Germany scores key EMU victory

Date: 02/11/1995

By Tim Jones

GERMANY has won the day in deciding how the transition to a single currency will be fashioned, so clearing the way for December's Madrid summit to map out a scenario for those countries ready to join a monetary union in 1999.

In a week when German Social Democrat leader Rudolph Scharping voiced doubts about the new currency, the country's monetary officials have persuaded EU colleagues to adopt their gradualist approach to the huge task of abolishing national currencies.

After months of negotiations within sub-groups of the Union's advisory monetary committee, officials have decided against forcing the creation of a “critical mass” of financial transactions the moment the so-called third stage of monetary union begins on 1 January 1999.

The decision will be a blow to Economics Commissioner Yves-Thibault de Silguy, who had given his full backing to the “critical mass” idea.

Finance ministers agreed at their informal gathering in Valencia in September that commercial banks should not be obliged to switch inter-bank foreign exchange and deposit-taking business into the new currency until it becomes legal tender in January 2002.

Now, in a report prepared for the monetary committee by a special working group on public administration, officials recommend that public-sector debt, civil service salaries and pensions should stay in national currencies until the end of the three-year transition.

The Commission had argued that the change-over to the European currency should be organised at the same time for new debt issues by public authorities, capital markets and some payments systems.

This, the Commission said, would reinforce the feeling in the markets that exchange rates had been “irrevocably” fixed even if the actual notes and coins would not be in circulation for another three years.

Back in May, it even warned that the so-called “delayed big bang” advocated by the Germans was “less consistent with the treaty requirement for the Ecu to be introduced rapidly as a currency in its own right at the start of stage three of monetary union”.

But, with banks allowed to chose when they switch business transactions and public authorities free to continue their work in national currencies, the change-over in market activity will be concentrated at the end of the three-year transition.

“This is close to a delayed big bang,” says a senior monetary official. “Most of the change-over will happen at the end of the third phase.”

The position of the German representatives on the working group was adamant and difficult to argue with. Talk about enhancing credibility through switching business transactions missed the point. Credibility would only come through “convergence”: reducing inflation, budget deficits and interest rates to a sustainably low level.

“We should focus on economic convergence and performance,” a working group member said. “Credibility has nothing to do with converting public debt. It would add nothing to public acceptance if you issue public debt in the new currency.”

The reports from the working groups were presented to the monetary committee yesterday (1 November) and are likely to be agreed by officials, then by EU finance ministers on 27 November.

With these key issues out of the way, much of the transition scenario has been drafted in time for the 15-16 December summit. The next meeting of the council of the European Monetary Institute on 7 November will put the finishing touches to its recommendations on the purely monetary aspects of the transition.

It will then be up to the heads of state and government to decide on the small detail of the currency's name.