The moves towards European Monetary Union and the introduction of the euro by the end of this century are starting to look unstoppable.
In Germany, Chancellor Helmut Kohl's unwavering support for Maastricht won support at the ballot box earlier this year in the Baden-Württemberg regional elections, when the opposition Social Democrats' flirtation with a Euro-sceptic viewpoint was roundly defeated. France's President Jacques Chirac has made meeting the Maastricht criteria his top priority, giving new life to the Franco-German alliance. The political commitment of the European Union's two most important players, together with the determination of several smaller countries including the Benelux and Ireland to be part of the new monetary system, has dramatically shifted the odds in favour of a common currency.
The questions being asked in Europe are no longer whether the single currency will emerge from the continuing intricate negotiations, but how the new monetary system will operate. The countries which are determined to be part of the system after 1999 already have begun to play hardball at the technical negotiations taking place in Frankfurt at the European Monetary Institute (the forerunner of the European central bank). They appear determined that those countries which choose to stay out of EMU like Britain, or those which fail to qualify like Greece and Portugal, do not enjoy the same monetary privileges as those inside. The language of monetary union has become a debate between the 'ins' and the 'outs.'
However, at this stage no one knows precisely who will ultimately qualify and be part of EMU. This should become clearer by December's Dublin summit, at which the heads of government will produce the first authoritative list showing which countries currently meet the criteria of economic convergence required to be part of monetary union.
Few countries, with the possible exception of Greece and Italy, fail to qualify on the basis of current and future rates of inflation. The big divide is over the requirement that budget deficits are held below 3 per cent of total output and that accumulated debt be no more than 60 per cent of gross domestic product. At present, the two countries most essential to monetary union, Germany and France, fail to meet the budget deficit criteria. But Germany should be there by the end of 1997, after some dramatic public spending cuts, and President Chirac is heading in the same direction through an aggressive privatisation programme.
Projections by investment bankers Kleinwort Benson show that on the basis of strict interpretation of the rules only Germany, Luxembourg, the Netherlands and probably Ireland might be judged to be qualifying candidates by early 1998. Denmark will have qualified on paper but already has decided to exercise the opt-out which it negotiated on the UK's tail-coats at Maastricht.
The real economic question for much of Europe, including France, is not so much whether spending can be cut sufficiently but whether growth will pick up fast enough to lower the budget deficits. There is a risk that France will fail to qualify. This potentially is the most likely reason why the start of EMU would be postponed, since a monetary union without the participation of France is not a real runner.
Certainly, there is no hesitation in French government circles as to whether it should substitute the French franc for the euro. Since the start of this decade, French economic policy has been dominated by maintaining the franc fort. Having put itself through a period of slow growth, high unemployment and economic reconstruction to prepare for the euro, France will not tolerate slippage. At the start of monetary union in the year 2000 all its public debt will be denominated in euros. In this France goes further than Germany, which plans a dual system for a transitional period. The most remarkable aspect of the process is how far the EU members have moved together in putting their economies on a similar footing.
In parallel to this process, the European Monetary Institute has been putting together the infrastructure of the euro monetary zone. A common clearance and payments system, to be known as Target, will be used by all banks and financial institutions in the EU - even in the countries outside the system. However, there is a vigorous debate about the degree of access to the system for countries like Britain which seem set to stay outside. The process of designing and printing the new notes, coins and monetary instruments is already well advanced, and most commercial transactions in the 'in' countries will be in euros from day one.
Commercial transactions in the 'out' countries, particularly those which are intra-Europe, will quickly move onto a euro basis. Companies will find it easier and less costly, in transaction terms, to price all their products for the EU market in euros and use their euro accounts to pay for their imports.
Banks in 'out' countries will maintain euro accounts as well as sterling or krone accounts, and many experts believe the weight of the euro will be so overpowering that it will become the currency of choice for major European corporations. This will be particularly true in travel and transport, where considerable savings could accrue from reducing the cost, time and complexity associated with cross-border transactions.
Airlines such as British Airways, for which intercontinental revenues outweigh those from intra-European business, may not feel immediately compelled to switch to a euro standard. But as the number of qualifying EU countries increases, the pressure for euro ticketing, accounting and payslips is likely to become irresistible.
Alex Brummer
Source: Airline Business
