A weak euro
A weak euro that trades at lower levels than foreign currencies will mean that exports from Euroland will be less expensive for foreign buyers. This also means that other foreign manufacturers will have to compete against those low prices. If the euro grows very weak, then there is the chance of inflation -- which would make borrowing expensive and further the problem.
What affects the strength of the euro?
In simple terms, the euro's strength is affected by supply and demand. When investors invest in a fund in a specific currency, that is essentially a vote of confidence in that issuer. But how do investors make their decisions about where to invest?
There are several factors that affect where investors place their money, including the overall stability factor. Is there a political or budgetary problem within the country (or, in the case of the euro, several countries)? Indicators like unemployment levels and overall inflation rates are considered.
The exchange rates are also considered. Trade among the countries that make up Euroland will probably increase in relation to trade with the rest of the world, simply because it will be so much easier than it was before. However, both imports from and exports to non-Euroland countries will probably increase less rapidly. When a country imports more than it exports, it runs a deficit in its current account, which isn't attractive to investors because it doesn't indicate long-term stability. Current account surpluses, which result from higher exports than imports, are viewed an indicator of a strong currency.
Interest rates also have an affect on investors. High interest rates mean high returns, but they may also mean inflation. There is a fine line between these two, and investors have to balance the risks accordingly.
How does the strength of the euro affect worldwide business?
The euro could have detrimental affects on the U.S. dollar. Euroland now has the second strongest economy in the world, and the highest level of world trade. This could establish the euro as a new reserve currency, and could cause a shift in demand from dollar-denominated markets to euro-denominated markets.
Another factor that affects the balance of the business world is the fact that growing countries that are trading with Euroland countries will begin invoicing in euros. This will have the effect of strengthening these key trade areas as euro trading zones.
A third factor that may strengthen the affects of the euro and impact worldwide business is the new freedom for expansion that Euroland manufacturers and other business firms now have. This growth opportunity will allow them to use economies of scale to their advantage and create highly competitive markets that didn't exist prior to the introduction of the euro.
While the euro may not help some of the problems within the Euroland countries themselves (such as unemployment), it will bring about an opportunity for growth that has not been possible in the past. It is anticipated by most that the euro will promote expansion and growth that will make European stocks as attractive to investors as American and Japanese stocks.
The euro has passed its biggest test yet with flying colours, but more challenges lie ahead for Europe's single currency.
The smooth launch of the euro as a cash currency has demonstrated that the public is willing to accept the credibility of the new currency, and that business was prepared to pay the substantial costs of transition.
Fears of a logistical nightmare proved unfounded, but just as with the millennium bug, that was due to substantial investment by banks and shops in training and computer systems.
And the ECB gained plaudits for releasing enough of the new currency to facilitate the changeover without boosting inflation.
Respected
But the euro's supporters want more than just acceptance of the new currency.
They want it to become an international currency as widely used as the US dollar, and as a domestic currency as respected as the German Deutschmark used to be.
But a number of obstacles still could derail this goal.
Among the most controversial are:
- Role of European Central Bank
- Coordination of economic policy
- Tax harmonisation
- Use of euro as reserve currency
- Adoption of euro in Eastern Europe
- Bigger role for EU in international economic policy discussions
Economic challenges
The strength of the euro will ultimately depend on the strength of the eurozone economy.
The European Central Bank was fashioned on the model of the German Bundesbank, giving it full political independence from politicians and a single objective of maintaining price stability of the new currency.
But there are questions whether the structure or objective of the ECB are appropriate for dealing with Europe's biggest economic slowdown since the euro was launched.
The ECB has been reluctant to cut interest rates as quickly as the US Federal Reserve bank in response.
That is partly because of its bulky Federal structure, with the governors of all 12 eurozone central banks being decision-making members of the ECB council, while economic conditions often differ between regions.
But it is also because price stability, not tackling high unemployment or stimulating economic growth, is its central objective.
The ECB has made some improvements in the way it presents itself to the public, revealing some of its economic projections and targets and reducing its interest-rate setting meetings to a monthly basis. But it has not changed its basic approach.
Stability pact
And eurozone governments are also limited in their response to recessions by the "stability pact" that accompanied the introduction of the euro, in which they pledged to keep budget deficits below 3% of gross domestic product (GDP).
At his news conference after the launch of the euro, ECB president Wim Duisenberg warned eurozone members against "fiscal activism".
As the monetary union draws European economies closer together, there have been tentative moves for greater coordination of fiscal policy.
As a first step, eurozone economies are being urged to publish their deficits at the same time and in a consistent manner.
But in the long run, more coordinated fiscal steps, such as harmonising taxes and budget deficits, could be on the cards - but would involve some painful choices.
Price differences
The launch of the euro should help to even out prices between different European countries, increasing competition and benefiting consumers.
It is also bound to highlight the differences in prices caused by the different rates of VAT and excise duty on different goods.
