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It is indispensable to say a few words about the European Monetary Union. It was formally adopted by the Treaty on European Union of 1992. EMU designates the zone of countries within EU which share the same monetary policy and currency, the euro. It began on 1 January 1999 when the euro became a legal currency and the national currencies of 11 participating countries subdivisions of it.
The next point of the essay talks about the experiences with the euro. Almost all of the Member States has doubts with the new single currency. To solve these doubts the Commission made a lot solutions to make the changeover as easy and simple as possible.
First of all every business needs a changeover plan. The big multinational companies began preparing for the euro in 1997. All of the big companies (of course there are exceptions) will keep all of their accounts in the new single currency before the end of 2001. Those small and medium-sized businesses who leave the changeover too late will find it virtually impossible to operate legally in the old national currency units after the date. These enterprises need to make sure that their information technology systems can handle the euro, and that their accounting system, marketing, pricing and payroll activities have all been adapted for the new currency.
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The 11 countries changed over to the euro on 1 January 1999, so this means that the single currency became the only legal currency and the national currency became the sub-unit of the euro. After the changeover deadline in 2002 the euro will be the only legal currency in the Member States, that is why I mentioned before that the businesses, who have not changed over to euro, will have problems with the law.
An other important point in this changeover is the question of the financial institutions. Financial news always affirm, that there is no need to worry about changing a bank account into euros when the final changeover happens. The banks are going to make it automatically, but it is better if the change is made before, because it will help the process of learning new values in euro. Just think about it. It is hard for a pensioner to count the new value of pension in one minute. To help these people, the government of the given country has to make teaching campaigns. For example, in Germany the government sent a lot of information brochure to people to teach them, how to use the euro. During the transition period banks will still make payments out of euro accounts in national currency when necessary. Another help is the so-called dual display of prices/values. It means that during the run-up to the launch of euro, many prices will be displayed in both national currency units and euros in shops, on bank statements and, by many companies, on wages and salary slips. In all member states except Austria, this is a voluntary process without any legal obligations.
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It is timely to talk about the European Central Bank. Formally it was constituted on 1 June 1998. The ECB is part of the European System of Central Banks together with the European Union’s 15 national central banks. Its primary objective is to maintain the price stability. Its basic tasks are: defining and implementing monetary policy for the euro area, conducting foreign exchange operations and holding and managing the official foreign reserves of the Member States.
On 15 April 1998, the Commission recommended a standard of good practice on banking charges for conversion to the new single currency. Its basic principle is that compulsory aspects of the changeover should be free for consumers. Recommendations cover conversion of accounts, incoming and outgoing payments, exchange of the bank notes and coins. Banks are urged to apply the same charges for a given service whether it is denominated in euros or in national currencies. In February 2000, the Commission urged banks to improve cross-frontier payment systems so as to ensure inexpensive, efficient and secure small value credit transfer charges and publishing its findings on the Internet every six months. I have to mention here an interesting thing with the credit cards. As with other financial services, euro-denominated credit cards have been available from 1 January 1999. Consumers are also able to make payments in euros with their existing credit cards. However, no one is obliged to start using the euro until 1 January 2002.
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The rounding of the changes can mean another problem, that is why the Commission made the rounding rules. It is governed by legal rules so as to guarantee clarity and fairness. Each conversion rate to one euro is expressed as six significant figures and these six figures should always be used when making conversions. They can not be rounded or shortened. If the number at the third decimal place is less, than 5, then euro figure must be rounded down. If the third decimal is five or above, then it can be rounded up.
Another important point is the consumer protection, that is why it has the highest possible priority in the planning and changeover. The conversion of the new single currency has the most important legal protection. The Member States can use only one conversion rate which was established on 1 January 1999. Those persons or firms, who use any other rate, is breaching the law. Consumers are also protected by rules on the rounding of odd amounts after conversion. Another aspect of consumer protection is the EU-level agreement between consumers and retailers on the use of a logo guaranteeing that retailers displaying it are respecting the laws on conversion and rounding.
