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The Introduction of the euro


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Title: The Introduction of the euro

  • 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

  • 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

The euro area 12 of 25 EU countries
  • Outside euro area but in the EU
  • UK
  • Denmark
  • Sweden
  • Malta
  • Cyprus
  • Czech Republic
  • Poland
  • Slovakia
  • Hungary
  • Slovenia
  • Estonia
  • Latvia
  • Lithuania
  • Euro area
  • Germany
  • France
  • Italy
  • Belgium
  • Netherlands
  • Luxembourg
  • Ireland
  • Greece
  • Spain
  • Portugal
  • Austria
  • Finland

The euro area - key statistics (2004/5)

  • USA Euro Area (12)
  • Population 296m 313m
  • 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
  • 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

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)
  • 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.

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
  • Further reduction of country risk premia
  • Potentially large increase in trade and
  • For the EU
  • Catalyst for further integration
  • contributes to stronger European identity

Costs of the euro adoption
  • Short-term costs at micro-level (change of
  • Loss of independent monetary and exchange rate
  • 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

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
  • 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 Communitys objectives
    (Art. 2 of the Treaty)
  • The euro brings about a change of policy regime 

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.
  • 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

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
  • 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
Member of the euro-zone
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
Common decision (Art.122) upon MS request,
Convergence assessment by Commission and ECB,
Commission proposal, Council decision
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
  • 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)

  • 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
  • Interventions at the margins will in principle be
    automatic and unlimited, but without prejudice to
    the ECBs price stability objective.
  • Co-ordinated intra-marginal intervention is
  • Not a waiting room but a training room

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
  • Czech Republic Managed float with euro as a
  • Poland Free float (until 2000 crawling basket
  • Sweden Free float

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
  • subsidiarity responsibility of the Member
    States (Art. 5)
  • however principle of coordination (Art. 4),
  • economic policies are a matter of common
  • 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).

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.
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 EUs 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
  • 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
1 Monetary policy Art. 105-113
European Council
Economic Financial Committee Economic Policy
Committee (25 MS ECBNCBEC)
initial conversion rates Art. 123
European Parliament
12 national Economic Policies Euro Group
ECOFIN Integrated Guidelines (Art.99BEPG
Social Partners
European Commission
Macroeconomic Dialogue Cologne process
COORDINATION surveillance Art. 4, 98-104
Fiscal policy Excessive Deficit Procedure
Stability and Growth Pact
Structural policy Cardiff process Lisbon agenda
Employment policy Luxembourg process Lisbon
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

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
  • 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

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...

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).

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 areaAnnual
Long term interest rate convergence (10 years
bonds)Annual rate in
Budgetary Deficits of GDP
Euro-areaGDP Growth and Job creation(Annual )
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
National advantages of the (Gallup)
In your opinion, for (OUR COUNTRY), is the
adoption of the euro ? see(http//
Consequences at a nat. level
  Do you think the introduction of the euro
would have positive or negative consequences for
(OUR COUNTRY)? ( - Total Positive)
Support for the euro
  Are you personally happy or not that the euro
could replace the (NATIONAL CURRENCY)?
Impact of the on prices
Concerning the evolution of prices for the last
4 years, would you say that the euro has ?
Consequences on prices
  Do you think the euro will help to maintain
price stability or, on the contrary, increase
inflation in (OUR COUNTRY)?
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Effective discretionary Budgetary stance in the
  • 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

Changeover timeframe
  When do you think the Euro will be introduced
The -cash changeover Keys to a successful
  • Early preparation
  • Good scenario and execute it
  • Excellent collaboration between public
    administrations, central banks, business and
  • Consumer protection
  • Communication

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

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
  • ? 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

The Introduction of euro notes and coins needs to
be swift (2)
  • ? that a maximum of national currency has been
  • before -day
  • ? piggy coin campaigns (to collect hoarded
  • ? 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
  • ? consumer spend residual (and small) amounts of
    legacy cash in shops
  • (rather than bothering banks)

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.

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,
  • 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 peoples future perception
    of the euro.

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.

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

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.

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

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