That will increase pressure to harmonise even more closely these tax rates.
Excise duties, in particular, will be a difficulty for countries like the UK, which derive far more government income from taxes on alcohol, petrol and tobacco than most European states.
International role
The euro also has some way to go to gain international credibility as a reserve currency.
Most central banks outside Europe rely on US dollars to keep their foreign exchange reserves, and even Mr Duisenberg admitted that there was slow progress.
But 20 non-eurozone central banks requested substantial cash transfers ahead of the euro cash launch, and 50 currencies are now linked one way or another to the euro.
The advantage for the United States in being an international reserve currency is that allows it to more easily run a trade deficit, as other countries are happy to hold dollars to finance its trade gap.
But if central banks are to hold euros, they need to be sure that its value on international currency markets is stable.
Despite its recent rise, the euro is worth 25% less than when it was first launched as an electronic currency against the dollar in 1999.
The credibility of the euro on foreign exchange markets is closely linked to progress on economic reform in Europe.
EU Commissioner Pedro Solbes recognised this when he told the BBC that "in the long term the exchange rate will be dependent on how we manage our economy".
Spreading eastwards
The influence of the euro, however, already extends across the region beyond the 12 members of the eurozone.
The 10 accession countries of Eastern Europe, ranging from Poland to Malta, are eager to accept the euro to replace their unstable currencies when they join the European Union.
Kosovo and Montenegro, which linked their currency to the Deutschmark as part of their move to separate from Yugoslavia, have already adopted the euro.
EU officials, however, are worried that they need to wait until their economies are at a similar level to those of eurozone members.
The euro was launched on 1 January 1999 as an electronic currency and became legal tender on 1 January 2002, but attempts to create a single currency go back 20 years. This chart shows the value of the euro (before 1999 as a basket of the 11 legacy currencies) against the US dollar.
The economy, and how it could be affected by joining the euro, is central to the debate.
In November 1997 Gordon Brown set out five economic tests along which the country's readiness can be measured. Each test assesses whether the British economy will benefit or suffer from the move.
Supporters of the euro believe that a shared cash currency would allow Britain to compare its own prices and wages more easily with those of its European counterparts. This, in turn, would lead to greater convergence.
Joining the euro would almost certainly mean better conditions for businesses considering long-term investment in Britain.
Significantly, many large multi-nationals are warning that they only chose to invest in Britain on the assumption that it would eventually join the euro. The strong pound means that companies like Nissan are not making a profit selling to Europe at the current exchange rate.
With this shared currency, though, come a pan-European interest rate and limits on the government's ability to borrow money.
Interest rates are set for the eurozone by the European Central Bank (ECB) in Frankfurt. The Bank of England will be left with just one vote, like all the other central banks in the eurozone.
Shocks to the economy, such as the terrorist attacks of September 11th, make it harder for the ECB to find the right rate.
Whether Britain should lose its own economic identity is hotly debated.
Britain emerged from September 11th stronger than its European counterparts: growth this year is expected to be around 2%, compared with negative growth in Germany and 1.5% in Italy.
Does Britain want its economy linked so closely with others if this means it could be affected by such economic slowdowns?
A final consideration is that some features peculiar to the British economy could be affected by the move to the euro.
Many people in Britain, for example, have mortgages with variable interest rates, as opposed to Europe's more common fixed interest rates. Britain also has the most flexible labour markets, with low interest rates meaning more jobs
The launch of the euro
On 1 January 1999 the European Union achieved a new and unprecedented stage of economic integration. With the launch of the euro, 11 countries merged their monetary sovereignty and transferred the task of conducting a common monetary policy to a supranational institution, the Eurosystem.
This historic step was the culmination of a long period of preparation, the magnitude of which can hardly be overestimated. EU Member States embarked upon an ambitious and sometimes painful fiscal consolidation process; exchange rate crises and hostile public opinion in some countries had to be overcome by a clear political conviction that the project would eventually succeed. At the technical level, the banking and financial sectors, EU legislators and many others diligently prepared the change-over to the new currency in co-operation with the ECB itself, its precursor organisation - the European Monetary Institute - and the national central banks.
Indeed, the thorough preparation has paid off: the euro got off to a smooth start. Given the sheer scale and significance of the project, it is, of course, unsurprising that it did not proceed entirely without hitches; on the whole, however, there were no major complications. External developments such as the initial depreciation of the euro against the dollar have attracted somewhat pessimistic headlines; but there are, in fact, several reasons for some satisfaction. The Eurosystem, and specifically the Governing Council as its main decision-making body, has taken up its responsibilities of formulating and implementing the single monetary policy. In so doing, the Governing Council - which comprises the 11 national central bank governors of the euro area countries and the six members of the Executive Board of the ECB - has not only shown its determination to think and act for the euro area as a whole but has also proven its capacity for decisive action - as exemplified by the decision to cut the ECB's main refinancing rate to 2.5% in April.
