By:
Bruce B. Palmer
London
Many of the fifteen member countries of the European Union ("EU") will participate in the Economic and Monetary Union ("EMU") by the turn of the century. The Euro is due to be introduced as a common currency in January 1999 when conversion rates for participating countries will be irrevocably fixed and co-exist with the Euro until 2002. Euro coins and notes will be introduced in 2002 and will replace national currencies altogether after a short dual currency period. EU member states will be required to fulfill a number of economic criteria prior to joining the EMU including:
Public debt should not exceed 60% of the country's Gross Domestic Product ("GDP");
The budget deficit should not exceed 3% of the country's GDP;
Inflation should not exceed the average of the three strongest member states by more than 5%; and
Long-term interest rates should not exceed the average of the three strongest member states by more than 2%.
At the Dublin Summit on September 22 of this year, the European Commission ("Commission") agreed on the basic terms of a Stability Pact as a means of enforcing budgetary discipline among countries participating inside the EMU single currency circle. A format was established for a new exchange rate mechanism to regulate dealings between those participating in the EMU and those member states which remain outside the EMU. The new framework will allow non-participating countries a fluctuation of 15% up or down against the Euro. Membership in the outer circle is voluntary.
On October 22 of this year, the Commission also approved a series of stiff sanctions for EMU countries failing to maintain the Maastricht Treaty budgetary targets. Under the rules, if any EMU member fails to correct a budget deficit of more than 3% of the GDP after 10 months, they will have to pay up to 0.5% of their GDP into a non-interest-bearing central fund. If they fail to correct the deficit, the funds will become a fine and after 2 years another deposit will be required. The Maastricht Treaty allows flexibility in "temporary and exceptional circumstances" if an EMU government exceeds the 3% deficit limit. The Commission has said, however, that it will apply this escape clause strictly and for unusual events outside of the control of the EMU member which have a major impact on the financial position of the government. German insistence on such strict rules to define when members of the Monetary Union would be allowed to run a budget deficit are causing delay in final agreement of the Stability Pact. A majority of States, led by Spain and the United Kingdom, are pushing for a more relaxed approach to enforcing discipline. This issue of creating rules to enforce budget discipline will likely be decided at the next meeting of EU leaders in Dublin on December 13-14.
The next scheduled event in the EMU timetable will be the preparation of a report by the Commission and the European Monetary Institute to determine which countries qualify under the convergence criteria. Each government must submit a budgetary program to the Commission and EU Finance Ministers two months prior to going to its national parliament for approval. EMU would formally begin in January 1999 if, pursuant the provisions of the Maastricht Treaty, a majority of member states have met the entry criteria.
Some uncertainties for EMU implementation remain, however, and relate primarily to the rigid initial qualifications for membership of the EMU inner group. Some countries, such as France and Germany, would appear to have the political desire to overcome some of the obstacles to be within the convergence criteria. Strictly applied, only Ireland, Luxembourg and Denmark currently meet the criteria and Denmark has already negotiated a special opt-out clause with respect to EMU. France, Germany, the Netherlands, Belgium, Ireland, Austria, Luxembourg and Finland are countries that have stated their intention to convert and join the EMU at the beginning of 1999 and are the member states most likely to fulfill the convergence criteria. The United Kingdom and Sweden are unlikely to join the EMU initially for lack of political will. Italy's 1997 budget is designed to bring the deficit down to the Maastricht target of 3% of GDP, and it is now possible that this will be accepted as Italy has recently reentered the exchange rate mechanism. The remaining EU member states -- Greece, Portugal and Spain -- are unlikely to meet the convergence criteria.
The Commission has also sought to clarify the legal position of the Euro within the EU following its October 22 meeting. A draft regulation has been issued which states that (i) the Euro will replace all ECU obligations on a one-to-one basis, (ii) the substitution of the Euro for national currencies shall not have the effect of altering or terminating any agreement, (iii) the amounts expressed in national currencies are to be converted into the Euro at officially designated rates and rounded to six significant figures, (iv) fixed interest rates will continue to apply following the changeover, (v) all debts between the years 1999 and 2002 may be paid either in Euros or in national currencies, (vi) member countries can switch government bonds and financial markets to Euros, and lastly (vii) national currency notes and coins will remain legal tender until 2002. These proposals, which will now be discussed by governments, will be encouraging to the business and financial communities. The main issue of concern for banks and businesses, however, will remain the continuity of contracts drawn up in pre-existing currencies. The widespread fear is that a party could unilaterally seek to terminate a contract on the basis that it is frustrated due to the introduction of the single currency. Another area of concern is the possibility that the Euro may not be recognised by the courts outside the EU. While the final regulation will apply throughout the EU (including countries that do not join the EMU), it cannot dictate recognition of the new currency in courts outside the EU.
