GDP Growth and Job creation (Annual %):  Euro-area:GDP Growth and Job creation (Annual %) Slide30:  Some results of the opinion surveys in €-area and in New Member States The Commission organises public opinion surveys about the € perception. Some of the main results are synthesised in the following charts. About the inflation perception linked to the €-cash changeover of 2002, information is given by the monthy survey the Commission organises by questioning around 20.000 households for measuring consumer opinion Slide31:  « In your opinion, for (OUR COUNTRY), is the adoption of the euro… ? » see(http://europa.eu.int/comm/public_opinion) National advantages of the € (Gallup) Slide32:  «  Do you think the introduction of the euro would have positive or negative consequences for (OUR COUNTRY)…? » (% - Total “Positive”) Consequences at a nat. level Slide33:  «  Are you personally happy or not that the euro could replace the (NATIONAL CURRENCY)? » Support for the euro Slide34:  « Concerning the evolution of prices for the last 4 years, would you say that the euro has… ? » Impact of the € on prices Slide35:  Consequences on prices «  Do you think the euro will help to maintain price stability or, on the contrary, increase inflation in (OUR COUNTRY)? Effective discretionary Budgetary stance in the € area:  Effective discretionary Budgetary stance in the € area Primary balance = Budgetary balance less interest rate charges Cyclically adjusted = without impacts of cyclical activites on public expenditures and receipts = structural budget CAPB = best indicator of discretionary net impulse of budgetary policy on the economy Slide41:  «  When do you think the Euro will be introduced in [OUR COUNTRY] ? » Changeover timeframe The €-cash changeover: Keys to a successful operation:  The €-cash changeover: Keys to a successful operation Early preparation Good scenario and execute it Excellent collaboration between public administrations, central banks, business and citizens Consumer protection Communication 1. Careful and pro-active preparations pay off:  1. Careful and pro-active preparations pay off First –wave countries which have invested in timely, comprehensive and thorough preparations were rewarded in many respects: ▪ Speed of the changeover ▪ Public acceptance of the new currency ▪ Smoothness of the transition 43 2. The Introduction of euro notes and coins needs to be swift (1):  2. The Introduction of euro notes and coins needs to be swift (1) All parties involved have a common interest in keeping the cash changeover as short as possible. In concrete terms, this requires: ▪ that major stakeholders need to be supplied with euro cash well before €-day: ▪ frontloading of banks ▪ sub-frontloading of retailers and other enterprises ▪ sub-frontloading of citizens (notably coins) ▪ that euro cash becomes easily and widely available as from €-day: ▪ ATMs are fully switched over to euro ▪ banks extend their opening hours ▪ retailers give change in euro only 44 The Introduction of euro notes and coins needs to be swift – (2):  The Introduction of euro notes and coins needs to be swift – (2) ▪ that a maximum of national currency has been withdrawn before €-day: ▪ ‘piggy coin’ campaigns (to collect hoarded coins) ▪ major cash holdings which are not necessary for daily operations should be returned to banks in advance ▪ that national cash is being quickly withdrawn (and not recycled): ▪ retailers give change in euro only ▪ ATMs stop issuing national currency as from €-day ▪ consumer spend residual (and small) amounts of legacy cash in shops (rather than bothering banks) 45 3. The withdrawal of national currency needs to be carefully prepared:  3. The withdrawal of national currency needs to be carefully prepared The main focus in the past was put on the introduction of the euro. The massive backflow of national cash came as a surprise and caused considerable logistical and other problems: ▪ shortage of CIT transport capacity; ▪ delays in the counting, sorting and processing of coins; ▪ late crediting of accounts and financial difficulties for certain companies. 46 4. Any impact on prices (or the perception thereof) needs to be closely monitored:  4. Any impact on prices (or the perception thereof) needs to be closely monitored Prior agreements with the retail sector need to be negotiated, widely publicised and also visualised (sticker, etc.). Public authorities should act, and should be seen to act. Consumer organisations need to be actively involved in the monitoring process and consumers need to be assertive. The quality of preparations (and therefore the easiness of the changeover) affects people’s future perception of the euro. 47 5. The mental changeover takes considerable more time than the physical changeover:  5. The mental changeover takes considerable more time than the physical changeover Survey results show that many citizens in the euro area still think in national currency when doing day-to-day shopping. A majority still thinks in national currency for large-value purchases (house, car, etc.) Dual displays facilitate the mental changeover but become counterproductive at some stage. 48 6. The cash changeover constitutes the tip of the iceberg (1):  6. The cash changeover constitutes the tip of the iceberg (1) The cash changeover (rightly) receives considerable attention in national changeover plans: it concerns all stakeholders (consumers, retailers, bankers, companies, public administrations, etc.) it constitutes the most visible and “spectacular” part of the changeover However: 49 The cash changeover constitutes the tip of the iceberg – (2):  The cash changeover constitutes the tip of the iceberg – (2) The changeover of different systems in the public and private sector absorbs considerable resources and requires timely preparation, e.g. ▪ financial and administrative systems ▪ accounting systems ▪ invoicing and billing systems ▪ payment systems ▪ administrative systems in general ▪ cash registers, ticketing systems ▪ vending machines ▪ etc. etc. The challenge will be even more important in countries adopting a “Big Bang” approach for joining the euro area. 50 Current state of preparation for the enlargement of the € area:  Current state of preparation for the enlargement of the € area General state of preparations “Pre-in” countries will join the euro area in several waves 9 New Member States have defined the target date for euro adoption: 2007: Slovenia (Estonia postponed, Lithuania was rejected) 2008: Cyprus and Malta + Estonia 2009: Slovakia (+ Lithuania? + Latvia?) 2010: Czech Republic, Hungary Poland has not yet fixed a date Countries with target dates before 2010 have established « Changeover Boards » 4 NMS have adopted the first version of their national changeover plan 51 Current state of preparation for the enlargement of the € area:  Current state of preparation for the enlargement of the € area 2. Content of the National Changeover Plans Big Bang-scenario: Introduction of euro banknotes and coins on €-day No transitional period Conversion of bank accounts on €-day Short dual circulation period (around 2 weeks) Frontloading and sub-frontloading arrangements Conversion of financial and accounting systems 3. Other preparations Selection of euro coin designs: Estonia, Lithuania and Slovenia have completed the selection process; others have started Supply arrangements for euro banknotes and coins National information and communication campaigns 52

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