With the launch of the single currency, the Eurosystem successfully began to operate a system of centralised setting and decentralised implementation of monetary policy, using a new set of rules and procedures. In line with its Treaty mandate, the Eurosystem has also assumed its wider tasks and responsibilities, relating, inter alia, to the collection of statistics, the preparations for the issuance of banknotes or the operation of payment systems.
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The impact of the euro on financial markets
The introduction of the euro has brought about momentous change in the financial markets, not only within the euro area, but also on a global scale.
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First, a functioning money market for the euro area as a whole is a precondition for the successful operation of the Eurosystem's single monetary policy. In order to allow this euro area money market to operate smoothly, the Eurosystem has established the requisite cross-border transfer and payment systems. The progress achieved in overcoming the previous fragmentation is highlighted by the rapid increase in transaction volumes within money markets and the almost immediate normalisation of bid-ask spreads. Even at this early stage there is every justification for observing that the euro money market has already achieved considerable depth and a high degree of liquidity.
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Second, the advent of the new currency has also brought about a transformation of the European capital markets. Even though capital movements within the European Union had already been liberalised by the early 1990s, the prospect of a truly pan-European capital market was still remote. It was the advent of the euro which provided a decisive impetus towards the further development of a single euro area capital market. This market is set to become even deeper and more liquid over time, and hence more efficient.
One particular area of the capital market in which the markets in euro area countries have traditionally been considerably less active than in the United States is the corporate bond and commercial paper market. The evidence of the last few months suggests that the issuance of euro-denominated bonds has indeed exceeded dollar-denominated issues. These data indicate not only the high level of confidence in the new currency, but also point towards the gradual establishment of a deep and liquid bond market in the euro area in the foreseeable future. Such a development should have a favourable impact on business activity and might stimulate further consolidation by way of mergers and acquisitions.
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Third, the introduction of the euro also appears to lend new urgency to greater integration and efficiency in equity markets. As consolidation within the financial service and banking sectors has increased the size and geographical reach of intermediaries and fund management institutions, they seem to be pressing for market-places to become more concentrated in order both to reduce costs and to enhance liquidity. These developments might eventually also lead to a closer co-ordination of trading practices and technology among stock exchanges, and the planned link-up of eight exchanges in Europe appears to point in this direction. Yet at the same time, the use of advanced information technology renders the physical location of stock exchanges less relevant. A developing perception of the euro area as an entity in itself is also reflected in the emergence of area-wide equity indices which provide investors with opportunities to monitor area-wide equity positions as well as, in some instances, positions in area-wide industrial sectors.
To sum up, the introduction of the euro has led to a perceptible shift in euro area (and EU) financial markets; greater depth, liquidity and integration should improve their efficiency, and a more efficient allocation of capital should mean improved financing opportunities for both sovereign and corporate borrowers.
Having set out the immediate impact of monetary unification on financial markets, I should like to give you a brief overview of the institution at the heart of managing our new currency, namely the Eurosystem.
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The role of the Eurosystem
Since 1 January 1999, the Eurosystem has had exclusive competence for monetary policy in the euro area. In fulfilment of this task, the Treaty establishing the European Community assigns to the Eurosystem the primary task of maintaining price stability. In order to guide expectations of future price developments and to facilitate the public's assessment of the success of the single monetary policy, the Governing Council has announced a quantitative definition of its primary objective: price stability has been defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%, to be maintained over the medium term.
The Treaty also states that the European System of Central Banks shall support the general economic policies in the European Community, as long as it can do so without prejudice to the objective of price stability. The very wording of the Treaty reveals its logic, namely that the best contribution which monetary policy can make to high employment and economic growth is to maintain price stability.
In its very essence, Economic and Monetary Union is of course a European endeavour. However, even at this stage it is clear that the introduction of the euro has implications for the global economy. Figures relating to the official and private use of the new currency reveal that the Eurosystem will have responsibility for an international currency of considerable standing. However, allow me to stress in this context that the Eurosystem does not pursue a policy of actively encouraging or discouraging the international use of the euro.
As has probably become clear from my remarks so far, we can derive considerable satisfaction from observing how well the immediate challenges of the introduction of the euro have been mastered, both by the financial markets and monetary policy-makers. Allow me in the second part of my address to concentrate on some of the longer-term challenges which the project of monetary unification will face.
One single monetary policy for 11 different economies
Looking at EMU from an external perspective, one might be tempted to ask: "It has worked so far, but will it last?" Is it sustainable for the Eurosystem to conduct a single monetary policy while economic policies continue to be shaped by 11 different governments?
The blueprint for economic and monetary union as set out in the Maastricht Treaty does indeed envisage the establishment of a single monetary policy to be conducted by a new supranational institution, the Eurosystem, with the ECB at its centre. Economic policies, on the other hand, have essentially remained the competence of the Member States. At the time, many commentators doubted the feasibility of a monetary union in Europe without some form of "political union".
