Doc. 7711
13 December 1996

REPORT1 on the implications for Europe of an Economic and Monetary Union

(Rapporteurs: Mr Mikko ELO, Finland, Socialist Group, and Mr John TOWNEND, United Kingdom, European Democratic Group)


      The European Union's Economic and Monetary Union (EMU) signifies a major crossroads in modern European history. The introduction of a single currency under the management of a European central bank is an essentially political project which will require, and therefore soon lead to, common economic policies and the formation of a federal Europe. The report examines the expected advantages of EMU and raises a number of basic questions concerning its likely consequences for participating and non-participating European countries.

I. Draft resolution

1.       The European monetary union foreseen in the European Community's Treaty on European Union - signifying the replacement of national currencies by a single European one and the latter's management by a European central bank - will, if realised, have far reaching consequences not only for Europe Union member states but for all Europe.

2.       It is a central concern of the Parliamentary Assembly, representing as it does the parliaments of forty member states and four special guest delegations, to promote pan-European economic co-operation, in conformity with the aim of the Council of Europe's statute to facilitate the economic and social progress of its members, and in pursuance of the Assembly's Recommendation 1195 (1992) on European economic monetary union - consequences of the European Community's Treaty on European Union and its Order No. 481 (1992) on the political consequences of Maastricht. The Assembly therefore considers it vital that all European countries should examine jointly the likely overall consequences of economic and monetary union (EMU).

3.       The Assembly believes that the single currency can facilitate trade, investment and economic growth in many regions by eliminating currency uncertainty and reducing transaction costs where relevant; permit European countries better to face fluctuations in other world currencies; and, to the extent it remains stable, contain inflation and attract foreign capital. Above all, a single currency will require, and therefore rapidly lead to, common economic policies among the participating countries and the formation of a federal Europe.

4.       Furthermore, the Assembly, believing that an economic and monetary union should have as its goal to heal rather than widen the economic divisions in Europe, calls on the member states of the European Union:

i.       to ensure that the important task of European Union enlargement is not hampered by parallel progress towards EMU and that economic relations between the European Union and other European countries, whether European Union applicants or not, are not made to suffer for the same reason;

ii.       to ensure that a single currency amongst some European Union member states is not allowed to disrupt the principles or functioning of the Internal Market resulting from the 1987 Single European Act.

II. Explanatory memorandum

by Mr Elo and Mr Townend



I.       Introduction: the Assembly's past work on the EMU       4

II.       The road to EMU       5

III.       Presumed advantages of an EMU       9

IV.       Fundamental questions that have to be asked, and answered,

      before an EMU is started       11

i.        Are candidate EMU countries sufficiently united at the

      political level for the project to work?        11

ii.       Is Europe's work force sufficiently mobile for a single

      currency?       12

iii.       Will fiscal transfers be sufficient to offset the impact

      of a single currency on different countries?       13

iv.       How to reconcile ESCB independence with ESCB accountability?       15

v.       Is the EMU timetable too tight?       16

vi.       At what rate should a national currency be locked into a

      single currency?       17

vii.       Can post-EMU economic rectitude be assured?       17

viii.       What will be the physical cost of switching to a single currency?       18

V.       Impace of EMU on non-participating countries       19

VI.       Concluding remarks       21

      Appendix        23

I. Introduction: The Assembly's past work on the EMU

1.       In October 1992 the Assembly adopted Recommendation 1195 (1992) on European Economic and Monetary Union - Consequences of the European Communities' Treaty on European Union. On the same occasion it adopted Order No. 481 (1992) on the political consequences of the Maastricht Treaty, in which it said: "The Assembly ... considering the major importance of this Treaty for the future of European construction, instructs its Political Affairs Committee and its Committee on Economic Affairs and Development to monitor closely the evolution of this question and to report back to the Assembly in due course". The present report, which will again concentrate on the Economic Monetary Union, is in pursuance of that mandate. In the course of its elaboration and adoption within the Committee on Economic Affairs and Development it was the subject of very full and lively exchange of views which the Rapporteurs have done their best to incorporate in this final version.

2.       Recommendation 1195 (1992; Doc.6652; Rapporteur: Mr Jessel) is as concise as it was hotly debated, in the Assembly chamber as well as in committee. Emotions ran high between those in favour of the EMU and those against it. The brevity of the text does not prevent it being highly generic. The EMU is seen as having "far-reaching consequences for its member states, for it foresees the replacement of national currencies by a single European one as well as the latter's management under a European central bank".

3.       The text goes on to say that the EMU "will also greatly affect all other countries in Europe and beyond" and points to the duty of the Council of Europe to take up the issue, given its mission to "enhance a constructive co-operation between member states of the European community and the rest of Europe". This holds even more for the Parliamentary Assembly, the text goes on to say, "representing as it does the parliaments of the Council of Europe's .... member states, to promote economic co-operation at the level of all its member states, in conformity with the aim of the Council of Europe's Statute to facilitate the economic and social progress of its members".

4.       After highlighting a number of perceived advantages and risks associated with EMU, the Assembly recommends the Committee of Ministers of the Council of Europe to invite the governments of the member states to consider: firstly, that the "pronounced economic divisions in Europe and the sense of exclusion on the part of countries left outside the Union should not be further exacerbated"; furthermore, that "Community institutions should be made sufficiently democratic and should always remain so - democracy's hallmark being that parliament, and not government or commissions, has legislative power and control". Finally, the Recommendation urges that "the richer countries or regions, to which investments are likely to be increasingly concentrated as a result of EMU, show sufficient support for poorer countries and regions" and that "EMU will have positive consequences for developing countries".

5.       The questions that will occupy the Rapporteurs in the presentation to follow are essentially these:

-       Is the EMU feasible given the present and likely future state of political unification among the countries participating?

-       What are the likely effects on:

      - EU member countries not participating,

      - EU members, and

      - the rest of the world?

6.       The Rapporteurs come, one from the United Kingdom, an EU member since 1973 and a major EU economy; and the other from Finland, an EU member only since 1995 and with a smaller population. Both countries have in common extensive trade also with the rest of the world, be it central or eastern Europe, North America or Asia. Finally the Rapporteurs belong to different political tendencies, a fact which has made the discussions between them in preparing the present report.

II. The road to EMU

7.       Economic and monetary union is not mentioned in the 1957 EEC Rome Treaty. That text only says, in its Article 107, that "Each Member State shall treat its policy with regard to rates of exchange as a matter of common concern" (while Article 103 says the same about "conjunctural policies").

8.       However, in December 1969 the political leaders of the, at the time six, EEC member states (Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands) announced their intention to establish an Economic and Monetary Union within a decade, i.e. by 1980. The EMU did not materialise on this occasion, partly but not exclusively owing to the 1973 oil crisis. However, the idea did give rise to the European Monetary System (EMS) and to the Exchange Rate Mechanism (ERM), both big changes in themselves.

