Central bankers and their advisers are obliged under the terms of the 1991 Maastricht treaty to be ready for monetary union by 1997, the first date at which existing currencies could be locked to form a union. However, the current assumption in Frankfurt, where the plans for union are being devised, is that there will be an insufficient number of countries ready to move towards a union until 1999.
Nevertheless, the technical plans for monetary union will be of enormous consequence for the whole of commerce. It is widely assumed, for example, that almost all commercial organisations (most of which find the volatility of currencies destabilising) will opt to move their transactions and payments systems into the new European currency at the earliest opportunity, even if individual countries decide that the notes used on their streets remain the same.
The concept of different currencies being used alongside each other - with the same par value - is not new. Such a system already operates in Britain where the Scottish banks issue different notes to those south of the border without jeopardising the currency union. Indeed, a working party is currently looking at the possibility of printing notes and minting coins which have national currencies on one side and a Euro-currency valuation on the other.
Much of the work on creating a new currency and the institutional arrangements to implement and police it is being conducted in Frankfurt at the European Monetary Institute (EMI). This little-known pan-European body, which is planned as the forerunner to the European System of Central Banks (ESCB), was formed in 1994 to coincide with the start of the transition stage to European Monetary Union (EMU). Frankfurt was chosen as seat of the EMI in 1993 after fighting off financial contenders including London and Paris. It was decided that should the member countries go ahead and form a European central bank, as will be necessary once monetary union takes place, then this would be in Frankfurt too.
There is a strong belief there that the location of the EMI in Frankfurt, under the watchful eye of the Bundesbank, will ensure that the single European currency which emerges after currencies are locked in 1997 - or at the latest 1999 - will veer to the hardest end of the European currency spectrum and be at least as strong as the German mark. It will not, however, be based on the existing Ecu, which is a basket of currencies and which has gained some adherents in Europe.
The EMI is located in the Eurotower in Will-Brandt-Platz at the centre of Frankfurt's financial district, close to Commerzbank and within sight of the twin towers of Deutsche Bank. Its president is Belgian Baron Alexandre Lamfulussy, former general manager of the Bank for International Settlement in Basle, who was first choice of the French and Germans. Lamfalussy has set about building the EMI with a degree of speed. A monetary technocrat, he is determined that this legacy, including the mechanisms for moving to a single European currency, will create a system that operates like the Bundesbank using a central monetary target.
But this will be more complex for the European System of Central Banks because banks across Europe are in differing stages of financial deregulation and sophistication - ranging from the Anglo Saxon model prevalent in the City of London to the more tightly controlled Rhineland model in Germany, only now coming to grips with deregulated financial instruments such as the money market fund.
Knowing what he does about the level of economic convergence among the countries which comprise the EMU and the political disturbances prevalent in the countries concerned, Lamfalussy believes there will not be the eight countries needed to go ahead with monetary union in 1997.
His view is shared by Hans Tietmeyer of the Bundesbank, who argues that monetary and fiscal conditions are unlikely to be right for a union in 1997, but accepts that some countries will move towards locked currencies and union at the end of 1999.
Despite the likelihood that monetary union will not take place in 1997, the EMI and its council comprising the central bank governors of member countries has set itself the task of ensuring that the EMI and its successors, the European System of Central Banks (ESCB), will have in place all the technical systems necessary - including compatible pan-European software and hardware which would be necessary to start operations in 1997, should that prove necessary.
A number of alternatives for introducing the single currency are now being discussed. The most radical would be the big bang by which everyone across the EU would convert all their banknotes, payment systems and other equipment from day one. More likely is a slow burn with banks and commerce moving their transactions to one currency - on the basis of the locked parities - from day one.
However, daily transactions could be conducted in national currencies until public opinion and commercial equipment were changed to meet the challenge of a new currency. Pan-European air carriers would expect to head the transformation.
Source: Airline Business