Today, nine months into the life of the new currency, our first experiences allow us to paint the following picture. From the very outset, monetary union in Europe has been conceived as a complement to the Single Market, a logic neatly summarised in the title of the Delors Report study: "One market, one money". Europe's Single Market already represents a remarkable degree of economic integration. A plethora of common rules govern economic life in the 15 Member States and create, to a large extent at least, a unified market serving 375 million people. The realisation of the free movement of goods, services, capital and people has integrated national economies and rendered national borders increasingly obsolete. A common competition policy has created a level playing-field, and common norms and standards guarantee Europe-wide market access.
Certainly, Europe's Single Market is yet to be fully completed: a number of sectors have yet to be fully liberalised and brought into the remit of common rules. Nevertheless, the notion of a unified "European economy" has acquired real substance, not least in the wake of the prominent "1992 Programme".
But is the degree of economic integration achieved so far with the Single Market sufficient for the proper functioning of a monetary union on a lasting basis? From the Eurosystem's point of view, the Europe-wide economic "governance" is of particular importance in a number of policy areas.
First, the completion of the Single Market in the area of financial services is paramount to the functioning of Monetary Union. In fact, euro area financial markets began the process of integration even before the introduction of the euro, and a large amount of work is currently under way to further develop a prudent, harmonised regulatory framework and to harmonise market practices. Harmonisation of, for example, repurchase agreements, national company laws (including bankruptcy laws) and other aspects of the legal and regulatory framework are set to enhance legal clarity and certainty and thereby improve the efficiency and stability of the financial markets.
Beyond the realm of financial markets, a functioning Economic and Monetary Union will require an increased awareness on the part of all Member States of the spillover effect of their national policies, especially their budgetary policies. Without this, the Eurosystem's single monetary policy would face severe pressures. In order to anchor responsible fiscal policies in the EMU rule book, the Treaty itself contains stipulations which oblige Member States to treat national economic policies "as a matter of common concern" and subject them to a multilateral surveillance procedure. These rules derive additional force from the existence of sanctions in the event of persistent excessive deficits. The stipulations have been further refined and made more effective by the Stability and Growth Pact agreed in 1997.
Our first experiences with these EU-level economic policy instruments show that the consolidation of public finances has indeed become a priority for all Member States, and that efforts, although not always sufficiently ambitious, have been undertaken to achieve balanced budgets in the medium term. Given Member States' high overall debt burden, the Eurosystem continues to call for heightened efforts to this end, especially in times of cyclical upturn such as the one we are experiencing at the current juncture. But even so, striving towards sound public finances, combined with the Eurosystem's stability-oriented monetary policy, should help to create favourable macroeconomic conditions such as Europe has not enjoyed in the past.
However, the euro area economies will only achieve higher growth rates and cut their chronically high unemployment rates in the long run if the necessary structural reforms are enacted. Not least due to the constraints imposed by the single currency, there now appears to be a growing recognition among policy-makers in Europe that over-regulation of labour markets, perverse incentives created by some elements of the welfare systems and rigidities throughout the economy urgently need to be addressed. In so doing, Member States are increasingly willing to learn from each other, to accept "peer pressure" and study examples of "best practice".
That said, it would be ill-advised to overrate the need for co-ordination, for example, with regard to social security or direct taxation systems: a healthy competition between national economic policies in such fields can certainly produce superior results. The process of economic convergence in the euro area, despite great progress over the past years, is not yet complete and will not be so for the foreseeable future. Under these circumstances, Member States must retain sufficient room for manœuvre to allow for differentiated policy responses.
In any case, developing an awareness of the euro area dimension of domestic economic policy decisions will be a gradual process. In this context, there should be no illusions: adapting to the new conditions of the single currency - where monetary policy is exogenously set by the Eurosystem - will demand a steep learning curve from policy-makers, businesses, trade unions and the public at large.
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Conclusion
I should like to conclude by remarking that the establishment of Economic and Monetary Union marks an outstanding historical achievement, a new quality in the process of Europe's integration. While we can certainly look back on the first few months of this endeavour with considerable satisfaction, we are aware that the task of making EMU a success will be an ongoing one. But, as my remarks have revealed, there is every reason for optimism: the euro's success is built on sound foundations. Further improvements are, of course, necessary, but we are confident that they will be accomplished. Clearly, the Eurosystem's stability-oriented monetary policy is a principal ingredient of a successful EMU, in which the euro enjoys both the trust of citizens as well as the confidence of investors.
Thank you very much.
In the next parliament Mr Blair is likely to call a referendum. This referendum will decide probably the most important issue facing Britain today. Should we join the Euro? At the moment the opinion polls are very much against the Euro. In the referendum the powers of the government will be pitted against the conservative press.