9.       Largely in order to provide the economic policy and currency counterpart to the 1992 Internal Market, the foreign and finance ministers of the, by now, twelve member states of the European Community in February 1992 signed the Maastricht Treaty on European Union, one of whose pillars was precisely the Economic and Monetary Union. The crucial difference from 1969 was that, this time, it was not just a Declaration but a Treaty which, if ratified, would bind the participating countries.

10.       The EMU part of the Maastricht Treaty on European Union goes far beyond anything decided previously. National sovereignty is to be given up in that most sensitive of areas, namely a nation's management of its own money. In addition, this is to be done before the corresponding political unification has been completed - that is, unlike what happened in the United States, where a single currency was adopted only after the creation of the Union (and in fact only a considerable time afterwards).

11.       One of the most prominently featuring justifications for moving to a single currency in the EU is that it alone can ensure free trade, full mobility of capital and stable exchange rates at the same time - a natural enough state of affairs since there would only be one currency. Free trade and freedom of capital movements are then seen as two key prerequisites for efficient resource allocation and peaceful political and economic co-existence.

12.       The EMU calendar foreseen in the Treaty on European Union started already in 1990, when capital movements were freed among the majority of EU member states. The second stage started in January 1994 - that is, one year after the completion of the "1992" project, with the creation of a European Monetary Institute (EMI). The third step comes at the end of this year, when the EMI and the Commission of the European Community will present a report to the Council of Ministers of the European Union on the state of "convergence" of the economies of member states. Convergence here stands for the extent to which economies are beginning to resemble each other in areas such as interest rates, inflation, fiscal policies and budget deficits.

13.       Two of the criteria concern monetary stability. A country's yearly inflation rate should not exceed the rate in the three best performing EC economies by more than 1.5 percentage points. Secondly, the long-term interest rate should not exceed by more than 2 percentage points the average rate for the three countries which serve as a basis of comparison.

14.       Another criterion concerns public financial discipline. A deficit-to-GDP ratio of more than 3 % is not accepted, except when it can be considered small and exceptional. Furthermore, a debt-to-GDP ratio of more than 60 % is not tolerated, except if effective steps are seen to be taken in order to reduce that figure.

15.       Finally, an exchange rate stability criterion calls for states to have remained within the narrow band of the EMS exchange rate mechanism without devaluation for at least two years. This last criterion has, however, lost much of its meaning since, following the EMS crisis of 1993, the range was broadened from +-2.25% to +-15%.

16.       To meet the above criteria EMU candidate countries are particularly trying to bring the yearly budget deficit down to the vicinity of 3 % by 1997, although in so doing they may encourage a recession which will automatically increase that deficit, notably through unemployment benefits and tax base erosion, and which could become all the more severe if everybody contracts at the same time. The long-term interest is in better shape, largely because of confidence of markets in member countries' determination to reduce budget deficits, and because of the as yet unbroken faith in the solidity of a single currency.

17.       The debt-to-GDP ratio is more difficult to attain for several EU countries, the accumulated debts of which amount to between 70 and 120 % of GDP. All in all, only Denmark, Ireland and Luxembourg are not required to take corrective action to cut budget deficits in line with the Maastricht Treaty targets of a 3 % deficit-to-GDP ratio. If one considers all the criteria mentioned in paras 12-15 above, only Luxembourg qualifies at this stage.

18.       Are, then, EU member States on their way to meeting the criteria? The Appendix shows the situation. All but five - Greece, Ireland, Italy, Portugal and Spain - meet the inflation criterion. However, the forecast for 1996 is that only Luxembourg will satisfy the 'budget-deficit-to-GDP' and the 'public-debt-to-GDP' criteria (with a very good margin). Greece and Italy are well outside both limits. Belgium is reducing its budget deficit, but still has a public debt amounting to about 130% of GDP. Ireland, The Netherlands, and Sweden have public debts around 80% of GDP, with Denmark, Portugal and Austria at around 70%. Spain, Finland and Germany are close to the 60% public debt limit, with the United Kingdom and France just below it. Budget deficits are being cut in a number of countries, with Belgium, The Netherlands, Finland and Germany in the 3-4% range - and France, United Kingdom, Austria, Portugal, Spain and Sweden in the 4-6% range.

19.       Generally speaking, there has been encouraging progress in recent years in the fields of inflation, long-term interest rates and exchange rate stability. The situation as regards public finances is less satisfactory. An EU assessment in the summer of 1996 made clear that the budgetary condition of as many as 12 of the 15 member States was rather poor. As yet only Denmark, Ireland and Luxembourg are in compliance with budgetary criteria. The others will have to slim down further in order to appear in good shape at the start of the EU. As these lines are being written (November 1996) the budgets for 1997 are being finalised, and their final shape will be of decisive importance.

20.       The most crucial budgetary developments are those in Germany and France. In order to meet the budgetary criterion both governments have announced significant austerity programmes. The inclusion in the German "Sparpaket" of a number of social reforms is welcome in this regard. To prevent our social welfare systems becoming unaffordable, it is crucial, with or without the EMU, to reverse throughout Europe the upward and unsustainable trend of public expenditure of social security, health care and pensions. Financial markets are well aware of this need.

21.       It is also important how budget deficits are being reduced. If public expenditure is reduced this would lead to lower taxes and hence to greater disposable income for citizens, and eventually to a more upbeat economy due to higher demand. However, if taxes are further raised disposable income will be further eroded, demand will be lower and unemployment higher, leading to further budget expenditure on unemployment benefits, renewed higher budget deficits and so forth. The recessionary spiral thus set in motion, especially if it is magnified across the EU within the EMU straitjacket, could easily spin out of control.

22.       There is the temptation for certain governments to resort to 'one-off' expenditure cuts to look in good shape in 1997 and thus qualify for the next phase in the EMU process. There are several examples of this in recent times, the most widely discussed perhaps being the French government's inclusion of the proceeds from its sale of French Telecom as an income in the 1997 budget (to be followed, incidentally by years of pensions payments to that company's employees, thus adding to future deficits). Indeed, off-balance sheet liability by many governments toward unfunded pensions is something which should have been included in the calculations for the Maastricht budget deficit criterion.

23.       Such 'window dressing' would over time serve neither the countries concerned nor the EMU project, for it would only mean a delay in structural reform, growing acrimony among participating countries in the post-EMU stage and scepticism on the part of financial markets as regards the value of Euro. To use imagery, slimming down is better achieved by frequenting a health club than paying an occasional visit to a spa.

24.       One important criterion missing in the Treaty is unemployment, which varies considerably amongst members of the EU, from 22.9% in Spain and 17.2% in Finland, to 7.9% in the United Kingdom and 3% in Luxembourg (Source: OECD Economic Outlook, June 1996). Many people consider that a single currency is not feasible among countries with such varying unemployment levels. Regret at the absence of an 'unemployment criterion' in the Treaty on European Union was expressed by several members of the Committee on Economic Affairs and Development. In particular, the Rapporteurs were asked to examine how the high unemployment rates which currently afflict so many EU member states might affect the viability of the single currency project.