The Commission made a convergence criteria to test those countries, who want to participate in monetary union. The four criteria are:
- inflation – within 1.5% of the best three performing countries in terms of price stability;
- public finances – absence of an excessive government deficit and debt;
- exchange rate stability – observance of the normal margins of the exchange rate mechanism without severe tensions or devaluation for 2 years;
- long term interest rates – within 2% of rates in the three countries with lowest rates of inflation.
(Barnes I. & Davison L. Eds. (1994): European Business, Butterword – Heinemann)
To check the analogy of the countries, the Commission requires so-called convergence reports. This assesses the performance of pre-in countries against criteria and a number of other conditions (including central bank independence). Both the Commission and the European Central Bank are required to issue convergence reports after an application to join European Monetary Union has been made. What is more, the Commission’s report is accompanied by recommendation. Hungary is now trying to be adequate for these criteria, and it looks that it is going to success in these criterions.
Pre-in countries (“pre-ins”) were the four Member States that did not participate in adopting the euro and a single monetary policy on 1 January 1999: Denmark, The UK, Sweden and Greece (this country due to adopt the euro on 1January 2001). Denmark will have a referendum on the issue in September 2000 and Sweden is also expected to put the issue to a referendum in 2002. The UK will have a referendum on the euro before adopting it.
To help the economic policies, the European Council made guidelines to help their co-ordination. Every June, the Council fits its guidelines to the recommendations from the Commission and discussion among Finance Ministers. These are the point of reference for the commission’s monitoring of the economic situation in Member States. If national policies deviate from the agreed guidelines, the Council may publish specific recommendations on corrective measures that are necessary. These procedures apply to all Member States.
(Király Rita (1999): EU for U. Tri-mester Bt, Tatabánya)
And last but not least the essay is going to talk about the redenomination. All Member States began to redenominate their outstanding debt (bond) when they adopted the euro on 1 January 1999. Most adjusted the nominal values of the redenominated bonds to avoid awkward amounts. All nominal values are expressed in cents, except in France and the Netherlands, where they are in euros. Private debt issuers are not obliged to redenominate their bonds before 1 January 2002 but when they do they are encouraged to follow the method of their national governments. As far as shares and equities are concerned, stock exchanges began trading in euros on 1 January 1999, but companies to not have to alter their share capital before 1 January 2002.
As a conclusion it can be asserted, that the single currency has a lot of advantages. It is clear that it is a big change, and as a change it has a lot of risk. But the Member States made a lot of good progresses to make it easier. I hope that when Hungary is going to join the EU, we will not have problems to use the euro as a single currency. I think this is imminent to use national currencies in the case of the European Union. The euro is going to be competitive with other currencies, such as the American dollar and the Japanese yen. It is hard to harden for the new values, but it will take only short time to use the euro without counting problems. The euro hang on a lot of opportunities in the future...
Word count: 1974 words without the references, bibliography and cover page.
Bibliography
Internet:
Books:
Király Rita (1999): EU for U. Tri-mester Bt, Tatabánya
Lőrincné Istvánffy Hajna (2001): Európai Uniós Fogalomtár, Budapest, Szaktudás Kiadó Ház
Theo Hitiris (1999): European Community Economics 6th edition Harvester Wheatsheaf
Hargita Árpádné – Izikné Hedri Gabriella – Palánkai Tibor (1999): Európa Kislexikon, KJK Budapest 1999
Horváth Zoltán (1999): Kézikönyv az Európai Unióról, Magyar Országgyűlés Budapest 1999
Weidensfeld Werner – Wessels, Wolfgang (1997): Europe from A to Z – Guide to European Integration, Luxembourg European Commission
Barnes I. & Davison L. Eds. (1994): European Business, Butterword – Heinemann
Palánkai Tibor (1999): Az európai integráció gazdaságtana, AULA Kiadó Budapest 1999