In this opinion I will make the case for Britain joining the Euro. The Euro offers the UK a host of important benefits and I will obviously highlight these. Of course there are disadvantages involved with joining the Euro. Some disadvantages are much overplayed by the media. I will explain the disadvantages of the Euro but ultimately I will show that the advantages outweigh the disadvantages. I will try and show exactly what the Euro will mean for things like prices in the shops and jobs.
There are several distinct arguments for and against the Euro. There are Economic arguments; Political arguments and many people have very personal reasons for their preferences. It would be impossible to make a decision about the Euro on 1 single area or 1 single issue therefore I will examine all 3 different areas.
Sterling v Euros: The Economic Arguments
Since joining the Euro is essentially an Economic decision then the Economic arguments are the most important. Perhaps the most obvious Economic argument is the “Transaction Costs” argument. By joining the Euro we will cut the costs of each transaction that we make with Euro-zone. Since most of our trade is with the Euro-zone the money we would save from cutting the cost of each transaction will be significant. Every time a business exports or imports something from the E.U. the business has to exchange sterling in to foreign currencies. If the Euro is introduced these costs would disappear overnight.
Recently the Labour government has been waging a war against what it has described as “Rip-off” Britain. According to the Labour government car prices in Britain are higher than in Europe and this probably strikes a chord with anyone who has attempted to import a car from Europe. A single currency would allow any consumer in the UK to see exactly what price cars were in Germany or France. This transparency would mean that companies could not get away with charging different prices in different countries.
An opponent of the Euro might say that these arguments are not particularly convincing. Transaction costs are not that high and real price transparency would be hard to achieve when each country still has very different tax regimes. On their own these arguments are not particularly convincing. Undeniably the most important and most persuasive economic argument for the Euro has to do with trade and currency fluctuations.
Every business must take risk into consideration when deciding on its strategy. The more risk involved with a certain strategy the higher return the business requires to make that strategy viable. Risk is a bad thing, something that any company would try and minimise. This is especially true of companies that to business abroad. Every business venture that involves foreign trade is exposed to the risk of currency fluctuations. If a company imports components from Germany and sterling suddenly falls then it is the company will lose money. The uncertainty of currency fluctuations means that many trading opportunities with the Euro-zone are lost. For domestic companies this means higher costs for components that could be bought in Europe and less opportunities for companies to export their goods to Europe. This means fewer jobs in the UK and higher prices in the shops. Foreign companies such as Nissan and Toyota face a choice between investing in the UK, with the risks of currency fluctuations, and investing in the Euro-zone. Direct foreign investment like this is very important to the UK economy. Entire towns, such as Sunderland with its Nissan factory, depend on foreign investment and being outside the Euro prejudices these investments.
Most of our foreign trade is with the Euro-zone. This is not to say that that trade with other countries would suffer if we joined the Euro. At the moment we negotiate trade treaties as part of the EU. Joining a single currency strengthens our position and the negotiating position of the EU. Of course as we have seen in Seattle many people are opposed to world trade (see my article on the WTO for my opinion on world trade). However the EU is the only serious exponent of many of the genuine concerns that the Seattle protestors had. The EU is looking at environmental issues and third world issues in a much more serious way than America will ever do. Throwing our hat in with the Euro can only help these issues and increase our influence on these issues.
And now to the economic arguments against the Euro. A very basic argument against the Euro, and one championed by the Sun, is its relative weakness compared with other currencies. Undeniably since its launch the Euro has been lost a lot of its value and this has been an unexpected development. Public support for the Euro has followed the strength of the Euro. A stronger Euro has generally won over more public support. However I think that a stronger Euro is not necessarily a good thing. Currencies fluctuate against each other for various reasons. The essential reason for currency fluctuations is to balance trade between countries. Currency speculation will distort this process and has probably contributed to the weakness of the Euro. But even so a weak Euro is not a symptom of underlying problems. It makes exports form the Euro-zone more attractive and has certainly increased employment within the Euro-zone.
Another cost of the Euro will be the transition costs. If we join the Euro then every company and individual would have to adapt. The transition costs are very much overblown by opponents of the Euro. Many companies are already geared up to use the Euro and many other companies will have to use the Euro whether or not we join up, Dooyoo for example. The transition costs will not be that high and over a few years the savings that would be made by cutting transaction costs will out weigh any initial costs.
Perhaps the most serious problem with the Euro is the fact that we will lose control of our monetary policy. The European Central Bank rather than the Bank of England would set interest rates. We would no longer be able to control the economy with interest rates; the same interest rate would apply in Malaga and Scunthorpe. This would seem to spell higher inflation rates. However I don’t think this is such a great problem. Firstly we can control the UK economy by using Fiscal policy, tax and spending. Also the UK economy is moving towards the European business cycle. Interest rates for France will tend to be right for Britain.
Overall there are Economic arguments for and against the Euro. I think that our reliance on trade with Europe outweighs the problems associated with losing control of our monetary policy.
