International Monetary Cooperation

The third stage of Economic and Monetary Union, EMU, is expected to commence on schedule on January 1, 1999. The participating countries will be selected in May 1998 with simultaneous announcement of the bilateral conversion rates between the national currencies of the participating countries to apply on the transition to the euro. Denmark has opted out of the third stage and as from January 1, 1999 will participate in the new exchange-rate mechanism, ERM2. Its purpose is to support exchange-rate stability between the euro area and the non-participating EU member states. The European Central Bank, ECB, will be established soon after the selection of the participating countries, at which time the European Monetary Institute, EMI, will be dismantled.

In 1997 the work of the International Monetary Fund, IMF, was concerned with the financial crisis in Asia in particular.

The European Union

The preparation of the third stage of Economic and Monetary Union progressed according to plan in 1997. Many important details of both the technical and the political preparations are now in place so that the third stage can commence on January 1, 1999 as planned.

At the beginning of May 1998 it will be decided which countries are to participate in the euro area from the outset, cf. the timetable set out in Box 4. All 15 EU member states will take part in making these decisions.

The euro countries will be selected on the basis of an evaluation of their convergence situation in 1997. According to a forecast in October 1997 by the European Commission, cf. Table 9, all EU member states except Greece will fulfil the interest and inflation criteria and be below or very close to the government-budget-deficit limit of 3 per cent of GDP. In February 1998 the EU member states published their reported budget statistics for 1997 which for 14 countries showed a government-budget deficit of 3.0 per cent or less of GDP.

According to the Maastricht Treaty a budget deficit exceeding the 3-per-cent limit can be tolerated, provided that as a percentage of GDP the deficit has declined substantially and has come close to the 3-per-cent limit, or if the excess is of an exceptional and temporary nature. A government debt in excess of the 60-per-cent limit is acceptable if the government debt as a percentage of GDP is deemed to have diminished sufficiently. The convergence achieved must be sustainable.

Table 9 EU member states' compliance with EMU criteria

In view of the considerably improved convergence situation in a number of member states it is generally expected that 11 of the 15 EU member states will be selected to participate in the third stage as from January 1, 1999. The other member states are Denmark, the UK and Sweden which

Box 4: Timetable for EMU decisions in the spring of 1998

do not wish to participate, as well as Greece which does not comply with the convergence criteria.

According to the Edinburgh Agreement of 1992 Denmark will not participate in the third stage of EMU. In this respect Denmark made use of its Treaty-bound right to opt out of participation in the third stage, even though the country fulfils the criteria for participation. As a consequence Denmark will have the same rights and obligations as the countries not complying with the criteria for participation in the third stage, the derogation countries.

In October 1997 the British government announced that the UK wishes to use its Treaty-bound right to opt out of participation in the third stage from the beginning. However, the British government will be prepared to propose UK participation at a later date should EMU be considered of economic benefit to the UK. The government has stated that in such case participation must be approved by a referendum which is estimated to take place around the year 2002 at the earliest.

In December 1997 the Riksdag (Parliament) approved the Swedish government's recommendation that Sweden does not participate in the third stage from the beginning, but that participation from a later date is possible if approved by referendum or general election.

In conjunction with the selection of the member states participating in the third stage the bilateral conversion rates between the national currencies of the participating member states, e.g. the rate of the D-mark against the French franc, will be announced. The conversion rates between the national currencies and the euro cannot be fixed until December 31, 1998.

Immediately after the selection of the participating member states and the announcement of the bilateral conversion rates the establishment of the European Central Bank, ECB, and the procedure to appoint the ECB's Executive Board will commence. Up to the commencement of the third stage on January 1, 1999 the monetary policies of the participating member states will continue to be an area of national competence.

It will not be possible to replace the national banknotes and coins of the participating member states with euro notes and coins from the outset due to the production time required. A gradual transition has therefore been planned whereby the national currencies will still be used for a transition period. This period can be divided into three sub-periods:

• Sub-period 1 runs from the selection of the participating member states in May 1998 until January 1, 1999. During this period the ECB will be established and the production of the banknotes and coins denominated in the single currency will commence.

• Sub-period 2 will start with the irrevocable locking of the exchange rates on January 1, 1999. During this sub-period the national currencies will exist side by side with the single currency, although in principle there will be only one currency, the euro, which will merely be expressed as different denominations, e.g. D-mark and French franc. In this period the euro will exist only as a currency of account.

• The third and final sub-period will begin on January 1, 2002 with the introduction of physical euro-denominated banknotes and coins. Within a period of six months as a maximum, i.e. until July 1, 2002, the national banknotes and coins must be withdrawn and replaced by the euro.

During the preparations for the third stage in 1997 many important elements were finalized. The meeting of the European Council in Amsterdam in June (the Amsterdam Summit) thus led to clarification of the new exchange-rate mechanism, ERM2, the Stability and Growth Pact and the legal framework for the euro. All three areas had been under preparation for an extended period.

On the commencement of the third stage a new voluntary exchange-rate mechanism, ERM2, will be introduced with the purpose of supporting exchange-rate stability between the euro area and the other EU member states. ERM2 will be based on central rates fixed for each participating non-euro currency vis-ā-vis the euro. A fluctuation band of +/-15 per cent around the central rate, equivalent to the band of the existing exchange-rate mechanism, will be defined.¹⁾ ERM2 entails a mutual obligation for the national central banks of the participating non-euro countries and the ECB to intervene should the exchange rate reach the limits of the fluctuation band. However, the ECB will have access to suspend the interventions, should it deem the price stability of the euro area to be at risk.

If the group of EU member states outside the euro area comprises Denmark, the UK, Sweden and Greece, Denmark could become the only member of the new exchange-rate mechanism. Denmark considers a formal exchange-rate mechanism for the Danish krone vis-ā-vis the euro to be of great significance to the continuation of the present fixed-exchange-rate policy. The positions of the UK and Sweden are affected by the fact that in 1992 these countries had to abandon their fixed-exchange-rate policies.

The legal framework for ERM2 comprises a resolution by the Amsterdam Summit and a central-bank agreement to be signed on the establishment of the ECB. The text of the resolution provides for a country with favourable convergence results to achieve a narrower fluctuation band than +/-15 per cent. Denmark has expressed interest in such an agreement, but actual negotiations await the establishment of the ECB. An agreement on a narrower fluctuation band will enable Denmark to achieve close exchange-rate ties, in many ways resembling the situation prior to the collapse of the ERM in 1993.

(to be continued)

Fodnoter