25.       The effect of high unemployment will be an increase in budget deficits, or at least dimmer prospects of reducing them. The effect on the future currency -the Euro - would presumably be that it would become weaker, unless participating countries find alternative ways of saving. A weaker Euro vis-à-vis eg the dollar and the yen would, on the one hand, help exports and hence employment, although imports would become dearer, including for oil and other commodities which are denominated in dollars. If, on the other hand, the European Central Bank were to insist on a strong Euro in order to hold down inflation and attract more foreign capital, then labour markets must become more flexible in order to avert the politically unpalatable prospect of continued high joblessness.

26.       Faithful adherence to the convergence criteria was seen as important also by committee members from outside the European Union. Thus, a Swiss member said his country was strongly in favour of strict realisation of the convergence criteria since, as he put it, a weak Euro would hurt not only the European Union but also all non-EU countries whose welfare depended on the EU's continued prosperity and stability. He also stressed the need for continued orthodoxy once the Euro had come into existence.

27.       Returning to the EMU scenario, the EU Council of Ministers, on the basis of the report prepared by the EMI and the Commission referred to, will decide which member states can be considered ready to enter Stage 3. On the basis of this report, the heads of state or government will take the final decision on a common currency in early 1998.

28.       Two scenarios are envisaged in the Treaty. In scenario 1, at least a majority of the member states will have been deemed ready to enter stage 3, and the date must be chosen when this stage should begin, for instance, 1 July 1997. In the course of that year, the European Central Bank (ECB) is to be created, replacing the European Monetary Institute.

29.       Since scenario 1 foresees at least eight of the currently fifteen EU member states to qualify, the remaining scenario 2 is the more realistic. In scenario 2, less than the majority of EU member states are considered ready to enter stage 3. Here, reports by the European Monetary Institute and the Commission will be addressed to the Council of Ministers in early 1998 on the subject of progress in reaching convergence among economies. By the summer of 1998, the Council of Ministers will examine which countries are ready to enter stage 3. Governments will then decide which member states are to start stage 3. In the course of 1998 the European Central Bank is created and on 1 January 1999 stage 3 is entered into by the countries concerned, with the European Central Bank assuming the responsibilities of the EMI.

30.       The European Central Bank will head existing national central banks of the participating countries. These will together form the European System of Central Banks (ESCB). The primary objective of the ESCB will be to maintain price stability. It will also be required to support the "general economic policies in the community" without prejudice to the price stability objective. Its actions will be required to be in accordance with the principles of an open-market economy, favouring an efficient allocation of resources.

31.       A debate is already under way as to the most appropriate strategy for the ECB to maintain price stability in the EMU area. Broadly speaking two alternatives are being considered: monetary targeting, traditionally undertaken by the Bundesbank, and inflation targeting, as currently pursued by a number of other European central banks.

32.       Fundamental to monetary targeting is the notion that, over the medium to long term, inflation is caused by excessive money growth, and that the central bank may achieve price stability by controlling the quantity of money through its interest rate policy. In an inflation targeting framework, on the other hand, the central bank uses a wide variety of relevant indicators, so as to prepare an estimate of expected inflation during the next one to two years on the assumption of unchanged policies. In other words, monetary targeting involves an intermediate target which serves as the primary indicator for expected price movements, whereas in the case of inflation targeting, interest rate policy is directly tuned to expected inflation. The two strategies have in common that they focus on achieving the lowest possible rate of inflation.

33.       Whatever strategy is ultimately chosen, it must above all be transparent. The ECB should set a clear objective enabling the general public and the financial markets to form well-founded opinions on the conduct of policy. Furthermore, the strategy must be implemented in such a way that the ECB can be held accountable. Mistakes will have to be explained. This contributes to the legitimacy of monetary policy and creates opportunities to establish credibility. The monetary strategy of the ECB will have to be a paragon of transparency and creditiblity. Timely and reliable information to the public and to the financial markets will be of essential importance to maintain the reputation of this new institution.

34.       The ESCB will formulate and execute the single monetary policy, hold and manage the official foreign exchange reserves of the participating countries, promote the smooth operations of payments and contribute to "the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system".

35.       The ESCB and the national central banks forming part of the ESCB are required to be free from all outside interference. Staff and decision-makers cannot seek or take instructions from any outside body, including those of the Community and national governments. These latter will in turn undertake not to seek to influence the ESCB or national central banks in the performance of their tasks.

36.       Great Britain and Denmark obtained derogations from any automatic membership in the EMU. The United Kingdom said it could not accept any commitment to move to a single currency monetary policy without a separate decision by government and parliament at the appropriate time. This option is contained in a Protocol that has the legal force of the Treaty. Furthermore, Denmark reserves the right in a separate Protocol not to move automatically to stage 3. Finland, Germany and Sweden have also made it clear that they will not participate in the EMU without the approval of parliament.

III. Presumed advantages of an EMU

37.       As during the Assembly's dealings with the EMU in 1992, the public debate on the virtues and risks with EMU continues to be very lively and heated; and so it should, considering the absolutely crucial importance of the issue for Europe's future.

38.       EMU advocates maintain that a single currency will favour investment and growth by establishing a solid economic ground on which to build. Countries participating, they argue, will enjoy stable prices, while the European Central Bank can prevent irresponsible economic policies at national level through its independence and its emphasis on low inflation. This will reinforce the confidence of international money markets, leading to lower interest rates and more investment.

39.       Furthermore, they say, the internal market, completed through the Single European Act and the "1992" project will function better in ensuring the free movement of goods, capital, services and labour. If countries can no longer devalue their currencies there can be no sudden changes in the competitive conditions within the EU. Consumers will have an easier job comparing prices for goods and services on offer. Transaction costs in exchanging currencies will ipso facto disappear, a cost which the European Commission has estimated at between 0.3% and 0.4% of the GDP of the Union.

40.       Those in favour of the EMU will also point to the importance of increased international monetary stability, on the understanding that the Euro (the name chosen for the single currency) will be more or less stable over time vis-à-vis the dollar and the yen. Furthermore, economic policies can become more stable, since a larger currency area may be less sensitive to money speculation. Politicians, it is argued, will thereby enjoy greater room for manoeuvre.

41.       Finally, it is maintained, excessive wage increases within a country can no longer get off scot-free through countries' resorting to devaluation of their currency. This will lead to a more flexible labour market. Finally, trade and other economic exchanges among countries will become easier, since everybody will become used to reasoning, planning and negotiating within the same money framework.