Brussels Bureaucrats v Our National Sovereignty: The Political Arguments
Most of the Economic arguments argue for the Euro. The political arguments are, in general, set against the Euro. If we join the Euro is argued that we will lose our sovereignty to un-elected “Brussels Bureaucrats”.
If the UK wants to become further integrated in to the EU then the Euro is an essential stepping-stone. However I think that the arguments over whether the UK should become further integrated into the EU are irrelevant. The Euro can stand as a single issue. If we join the Euro we do not need to become further integrated into the EU. It therefore means you cannot argue against the Euro because it allows further integration. We can join the Euro and stop there. We should assess the political implications of the decision to join the Euro on its own merits.
Undoubtedly joining the Euro will be a diminishment of National Sovereignty. As a country we will no longer be able to set our own interest rates and we will no longer be able to control our own currency. An un-elected body, the European Central Bank, will decide all this.
However at the moment our elected representatives and the government do not decide the interest rates. In the field of monetary policy the Bank of England has far more power than the government. Many people in the country believe that this is the best way to make policy. Lots of countries, including the United States, have un-elected bodies deciding monetary policy. Therefore it seems reasonable to accept that an un-elected body should decide our monetary policy.
The principle underlying European integration is that of subsidiarity. This basically means that Europe should take the appropriate decisions at the appropriate levels of government. This means that Europe decides to negotiate trade treaties with America on a collective level since together we have more clout. On the other hand waste collection is organised by County Councils since this is more efficient than organising them from Brussels. There are many cases where we have accepted the subsidiarity principle and where it has benefited the UK. It therefore seems sensible to accept it when dealing with economic issues. The economic arguments show that it is better to decide monetary policy on a Europe wide level and therefore it seems sensible to accept this.
Sentimentality v Progress: Personal prejudices against the Euro
Many of the reasons people give against joining the Euro are quite personal. People want to keep the Pound and the Queens head on their £5 notes rather than having funny “German notes”. I think there are two personal reasons why people want to keep the Pound: sentimentality and xenophobia.
When the UK decided to decimalise there were many people who were dead set against this because of their emotional attachment to shillings and guineas. The sentimental attachment to the Pound should not stand in the way of progress. There is not much else that can be said. If you value a sentimental attachment to a piece of paper and a couple of shiny metal things over a stronger country and a better standard of living then there is not much I can say that would persuade you otherwise.
I think that many of the tabloid papers approach to the Euro have simply been designed to stir up xenophobic prejudices. Virtually all of the “Euro stories” in the Mail and in the Sun have simply been rants against so called Brussels Bureaucrats and of course the Germans. It is sad to think that the outcome of the referendum might simply be decided by the personal prejudices of Sun readers.
But for those people who don't read the Mail or the Sun the Euro will be a great personal advantage. Every time you go on holiday you won't need to worry about currency exchange or traveller cheques. You will actually know how much you are paying for your hotel and your meal.
I have gone on far too long so before you leave I will finish. The referendum will undoubtedly be very hard fought. My mind is obviously made up. All I ask of you is that you assess the arguments that I have set out and that you make your own mind up.
Question 1
What does the changeover to the euro entail for consumers?
Answer
Principal effects for consumers:
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The euro will become legal tender on 1 January 2002.
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As from 1 January 2002, ATMs will exclusively dispense euro banknotes.
- Right from twelve midnight on 1 January 2002, all retail transfers will be effected in euro. The same applies to electronic payments by PIN, chip and credit card. If, by error, credit card payments with sales slip are still effected in guilders after 1 January 2002, they can be processed until 1 April 2002.
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You can still pay in guilders until 28 January 2002.
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Shops and other retailers will give back change in euro from 1 January 2002. Even if you pay in guilders.
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From 17 December 2001 you can buy starter kits of euro coins from banks and retailers for NLG 25.
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The public authorities will give everyone over the age of six a free set of euro coins in the second half of December 2001, the so-termed euro kit, for information and familiarisation purposes.
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You must return guilders kept in piggy banks and dormant cash holdings to your bank at a quiet moment before or after the changeover period.
Question 2
What must consumers do to ensure a smooth changeover to the euro?
Answer
To contribute to a smooth changeover you do the following:
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You will go to your bank in the autumn of 2001 to deposit your cash savings on your account.
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With the coupon you receive by mail in early December 2001 you will collect the free euro kit at one of the distribution points from 14 December.
- From 14 December 2001 you will buy one or more starter kits of euro coins for NLG 25 a piece so that you will immediately have sufficient euro coins on E-day.
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You make sure that towards the turn of the year you have as few guilders as possible left over. It would, at any rate, be wise not to make too many guilder withdrawals in late December.
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From 1 January 2002 you will withdraw euro banknotes from ATMs.
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In shops you will pay the exact amount in euro right from 1 January 2002. If you wish, you can first pay the guilders that may still be in your purse. The shopkeeper will give back change in euro, even if you pay in guilders. Even better is to deposit any leftover guilders on your bank account after 27 January 2002. This can be done until the end of the year, and will be free of charge until 1 April 2002.
