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Isn't the Emu some kind of hairy camel?

-- Ian Giddy (igiddy@mindless.com), February 05, 1997


Yes. Also known as Economic and Monetary Union. Its hair is useful for making blankets. When shorn of its trappings, it becomes rather vulnerable. Its lifespan is unknown.

-- Ian Giddy (igiddy@mindspring.com), February 05, 1997.

Seriously, though...

According to the Maastricht Treaty the European Economic and Monetary Union (EEMU) is to be realized in three stages or change-over phases according to the following schedule:

In Stage 1 (Preparatory Phase) that began on July 1, 1990 important conditions were to be created for the following two stages. In particular the European Common Market was to be completed and the currencies of all member countries were to participate in the European Monetary System (EMS) within the normal fluctuation bands of 12.25%. Still existing limitations of capital transactions were prohibited by the new treaty. The Common Market officially began on Jan. 1, 1993, but it is far from being completed. Nor did the integration of the currencies of the member countries within the narrow fluctuation bands of the EMS succeed. On the contrary: in September 1992 the Lira and the Pound Sterling left the exchange rate mechanism after vehement currency turbulences. Furthermore in August 1993 the fluctuation bands for the remaining currencies - except for the relation between D-Mark and Dutch Guilder - were widened up to 115%.

Nevertheless the Stage 2 (Phase of Convergence) came into force - as scheduled - on Jan. 1, 1994. In this stage particularly the economic, monetary and fiscal convergence of the member states are to be driven forward in order to facilitate a smooth changeover into Stage 3. Right at the beginning the European Monetary Institute (EMI) was established which can be seen as conceptional precursor of the future European Central Bank (ECB), but which does not hold any monetary steering function yet. The EMI was given the task to coordinate the monetary policies of the EU-countries with regard to the goal "stabilization of the overall price level" and to supervise the functioning of the EMS as well as the use of the ECU. Furthermore it has to fix - until the end of 1996 - the regulatory, organizational and logistic frame, which is required by the future European System of Central Banks (ESCB) for the realization of its tasks. Apart from that the allocation of central bank loans to government or Community institutionswas forbidden. Finally the legal conditions for the independance of the central banks of the national governments must be established during this period of time. Still in this phase and before July 1, 1998 the heads of state and government will determine - on the basis of the convergence situation inside the EU - which EU-countries may participate in the Monetary Union.

Stage 3 (Monetary Union) is supposed to start on Jan. 1, 1999 at the latest with the irrevocable fixing of the exchange rates among the involved EU-states.

The change-over scenario - which was decided in last December - divides the technical-organizational transition from the national currency units to the Euro into three phases. The so-called Transitional Period will commence on July 1, 1999 and consists of the Phases A and B. The Transitional Period will therefore last until December 31, 2001.

Phase A begins with the fixing of the participants in the EMU beginning of 1998. Immediately afterwards the EMI will be closed and the ECB will be established. During this phase the countries participating in the EMU have to pass all legal regulations that are necessary for the application of the monetary instruments and the introduction of the single currency. Especially important for the use of the Euro is the legal framework. In this framework the conversion rate between the national currencies and the Euro will be irrevocably fixed (altogether 6 digits before and behind the decimal point) and the legal status of the Euro.

At the beginning of Phase B (Jan. 1, 1999) the exchange rates among the participating EU-currencies will definitely be fixed by the Council of Ministers. The monetary responsibility for the single currency area will be transmitted to the ESCB. At the same time the payments and settlement system "TARGET" (Trans European Automated Real-Time Gross Settlement Transfer) will be put into operation. During this phase Euro banknotes and coins are not yet available. Until the end of the changeover process the economic units should be able to decide for themselves whether to settle their non-cash payments in the respective national currency or in Euros. The national currencies in their national boundary will still and exclusively be legal tender. The private money market participants (credit institutes, institutional investors, large companies) will probably switch to the single currency very fast and ensure an increasing circulation of the Euro in the course of time.

Probably the current deposit money transactions with public bodies - like tax payments, wages and salaries, pensions, etc. - will be effected in national currency as long as the Euro cash does not exist physically. In order to promote a fast and widerspread circulation of the Euro public authorities will launch all tradeable new issues in the new currency right from the beginning of Phase B. It has to be taken into account that selected secondary market issues will be converted during Phase B.

During Phase C which begins Jan. 1, 2002 and is supposed to last no longer than six months. Phase C can be shortened by national legislation. In this phase the final change-over to the single currency will be concluded. All accounts receivables and liabilities that are still denominated in national currency will be converted into Euro according to the official exchange rate from Jan. 1, 1999. This is equally effective for all prices for goods and services. The new Euro banknotes and coins will be gradually exchanged against the national currencies and the whole infrastructure for the use of the new cash money (for example automatic teller machines) will be adjusted to the common currency. During this period of time both, the national currencies and Euros are in circulation. Both money units function as legal tender. In this phase dual pricing will be necessary.

This change-over process clarifies that the transition from the national currencies to the Euro is not a currency reform but a plain currency conversion (accounting process). All stock and flow variables - like assets and income - denominated in national currency will be converted into Euro according to the same exchange rate.

The whole transition process ends on June 30, 2002 at the latest with the replacement of the national currencies by the unified European banknotes and coins. From then on only the Euro is legal tender. The national currencies lose their validity. But even then the possibility to exchange at the ESCB remains.

-- Ian Giddy (Igiddy@stern.nyu.edu), February 06, 1997.

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