42.       However, many would take issue with many of these arguments, your British rapporteur being one. Firstly, with improved technology the transaction costs in currency exchanges can be expected to fall even further - according to the estimates by the European Commission to as low as .017 % of GDP in the more advanced countries. Furthermore, the transaction costs that will be avoided will of course only be those with other EMU participants. In all the trade with the rest of the world, transaction costs will remain. Many raw materials and commodities, such as oil and metals, trade in dollars. Finally, jobs will be lost as people employed in currency transactions will become superfluous.

43.       Against the argument that a single currency is essential for the operation of a single market, the objection can be made that the USA and Canada form the biggest single market in the world between independent countries, with each maintaining their own currency.

44.       Furthermore, the contention that a single currency will ensure low inflation throughout the EMU area is largely based on the historical performance of the Deutschmark. However, with correct policies, low inflation can be achieved by any country. While the Bundesbank has remained fairly free from political interference, can we really safely conclude that a European central bank would be similarly immune to infiltration or influence by politicians? If this happens, it must be feared that inflation would be higher under a European Central Bank than under the Bundesbank. Moreover, Euro stability vis-à-vis the dollar and the yen presupposes that the latter two currencies remain stable against one another. However, in recent years this has rarely been the case. Thus, to the extent that the dollar and the yen will continue to fluctuate in respect to one another, the Euro will of necessity fluctuate against one or the other of them, too.

45.       Certain committee members maintained that EU countries in particular, and Europe in general, would derive major economic and also financial benefits if the Euro gained the role of a world currency. Others saw it as necessary if Europe were to compete successfully with the United States and Asia.

46.       The Rapporteurs would agree that governments owning world currencies stand to make certain profits through their central banks' issuing of bank notes. The Federal reserve of the United States earns billions of dollars every year in this way. Moreover, a Euro which could be more 'its own anchor', like the US would also be less hostage to the ups and downs of, say, the dollar and the yen; for, at present, many EU currencies find themselves between a 'rock' in the form of a relatively weak dollar and a "hard place" of a very strong DM, to which they are in reality more or less aligned. A Euro with a greater voice in the world economy than the choir of individual current ones might then be allowed to depreciate somewhat and thereby gain export advantages for the region, in somewhat the same way as the dollar and to some extent the yen do at the moment. Since, today, currency depreciation seems to be less accompanied by a surge in inflation than was the case in the past, such a strategy might pay off, at least up to a certain point. We might then, on the other hand, witness an incipient, creeping depreciation race among the Euro, the dollar and the yen, and possibly others.

47.       It is sometimes argued that countries remaining outside an EMU would pay an 'interest rate premium' as a price for non-participation, reflecting greater confidence of markets in the single currency than in their own and leading to slower economic growth for countries outside the EMU. This might be true in the short term, but it would not necessarily hold over time, particularly if the European Central Bank were to succumb to political influence of the kind mentioned. In any case, if countries outside the single currency area pursued low inflation and produced sound money, any such interest rate premium would decline and probably disappear over time.

48.       Finally, the EMU takes for granted that EU economies will converge as regards performance. However, just to take one example, the United Kingdom is an oil-producing economy, and any major hike in oil prices has an effect on the United Kingdom which is exactly opposite to that which would befall all those other EU economies which lack oil. This means that the economic cycle of the UK will often be out-of-phase with much of the rest of Europe. Other differences are that the UK has a large housing debt with floating interest rates, while most EU countries in continental Europe have a small housing debt with fixed rates. Finally, the pensions in the UK are much more highly funded through the private sector than is the case on the continent.

IV. Fundamental questions that have to be asked,

and answered, before an EMU is started

49.       The Rapporteurs at this point wish to raise a number of fundamental questions, fundamental in the sense that they are of the highest importance for future economic, social and political stability in Europe.

i.       Are candidate EMU countries sufficiently united at political level for the project to work?

50.       The most basic question is whether nations participating in the EMU are in fact sufficiently politically united in order to be able to follow one and the same economic and monetary policy, and this not only during the brief post-EMU honeymoon period but, more importantly, afterwards. At present there is no European government, and many of us would not wish to see one installed. There is a Commission, consisting of bureaucrats and led by Commissioners who are appointed, not elected, and who are not individually responsible before any elected body (only collectively before the European Parliament which, however, does not have any truly legislative role within the EU).

51.       With a single currency participating nations will no longer be able to, say, expand fiscal policies or reduce interest rates, if this were seen as beneficial by the electorate; nor would they be able to depreciate that national currency which no longer exists, so as to adapt the economy to new international circumstances. Within the EMU the European Central Bank would have all the say in the matter.

52.       However, the ESCB is supposed to be independent, that is, not politically accountable. In other ways, the "democratic deficit" already existing within the European Union would be intolerably widened through the domination by an unaccountable European central bank, possibly assisted by an equally unaccountable Commission, over national governments and parliaments.

53.       Even if fiscal expansion were tried by a country suffering recession, the Maastricht criteria make sure that this cannot happen.

54.       Salaries could of course be reduced, but is this socially desirable, and politically and socially possible? Can countries with lower unemployment be expected to place money in those with higher unemployment in order to help? For instance, assuming that Country A has higher unemployment than Country B, would Country B's voters agree to bailing Country A out, without attaching any strings? And would Country A accept such strings? This is less than likely.

55.       If it does, efforts will be made to create some kind of EU authority to ensure that the money lent will be intelligently used so as to produce the intended result. Will, at this stage, the shadow line between Economic Union and Political Union be crossed? The step would be short between a European central bank to a European Ministry of Economic Development. In other words, a federalised Europe would follow from a single currency Europe. However, is this something that the citizens of the countries concerned would want, or even accept?

56.       It is highly interesting to note that both those on the Committee on Economic Affairs and Development who are in favour of the EMU and those who are more sceptical agree on one point at least: namely, that the project will indeed lead to a federal Europe, and that this has in fact been the rationale for it! This helps clarify positions enormously. Thus, one EMU proponent argued that national sovereignty over monetary policy should cease; another, coming from a small country neighbouring Germany, said his nation in any case had no sovereignty but had to toe the line of the German Bundesbank at all times.

57.       The Rapporteurs would recall, however, that even though a country may choose at the present time to follow the German Bundesbank, it still has the sovereign option, as a last resort, not to do so - in the manner Sweden, Finland, France and others have done in recent years under intense interest rate pressure. Under the EMU no such possibility would exist.

ii.       Is Europe's work force sufficiently mobile for a single currency?

58.       The United States has a single currency (although it took some thirty years to introduce it). The United States also has an extremely mobile workforce. Roughly 17 % of all Americans move in a typical year from depressed to more prosperous areas - whether from the east coast to California or from the "rust-belt states" in the north to the "sun-belt states" in the south. In total, 3 % of the national population, some 7.7 million people, change their State of residence in a typical year. Between 1990 and 1994, Utah, for example, saw a 24 % increase in the number of jobs, or 200,000. Colorado added 300,000, a 20 % increase over the same period. Between 1960 and 1990 the proportion of the US population living in California rose by 37 %, and between 1980 and 1992 that state's population grew at an annual rate of about 2.2 %. Conversely, during the recession of 1993 and 1994, 850,000 people left the state. The proportion of the US population living in Florida almost doubled between 1960 and 1990, whereas the proportion living in New York fell by more than one quarter.