Question 3
What do I do with banknotes and coins from other euro area countries?
Anster
Until 1 April 2002 banknotes from other euro area countries can be exchanged in the Netherlands at banks and at the Nederlandsche Bank (free of charge). After that they can only be exchanged at the central bank of their country of origin.
Foreign coins cannot be exchanged at banks in the Netherlands. To collect these coins, charity organisations have jointly organised a nation-wide campaign, which will start after the changeover period (end-January 2002). You may then also donate your guilders.
Question 4
What do I do with my cash savings?
Answer
Consumers must as soon as possible pay in euro – preferably in exact amounts. They must deposit their leftover guilders on their own bank or giro accounts at a quiet moment, before or after the changeover period. This may be done free of charge at the consumer's own bank, at least until 1 April 2002. After that, guilder banknotes and coins will be accepted by banks until 1 January 2003, albeit at a charge. Guilder coins can be exchanged free of charge at the Nederlandsche Bank until 1 January 2007, guilder banknotes until 1 January 2032..
Question 5
What is a free euro kit?
Answer
The euro kit is a set of eight euro coins, one of each denomination: 1, 2, 5, 10, 20 and 50 euro cents and EUR 1 and EUR 2 (value: EUR 3.88 or NLG 8.55). All Dutch citizens from the age of 6 should receive one. The objective of the euro kit is to inform people and familiarise them with the look and feel of the euro coins.
Question 6
How do I get a free euro kit?
Answer
In December 2001 an information leaflet with a coupon attached will be sent home to every citizen over the age of 6. From 14 December 2001, the coupon can be used to obtain a free euro kit at one of the – yet to be specified – distribution points.
Question 7
What is a starter kit?
Answer
The starter kit of euro coins is meant to facilitate a smooth changeover to the euro, by distributing as many coins as possible among the general public prior to E-day. Starter kits contain 32 euro coins worth NLG 25 and can be purchased at banks and retailers from 14 December 2001. Starter kits can also be given back as change (instead of NLG 25) to clients
Benefits for the economy and businesses
The euro is an expression of the achievement of the Internal Market as much as it is an additional step towards a closer political Union.
First, the introduction of the euro will result in greater stability. The economic discipline which underpins Economic and Monetary Union is fundamental, as is the Stability Pact, which ensures continuous budgetary discipline. The improved macro-economic conditions necessary for the introduction of the euro should bring beneficial effects for European businesses.
The introduction of the euro will also bring immediate benefits for enterprises. In tangible terms, the euro will mean lower transaction costs for converting money into different currencies (exchange costs and insurance costs). The elimination of exchange rate movements will lead to reduced costs, less uncertainty and new opportunities for all European enterprises.
When enterprises use the euro, they will be acting on a larger scale, within a larger market made up of more than 370 million customers. Globalisation of the marketplace plus technological change will bring greater competition in itself. Prices and incomes will be much more transparent. They will depend only on the market, without any monetary interference. Prices, business units and market opportunities will therefore become directly comparable across countries and competition should increase.
Enterprises will have a clearer view of how to improve the efficiency of resource allocation. It will be much simpler for them to assess their strengths and weaknesses, to check their competitive position, to evaluate the products of competitors and to adapt their own products or prices. This could result in changes of suppliers. In addition, the euro may act as an incentive for companies, including SMEs, to develop themselves on new markets in a safer environment, find new partners and enter into cooperation at European level in various areas, such as sales and marketing, production, research, subcontracting, etc. The strategic opportunities and benefits offered by the euro should not be underestimated.
The euro will mean certain changes for business both within these countries and throughout Europe. It should influence the markets in three important ways:
1. Cheaper transaction costs: The single currency will allow countries in the euro zone to trade with each other without changing currencies. This will reduce (but not remove) the transaction costs. It will cost less for companies to make payments between countries within the euro zone. Firms in the euro zone will notice the greatest difference. However, businesses from outside the euro zone which trade with companies inside it will also notice the effects.
2. Stable exchange rates: The single currency will remove exchange rates between countries in the euro zone. This may lead to better decision making for its companies. If UK companies purchase products priced in euro the exchange rate risk may be transferred to them. It is possible that some domestic UK businesses which do not currently experience exchange rate risk will do so in future.
3. Transparent price differences: The single currency will make price differences in different countries in the euro zone more obvious. This may affect companies who charge different prices for their products in countries within the euro zone. On the other hand, companies buying from the euro zone will be able to compare prices more easily. Either way, this will sharpen competition.
Businesses which will most probably be affected by the euro in 1999 include:
Exporters and importers: Exporters and importers will need to be ready to deal in euro.
Multinationals: Some multinationals that operate in Europe plan to use the euro after January 1, 1999, to simplify their accounts and finances.
Firms in supply chains: Many firms may find themselves being asked to deal in euro if they are in supply chains headed by multinational companies.
Retail banking: Banking systems will be ready to make payments in euro. Most banks are likely to offer euro accounts for businesses.
Retailers: Most retailers do not expect to use the euro in the UK from 1999. However, some shops (for example in tourist areas) may have customers who customers until euro cash is available in 2002.
Wholesale financial markets: Financial markets will start to use the euro instead of the currencies it replaces on January 1, 1999.
Subsidiaries: Subsidiaries owned by a parent company based in the euro zone may find that its Group's accounts will change to the euro.
Strategic Issues that Businesses Need to Think Now About Include:
Increased cross-border competition: Businesses who want to export into the euro zone may be at a disadvantage against competitors within the zone who share the same currency as the importer.
Cross-border mergers and other joint ventures: Increased competition might make business mergers within the euro zone more likely. Sharing the single currency may also make them easier.
Distribution and purchasing: Distribution and purchasing arrangements may become simpler and cheaper inside the euro zone, because businesses there will not have to worry about exchange rate risk when trading with each other. However, UK companies purchasing goods and services may also benefit.
Raising finance: Firms may have more choice since bond and equity (share) markets may be more attractive in euro.
Market opportunities and risks: The euro will bring new opportunities and threats for many businesses – not only those trading in the euro zone. Companies will need to reconsider their marketing strategies – especially where products are priced in euro.
Pricing: Companies who export goods into the euro zone may have to decide whether to set new pricing points, since the same price is unlikely to be as 'attractive' in euro as in the old national currencies.
Businesses who operate across borders in continental Europe, or have firms based in the euro zone might need to make practical changes as to:
Financial systems and accounts: If your company accounts include any transactions in major European currencies, you will need to include (or change to) the euro. This may mean adapting your accounting system.
Business finance: Your firm, especially if it has cross-border operations, should think about what financial services it may need. Larger businesses may need to think about the effects of EMU on the financial markets, as well as on their own internal treasury
Pricing policy: If you decide to change your company's pricing strategy on goods for export into the euro zone you should consider the manufacturing and packaging implications of making those changes.
Information technology (IT): There is no single solution to setting up your IT systems to handle the euro. The most important thing is to look into it now because the changeover may not be simple – and many businesses are already trying to deal with another IT challenge – the Year 2000 (Millennium Bug).
The euro in the UK: While the UK stays outside EMU, the euro will be a foreign currency and will not be legal tender in the UK. UK businesses will not have to accept it unless they agree to do so. The Government will facilitate businesses who do wish to use the euro in the UK.
Transition to the Euro []
There will be a three-year transition period before euro banknotes and coins are introduced on January 1, 2002. During this period, national currencies will continue to exist but as units of the euro. Rates to convert them to the euro will be fixed.
The Maastricht Treaty, which was signed in 1992, determined three stages for achieving monetary union. The first had already started in 1990 with the removal of any restriction on capital movement. Stage two began on January 1, 1994: the European Monetary Institute (EMI) was established and governments could no longer have overdraft facilities or any other type of credit facility with the central banks.
The third stage of EMU will start on January 1, 1999. According to the Treaty, the exchange rates of the participating currencies will be irrevocably fixed, monetary policy will be conducted by the European Central Bank and the Council shall take the measures necessary for the rapid introduction of the single currency. The Treaty does not determine how and when the single currency will be introduced. This was decided by the European Council at its meeting in Madrid on December 15 and 16 in 1995. It was at this time that the Madrid Council decided that the name of the single currency will be the euro.
What will be the effects of the euro?
In general
Advantages
- The elimination of exchange rate risks and foreign currency transaction costs for trade, tourism and investment among participating member states.
- The likelihood of low and fairly uniform interest rates; promotion of price stability, sound public finances and sustained low inflation growth. Competition among producers and suppliers in the euro area is expected to become more intense so helping to keep inflation down.
Disadvantages
- A participating member state will no longer be able to devalue its currency or change its interest rates in response to changes in economic circumstances.
- A single monetary policy also involves a certain pooling of sovereignty.
- The changeover itself may involve short-term costs for business and others.
For farmers
The euro should be beneficial to all businesses, including farming. All the countries in the euro-zone will be dealing in the same currency. This will make it easier to compare the prices of inputs (for example silage additives, machinery parts, veterinary products) and make it easier to shop around for the best price in the twelve euro-zone countries.
Farm business transactions
All personal and farm business transactions will be done in euros from early January.
This means that:
- You will be writing cheques and handling cash in €.
- You will be paying for your petrol and diesel in €.
- You will be paid in € for the milk, beef, livestock, grain etc. you sell off the farm.
- You will be buying all farm supplies in €.
- You will be buying your groceries in €.
- You will be bidding for and paying for livestock in marts in €.
- All EU premia and scheme payments will be in €