59.       This kind of labour force mobility is one factor explaining why a single currency can work within the United States. People go to where the jobs are, regardless of where they are. The only time in the year many families get together is Thanksgiving. Can one imagine similar mobility within Europe without, at the present stage, causing considerable political and social upheaval? Although the European Union has taken important steps towards ending the formal barriers which existed for citizens of any of the member states to move to and live and work in another member state, significant informal barriers remain. Linguistic and cultural differences no doubt are major impediments to wide-scale cross-country migration.

60.       Over time, these differences may of course diminish: more retired people from northern Europe may seek out sunnier climates along the Mediterranean, much as their American counterparts move to Florida. As the multilingual workforce expands, more workers might find the attractions of higher pay and the excitement of living in a different culture alluring. However, this does not describe the Europe of today. As an alternative to exchange rate variations as a form of macro-economic adjustment, Europe simply cannot rely on cross-national labour force mobility to the extent that is the case in the United States.

iii.       Will fiscal transfers be sufficient to offset the impact of a single currency on different countries?

61.       Comparing again with the single currency in the United States, another factor to be considered is fiscal transfers through that country's uniform income tax. For instance, as the state of California grew during the 1987 to 1991 boom-years, it contributed as estimated 16.6 % of additional federal tax revenues, raising its percentage contribution to federal tax receipts from 12 to 13.4 %. As California's economy underwent a crisis in 1991 to 1994, the state's share of increased federal tax revenue fell to just 8.1 % and its share of the national burden declined to 12.5 %. If California's tax share had stayed unchanged between 1991 and 1994, its 1994 federal tax payments would have been 11 billion dollars higher than they actually were. This 11 billion dollar decline is equivalent to roughly 350 dollar per capita.

62.       This illustrates the fact that a significant portion of the automatic stabilising properties of the progressive tax system in the United States actually manifest themselves in a regional redistribution of the income tax burden, via the previously mentioned high mobility of the workforce. In other words, individual states within the USA are assisted in overcoming recessions in their economy by contributing less to the federal budget, while states with an expanding economy pay more. In addition, the federal government also effectuates large transfers to individual states in the form of grants and aid programmes, further equalising conditions among them.

63.       By contrast, Europe has no such automatic fiscal transfer mechanism, firstly because labour mobility is much lower and, secondly, because the budget of the European Community is infinitely lower in comparison with the combined GDP of EU member states, about 1.15 %, than the US federal budget amounting to about 35 % of US gross national product. True, EU expenditure does involve some transfer-oriented programmes, such as the Common Agricultural Policy and the Regional Fund. Therefore, Europe lacks the kind of automatic stabilising properties which a unified fiscal mechanism affords the United States as an alternative to exchange rate variations.

64.       To sum up, Europe does not at this time possess the alternative stabilising mechanisms which seems necessary to make a single currency zone work. Trans-national labour force mobility does not come even close to that found in the United States. Furthermore, the stabilising properties of a currency zone-wide fiscal process are not in place, nor are they likely to be in the near future given the reluctance of EU member states to increase the institution's budget. (Indeed, the EU Council of Ministers have recently (July 1996) announced their wish to effectuate a slight real-term reduction of the EU budget for 1997.) In addition, the strict convergence criteria laid out in the Maastricht Treaty would seem inconsistent with any fiscal flexibility at national level.

65.       Perhaps in the longer term future the peoples of the European Union will find their mobility on the increase and the traditional cultural barriers to migration on the decrease. Perhaps, if the single currency comes about, followed by other moves towards a more federal Europe, fiscal policy will become more centralised within the community as has previously been indicated. Perhaps it could then become more of a regional stabiliser to assist countries or regions that find themselves in a recession. However, many people would object in principle to such a development.

66.       This brings the Rapporteurs to that most commonly stated advantage of multiple currencies. In any dynamic modern economy, there are bound to be regional differences in economic performance. These differences may involve transitory factors which cause different regions to be experiencing different stages of the business cycle at any given point in time, as well as long term structural differences in the performance of the key industries which characterise the local economy. Economic policy will try to ensure that such differences become self-correcting, essentially by putting in place automatic stabilisers be in place which provide stimulus to economies which are performing below par, and which constrain demand in economies with well-above normal growth. Movements in exchange rates - which presuppose the existence of different currencies - can act as such an automatic stabiliser. Properly used, a locally based discretionary monetary policy might well help to localise regional business cycles and thus to augment the stabilising properties of which we are speaking.

67.       In Chapter II we discussed how unemployment might affect a single currency. Committee members made the additional request for an analysis in the opposite direction, namely the likely impact of an EMU on employment. Here there are two forces: firstly, employment should be helped to the extent that further economic integration under a single currency is likely to stimulate trade and production in the most competitive companies and regions.

68.       However, due to the relative lack of work mobility in Europe and insufficient fiscal transfers (unless we imagine a powerful EU Federal Treasury), this growth is likely to be highly uneven, concentrated in fact to the most prosperous regions of the European Union, and in particular the famous "arch" stretching from south-east England across large parts of the Benelux countries, the western part of Germany and north and north-eastern France down to northern Italy.

69.       By the same token, unemployment in peripheral, less prepared and already poor areas of EU territory are likely to see unemployment rise, especially if the jobless refuse to move to the high growth areas, or if they do not stand a chance of finding jobs there. Again, this will call for major wealth transfers from prosperous regions to less prosperous ones, which brings us back to the inevitable federal consequences of EMU, to which we have referred.

70.       Other members of the Committee on Economic Affairs and Development called for a deeper analysis of the social consequences of EMU. However, the Rapporteurs, after careful reflection, believe that such a study would be too hypothetical at this stage. Needless to say, the social consequences will depend on economic developments, as well as on the effects of EMU on unemployment and different regions.

71.       Of course, this reasoning must not be carried to its extreme. Finland, for instance, needless to say has only one currency. Certain parts of the country are in worse shape economically than others. To imagine that northern Finland were to have one currency, central Finland another and southern Finland a third would surely be sub-optimal, because different currencies, as we have seen, also involve transaction costs.

72.       However, and this is the key point, in the absence of a truly politically unified European Union with a clearly defined and recognised authority, a single currency risks causing economic suffering at regional level for which their is no democratic, ie politically legitimate, representation in existence. A single currency, therefore, risks not only violating the democratic principle but, indeed, undermining the fundaments to European democracy.

iv.       How to reconcile ESCB independence with ESCB accountability?

73.       As we have seen, the European Central Bank envisaged is supposed to be completely independent. This was a German insistence, based inter alia on the country's traumatic experience with inflation in the 1920s and on the success of its post-second world war economic recovery built to a large degree on Bundesbank independence. Other countries, such as the United Kingdom and France, have a somewhat different tradition implying a certain, but not total, independence of their central banks vis-à-vis the political, ie. democratically elected, authority. The justification for central bank independence is that politicians may be tempted to raise the money supply temporarily in order to win upcoming elections, which in turn may hamper longer term growth. (However, it may be doubted that even the German Bundesbank is at all times fully independent. At the time of the German unification in 1990, the Bundesbank wanted an exchange rate of 1 D-mark for 2 East German Marks, but the government insisted on a 1-to-1 rate. The German economy is still paying the price for this.)

74.       There is, thus, a careful balance to be observed between independence against manipulation of the economy for political ends on the one hand, and the people's need to have any authority set up to govern them remain accountable before it on the other. The challenge facing the countries participating in the EU single currency will therefore be to design rules for the European Central Bank which successfully balance accountability and independence. This, of course, is rendered more difficult at the present time, since the political structure of the EU is itself in constant evolution. Ultimately, responsibility and accountability to the public at large is what matters. Accountability to intermediary institutions which do not themselves possess the legitimacy given by public accountability will not be enough.

75.       Accountability and independence should not be seen as polar opposites. In a democracy any central bank or monetary policy institution which stresses only its independence and ignores its ultimate accountability to the body politic may soon find its independence at risk. It will have lost contact with its ultimate mission, namely that of serving the public at large. The basis of central bank independence is the role it can play in correcting some imperfections in the normal democratic process. However, this independence is granted democratically through that process. Central banks should be held accountable for maintaining their independence, but they must remember that the key to their independence is the fact that they are ultimately accountable before the people.

76.       Intensive discussion took place in the Committee on Economic Affairs and Development on the question of accountability versus independence of the ECB, presumably reflecting the different traditions in different countries. Some argued that there should, of course, be political control over, or at least insight into, the dealings and doings of the ECB. Presumably they took comfort in the fact that the statute of the ECB can be said to include safeguards for the democratic embedment of its policies. For example, the ECB President and the members of its Executive board are appointed by the heads of state or government of the member States, after consultation of the European Parliament.

77.       Furthermore, the President of the ECB is to report regularly on the system's operations, and the ECB will issue its annual report. The ECB President may also appear before the European Parliament to explain the system's monetary policy. Transparency of ECB policy is said to be further enhanced by the provision that the President of the EU's so-called ECOFIN Council, and a member of the European Commission may attend meetings of the ECB's Governing Council, albeit without voting rights. Conversely, the ECB President will attend certain ECOFIN meetings.

78.       The Rapporteurs will limit themselves to asking the reader whether he or she believes that this is sufficient democratic control. In other words, do governments, which are two steps away from the people (the parliament being one step away) possess sufficient democratic representativeness, especially when they have to share their exercise control over the ECB with the governments of other EMU participants? Is the European Parliament - which is democratically elected but which has no ultimate legislative function in the European Union comparable to that of a national parliament - sufficiently representative from a democratic point of view?

v.       Is the EMU timetable too tight?

79.       At the present time, many countries in the European Union are vigorously pursuing policies meant to permit them to meet the previously mentioned EMU criteria. The Rapporteurs are the first to recognise the long-term need for fiscal rectitude in order to atone for any budgetary frivolity of the past or for slowness in carrying out domestic reform. However, there is a risk that if too many of Europe's economies do this at the same time, a generalised recession will follow. If massive social protest results, the very path of reform may be blocked and political stability jeopardised. It should not be forgotten that the Maastricht criteria were decided at a time when the economic situation looked much rosier than at present.

80.       Similarly, there is no fall-back position foreseen if the preparations for the EMU were to run into serious trouble. The reason is, of course, that its very existence would whet the appetite of speculators, although markets seem to have been calmed by the recent EU Dublin Summit of September 1996, with its firm commitment to proceeding on schedule. The backside is, however, that there is no guarantee that pressures on candidate currencies during the interim period would not become unbearable; or, for that matter, that a fledgling Euro would not be subjected to similar harsh treatment. At any rate, the fears of certain Committee members over the timetable were such, that they raised the question whether it should not be drawn out a little, in particular to allow for the next economic recovery to smooth the process.

vi.       At what rate should a national currency be locked in to a single currency?

81.       This is an important issue. Suppose that a country's currency is temporarily overvalued at the time of it being locked in to the single currency grid. In that event, the country's industry risks losing competitiveness for years to come. Will there be a secret competition between countries to ensure that their currencies enter below their 'real' value vis-à-vis other currencies in order to gain such comparative advantage?

82.       A case in point is the debate in Italy in the autumn of 1996 regarding the proper exchange rate entry for the lira vis-à-vis the German mark. Industrialists warn against letting the lira enter at the approximate current rate of 950 to the DM, preferring instead a value of between 1,000 and 1,100. They warn of dire consequences unless this is done. Similar discussions take place in many other EMU countries.

vii.       Can post-EMU economic rectitude be assured?

83.       The EMU criteria are only for the period leading up to the single currency introduction. Nothing is mentioned about their observance afterwards, even though certain candidate governments have stated that they must of course be applied afterwards, too. How, in the absence of a central political authority at EU level, can such generalised observance be ensured? If a central political authority is created to ensure observance, would that be in line with what the peoples of the participating countries will have wanted?

84.       In 1995 Germany, with this in mind, suggested a "Stability Pact" to guarantee fiscal discipline among EMU participants, as a means of ensuring that the Euro should remain as strong as the DM. The pact would include the threat of automatic, draconian fines on erring EMU participants to ensure sound public finances, while simultaneously restricting the leeway of countries for loosening the fiscal strait-jacket once they enter the EMU.

85.       The principle of a tough Stability Pact was endorsed at a meeting of EU Finance Ministers in Dublin in September 1996. Their declaration impressed financial markets and strengthened the credibility of the EMU project. However, there is much hard bargaining in view as to the precise terms of the Stability Pact.

86.       The European Commission, subsequent to the Dublin Summit, presented a paper which proposes preventive action in three areas:

i.       Countries are to be obliged to adopt "stability programmes" containing budgetary goals which will be submitted to the European Commission and EU Finance Ministers within two months of the plans going to national parliaments.

      The medium-term objective is for a budget equilibrium or surplus, but with a breathing space for annual cyclical variations within the Maastricht Treaty's limit of 3% of GDP. The Commission is to operate an early warning system to identify and correct any budgetary slippage.

ii.       Countries in difficulties face a threat of sanctions according to a clear timetable. If their budget deficits exceed 3% of GDP they would be given a ten-month warning. Failing reduction of the deficit in question, the Council of Ministers of the EU could order the country to launch a non-interest bearing deposit with the European Commission. If the excessive deficit remains after two years, it would be changed into a definitive fine paid to the EU budget.

      The sanctions - to be approved by a two-thirds majority of the votes of EMU participants - would be made up of a fixed element equivalent to 0.2% of the country's GDP, plus the equivalent of one-tenth of a percent of GDP for every 1% over the 3% maximum, up to a ceiling of 0.5%.

iii.       The Commission suggests a certain leeway for governments breaching the 3% deficit limit in "temporary and exceptional circumstances" resulting from "an unusual event outside the control of the relevant member State and which has a major impact on the financial position of the general government, or when resulting from a severe economic downturn, in particular in the case of significant negative annual real growth".

87.       To the Rapporteurs, this Commission-proposed enforcement plan for the Stability Pact is clear confirmation both of the development toward federalism in case EMU is realised, and of the strong role of a non-democratic and unaccountable European Commission in this process. The Stability Pact may assume a more precise shape over the next few months. Generally speaking, the EU governments try, through the Stability Pact, to ensure through commitment and sanctions what, in a politically united single currency area such as the United States, is obtained by market forces. The question is, can promises and dictates take the place of the market without causing undue friction?

88.       Markets are closely watching the above; especially, if pre-EMU laxness is being tolerated in order to get the project going, markets will start to doubt the willingness of political authorities to sanction post-EMU fiscal misbehaviour in a given country. Markets will punish this by insisting on a currency premium vis-à-vis other world currencies, and it may also hurt investment.

viii.       What will be the physical cost of switching to a single currency?

89.       Of less fundamental importance, but still worthy of consideration, is the physical cost of going from several to one currency. The decimalisation of the British currency in 1971 took some four years to prepare, and the cost of producing new coins and converting machinery has been estimated at between 600 and 900 million pounds at today's prices. A switch to the Euro would be a far more complex exercise, for all notes as well as coins would need to be replaced in all of the participating nations. Furthermore, none of the national currency units would convert on a one-for-one basis into the Euro.

90.       To this should be added the cost of informing the public of the change over, not least elderly people who have been used all their lives to their national currency. There would thus be a very large cost to taxpayers, banks and the public to bring in a single currency. Huge numbers of computer programmes and machines would have to be changed. Every cash dispenser, every till, every slot-machine, each car-parking ticket machine, drinks machines and turnstiles would need changing. Every business accounting programme, bank telling machine and payroll programme would need changing.

91.       The sheer physical task of withdrawing all the coins currently in circulation in the EU countries and minting an entirely new set sufficient for 350 million people would be a very expensive and time-consuming task (although, of course, the cost would be reduced if, as expected, fewer than all the 15 EU nations participate). Businesses which are entirely domestic would have all the costs and none of the benefits. There would be no advantage for them in the reduced transaction costs in foreign currencies, whilst they would have to renew all of their equipment if the latter were to collect or calculate monetary amounts.

92.       Even those businesses which did have transaction costs in foreign currencies that they could reduce or save as a result of the single currency would have transitional and equipment costs far outstripping the likely benefits for many years to come. The main beneficiaries would be the business machine manufacturers. While, as far as the Rapporteurs know, there is no overall estimate of the total cost of the change-over, it is estimated that Great Britain banking alone would have to spend 914 million pounds for the hardware and 436 million pounds for the software changes.

V. Impact of EMU on non-participating countries

93.       As regards the impact of the EMU on non-participating countries, we have to distinguish between those in the European Union, European countries not members of the EU, and non-European trading partners, including developing countries. Firstly, for non-participating EU countries - and for EFTA members, Iceland, Norway and Liechtenstein, as members of the European Economic Area - there is the reality of the completed Internal Market created through the Single European Act. This major achievement must, of course, not be called into question; indeed, to do so would be folly given the fact that much European employment depends on the closest possible trade relations between EU members.

94.       Indeed, the Treaty on European Union does not make any distinction between members of the European Monetary Union on the one hand, and other EU countries on the other, as regards the functioning of the Single Market. All EU countries are covered equally by the provisions of the Treaty and the secondary legislation introduced to facilitate the single market. Protectionist measures taken to exclude an EU country from the single market - say, on the basis of alleged wayward behaviour on the EMU - would therefore be illegal, apart from being against the best interests of the EMU participants themselves.

95.       It is also clear that the development and implementation of the single market - which is essential for the future prosperity of the EU as a whole - predates any move towards monetary union. Its benefits and validity do not, therefore, depend on a move to a single currency by some or all EU countries. Those who seek to establish a link between EMU non-participation and access to the single market are either advocating the dismantling of the single market itself, which would be economically damaging to all parties, or supporting unlawful discrimination. Alternatively, they might be seen as seeking to impose political pressure through threats and bluster. None of these approaches seems admissible.

96.       However, what may happen if, say, due to the strength of the Euro, non-participating EU and EEA countries find that their currencies lose in value vis-à-vis the single currency? Would this then risk being seen as a "competitive devaluation", even though it may only be a natural reaction to the changing economic fortunes of the country in question? Would tariffs then be imposed on that country's exports to its EU trading partners, as some politicians in EU candidate countries have seriously proposed? Would currency depreciations (or appreciations) no longer be a matter for the country concerned alone? Would payments from the EU's Cohesion Fund in favour of certain countries found 'guilty' of currency depreciation be reduced, as the French minster of Finance, Mr. Arthuis, suggested at the EU summit in Verona in April 1996? If the 'ins' were in this way to try to discriminate against the 'outs' through tariffs or restrictions, then that would undermine the whole principle of the Single Market and could cause the European Union to break up completely. It would also be very 'non-communautaire. However, the prospects do not look to good, as some major presumptive 'in' countries are hinting that the EU 'outs' would not have access to Target, the future EU payments system.

97.       It is obvious that the "out" countries, ie those that do not participate in the EMU in the first stage, will not at all be in the same position. If one takes account of the possibility of future EU-enlargement, perhaps on a timetable running parallel to that for the EMU, then the various prospective "out" countries could well be beginning from very different positions indeed. Some non-EMU members may already be close to convergence and full membership. Others may have achieved economic convergence, but may lack political motivation to join. But most of the "outs" - actual and prospective - will not have converged sufficiently to be strong candidates for membership of the Monetary Union.

98.       Furthermore, pegging their currencies against the Euro may not be the best way for them to move towards achieving greater convergence. Indeed, to the extent that they have not already achieved sufficient convergence, it is difficult to see how they can be confident that a unilateral exchange rate peg could be sustained. What is called for is therefore a degree of flexibility to accommodate different approaches, and the different circumstances in which the "out" countries find themselves.

99.       Turning to European countries outside the EU, it must first of all be recognised that they are major trading partners of the European Union. For instance, about half the exports and imports of the Czech Republic, Hungary and Poland are with Austria, France, Germany and the Benelux countries. The economies of an increasing number of central and eastern European countries are by now highly integrated into those of the EU. Trade is practically liberalised, and the few remaining restrictions on capital flows no longer constitute any serious constraint. Consequently, changes in the monetary and exchange rate policies of EMU would have an immediate impact on central and eastern European economies.

100.       A remaining particularity of the transition economies is, however, that demand for money is relatively unstable and more difficult to predict than in more economically developed countries in western Europe. One reason is that the break-up of large firms as a result of privatisation, as well as the emergence of hundreds of thousands of new enterprises, have led to an increase in money demand in the enterprise sector. To this should be added a relatively large informal economy, which is also in increasing need of cash. This means that it is comparatively difficult for a central or east European economy to comply with the strict monetary targeting of non-participating countries foreseen under the EMU. As transition proceeds, the problem can be expected to diminish. It is important, however, that the EMU should not be allowed to hinder, but rather should help, the economic reform process in central and eastern Europe.

101.       The European Monetary Institute has made considerable progress preparing a Europe-wide payment system as a necessary underpinning to the European Central Bank. This system, called "TARGET", will permit swift financial transfers among the national central banks. Although the "outs" will not be part of the TARGET, they will be connected to the system. Central and east European countries are in the early stages of developing their own national payments systems. They need to be as closely involved with TARGET as possible, and to learn as soon as possible what will be its features and requirements. This would provide them with an opportunity to leap-frog, introducing right at the outset systems which are compatible with, and best suited for, TARGET.

102.       Another issue which needs clarification is the continuity of contracts. Many contracts denominated in currencies that will cease to exist - between public as well as private parties - will remain in force following the establishment of the EMU. The European Commission has stated that the change-over should not affect the continuity of contracts, and that the non-revocability principle should apply in all cases for all contracting parties. Certain more recent, contracts take the EMU into account, but early ones do not.

103.       Among other issues of direct interest to non-EMU and non-EU European countries include the whole area of legislative harmonisation in the central banking and financial field. Of particular importance is the question of what such countries will have to do to join the EMU, that is, what obligations they will have to make during the accession negotiations to show they are willing and able to take on the acquis communautaire in the area of the EMU. The Rapporteurs hope that these obligations will crystallise progressively. It is necessary for the countries concerned to be closely involved with the proposals, studies and evolution of thinking about the future of EMU, in order to best prepare themselves for any eventual entry into it.

104.       In Verona the idea was also launched to form a "ERM 2 " (ERM stands for Exchange Rate Mechanism) tying the countries of non-participating EU countries within narrow limits to the Euro? But if so, would that not invite speculation against the weaker currencies within such an ERM 2, similar to that which afflicted the ERM in 1993 and which eventually led to a widening of the fluctuation margins? The destabilising consequences of such a proposal should be taken into account.

105.       One of the Parliamentary Assembly's, and our committee's, primary concerns ever since 1989 has been to further the economic development of central and eastern Europe within the European and world economic mainstream. Would countries participating in the single currency make the same requirements vis-à-vis these countries as they would to, say, non-participating EU members? This would, however, risk trapping them in chronic recession, since they would be unable to adapt their currencies to the national economic situation. Worker mobility would of course help the problem as has previously been pointed out. However, is such large-scale migration from central and eastern to western Europe politically feasible? Membership in the European Union, to which many of these countries aspire, would possibly exacerbate this problem, on the assumption that currency discipline would be particularly strict within the EU.

106.       The likely impact on other parts of the world, including developing countries, seems rather straightforward. If the Euro is strong, exports to non-European countries with weaker currencies may suffer initially but may recover over time, especially if the Euro is stable. Developing countries should be able to profit similarly. It could be mentioned as an aside that a large number of foreign exchange dealers and bank employees in Asia are expected to lose their jobs when they will no longer be able to change from and between as many European currencies as before. It is expected that this will lead to more intense trading among various Asian currencies.

VI. Concluding remarks

107.       Europe stands before a major crossroads in its modern history. The members of the European Union will have to decide whether to proceed or not to a single currency and, if so, who should join. It is a decision which is irreversible in the sense that it would be exceedingly difficult, if not impossible, to return from a single currency to, again, different ones.

108.       The EMU is essentially a political, not an economic, project, but it will have profound economic as well as political consequences. It is an irreversible move towards a Federal United States of Europe. Before countries concerned enter into this commitment, it is of supreme importance that they consider carefully the likely consequences of the options before them, and that they stand ready not only to reap any benefits but also to carry any expected costs, some of which the Rapporteurs have wanted to point to in this report.

109.       The Parliamentary Assembly of the Council of Europe, representing as it does forty member States and five Special Guests, at any rate owes it to the larger Europe to continue to follow closely the evolution of the EMU, in pursuance of the Assembly's Recommendation 1195 of 1992. Thus, the Rapporteurs hope that the debate in the Assembly of the present report in early 1996 can be followed by a public hearing on the matter somewhat later.



Figure 1:       Inflation and 10-year government bond yields in 1995 in

      individual EU member countries (Greece and Portugal: not announced;

      Sources: National Statistics and "The Economist")

Figure 2:        Budget deficits and public debt in 1995 as percentages of GDP

      (NB:        Luxembourg has a budget surplus of 0.7% and public debt of 6.2%        of GDP; Source: European Commission)

Reporting committee: Committee on Economic Affairs and Development

Budgetary implications for the Assembly: none.

Reference to committee: Order No. 481 (1992)

Draft resolution adopted by the committee on 19 November 1996.

Members of the committee: MM. Davis (Chairman), Mrs Degn (Vice-Chairperson), MM. Andreoli, Bársony, Behrendt, Belyaev, Bilinski, Billing, Mrs Blattmann, MM. Bloetzer, Bogár, Mrs Bribosia-Picard, Mr Brunetti, Mrs Burbiené, MM. Buzatu, Mrs Calner, MM. Cerqueda Gispert, Cusimano, Mrs Durrieu, MM. Elo, Eltz, Eyskens, Fenech, Dame Peggy Fenner (Alternate: Lord Kirkhill), MM. Figel, Frey, Mrs Frimannsdottir, MM Galváo Lucas, Gonzalez Laxe, Goop, Gusenbauer, Kamhi, Kiratlioglu, Kirilov, Kiršteins, Kopliku, Koucky, Leers, Le Grand (Alternate: Mignon), Liapis, Malinowski, Masliukov, Mautner-Markhof, Merkushov, Minkov, Muravschi, Pahor, Pereira Coelho, Poppe, Puche, Radulescu Botica, Rigo, Rippinger, Siebert, Mrs Stepova, MM Telgmaa, Townend, Tribunovski, Tumanov, Valleix, Verivakis, Mrs Verspaget, MM. Wallace (Alternate: Mitchell), Yaroshynsky (Alternate: Kapustyan).

N.B. The names of those members present at the meeting are printed in italics.

Secretaries to the committee: MM. Torbiörn and Bertozzi.

1 1by the Committee on Economic Affairs and Development