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International Monetary CooperationEuro banknotes and coins were put into circulation on 1 January 2002, marking the full achievement of the Economic and Monetary Union of the 12 euro-area member states. The changeover was smoother than expected, and after only around two weeks virtually all cash payments were made in euro. The EU member states that do not participate in EMU are the UK, Sweden and Denmark. The Stability and Growth Pact imposes an obligation on the EU member states to seek to maintain a budgetary position close to balance or in surplus. The significant slowdown in growth in 2001 presents a major challenge to some of the euro-area member states. For the IMF, 2001 was characterised especially by the large loans to Argentina and Turkey to alleviate financial crises in those countries. Reform proposals for greater involvement of the private sector in resolving financial crises are being discussed more and more actively. The changeover to euro banknotes and coinsOn 1 January 2002 euro banknotes and coins were introduced in the 12 euro-area member states[32]. Concurrently the central banks began to withdraw the legacy currencies (e.g. D-mark, Finnish markka and Dutch guilder) from circulation. The introduction of the new banknotes and coins and the withdrawal of the legacy currencies progressed more smoothly than expected. Around two weeks after 1 January the European Central Bank, ECB, could already note that virtually all cash payments in the 12 euro-area member states were made in euro, even though the citizens of most of the member states were still able to use the legacy currencies up to 1 March 2002. The retail sector was a key changeover channel whereby shops received amounts in legacy currencies and gave change in euro. Many citizens also exchanged their money at private banks, and ATMs in all the member states adopting the euro had been adjusted to exclusively dispense euro banknotes as from 1 January 2002 or a few days thereafter. Both the retail sector and the general public appear to have wished to make the changeover as quickly as possible, which put significant pressure on the supply and distribution of euro banknotes and coins. Overall, the changeover presented no major problems. Legacy currencies can still be exchanged for euro. Banks in many euro- area member states offer exchange services for a number of months after 1 March, and the euro-area central banks will exchange banknotes and coins in legacy currencies for euro free of charge for several years after the changeover. The banknote series comprises 7 euro banknotes of uniform design in all euro-area member states. The coin series consists of 8 euro coins with both a national and a common side, although all coins may be used in all euro-area member states.[33] The production of both euro banknotes and coins commenced several years ago, but actual frontloading started during the 2nd half of 2001. In a large-scale logistics operation euro banknotes and coins were frontloaded to banks and shops. These frontloading activities were accompanied by a comprehensive information campaign to prepare for as smooth a changeover as possible after the turn of the year. The European Commission, the national authorities in the euro area and the European Central Bank conducted parallel information campaigns that involved TV spots, newspaper advertisements, Web sites and brochures to all households (more than 200 million brochures were distributed). The introduction of euro banknotes and coins marks the full achievement of the Economic and Monetary Union of the 12 euro-area member states.[34] The single currency was introduced on 1 January 1999, but for the first 3 years existed only as a currency of account. Since the euro was introduced in 1999, the euro-area member states have conducted a single monetary policy via the Eurosystem which comprises the European Central Bank, ECB, and the national central banks of the 12 euro-area member states. The structure of the ECB and the Eurosystem are described in Box 7. Non-participating eu member states and the candidate countriesThree of the 15 EU member states are not part of the euro area. These member states are Denmark, Sweden and the UK. 12 central and eastern European and Mediterranean countries are negotiating accession to the EU. After their inclusion in the European Community these countries will eventually be obliged to join the euro area, but first they must comply with the convergence criteria, cf. below. Box 7 The european central bank and the eurosystem
Denmark, Sweden and the UK In Sweden, the Social Democratic government has stated that it is in favour of Swedish participation in the euro, in the fullness of time. This requires the endorsement of the people of Sweden via either an election or by referendum. Opinion polls show a significant shift during 2001 from a predominantly negative to a predominantly positive view of Sweden's adoption of the euro. In January 2002 Sweden's Prime Minister Göran Persson submitted a draft schedule for Sweden's possible adoption of the euro according to which a referendum may be held in the spring of 2003. The government of the UK has set up five economic tests that must be complied with before any decision on EMU participation may be taken. The government has previously stated that the five economic tests would be assessed at the latest two years after the general election. The election was held in June 2001. The government has also stated that if the UK adopts the euro the decision must be endorsed by a referendum of the British people. Opinion polls showed a clear majority against the UK's adoption of the euro throughout 2001. The candidate countries In the European Commission's Annual Progress Report on the Accession Process in November 2001, the Commission found that all 12 candidate countries comply with the political requirements, and that the economic criteria were met by Cyprus and Malta, and will be met soon by the remaining eight countries in the first wave, which are: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. The ongoing accession negotiations primarily concern the implementation and enforcement of the EU's acquis communautaire. According to the Progress Report, negotiations made good progress in 2001. However, certain major issues such as agricultural and budgetary matters still remain to be negotiated. The European Council in Laeken in December 2001 found that 10 countries can meet the time schedule at the current pace of negotiation and reform in the candidate countries. Bulgaria and Romania will not be able to comply within the required time frame, however. After inclusion in the EU the new member states will be obliged in the course of time to introduce the euro, subject to prior compliance with the convergence criteria, including the condition of ERM II participation, for at least 2 years prior to the introduction of the euro.[37] Enlargement of the EU with the aforementioned 10 countries will increase the population of the EU considerably. In 1999 the population of the 10 countries was approximately 20 per cent of the EU's population, while the 10 countries' total gross domestic product is only approximately 4 per cent of the GDP of the EU. The economic policy guidelines of the EUThe principal instruments for the EU's surveillance of economic policy are the Stability and Growth Pact and the Broad Economic Policy Guidelines. The Stability and Growth Pact In March 2001, the Ecofin Council completed its review of the EU member states' national programmes for 2001. The Ecofin Council's opinions show that virtually every EU member state complied with the Stability and Growth Pact in 2001.[38] However, it was found that Germany and Portugal would not comply until 2002 and 2003 respectively. The Ecofin Council stated that the temporary deterioration in Germany's budget was attributable to the implementation of a tax reform, and Germany was encouraged to maintain strict expenditure control. Portugal was encouraged to increase the safety margin to provide more scope for the automatic stabilisers in the event of a recession[39]. Most member states were encouraged to prepare more ambitious programmes, particularly as regards the budget consequences of the ageing population. Measured in terms of the results for 2000, for the third consecutive year all 15 EU member states complied with the provision of the EU Treaty that the budget deficit may not exceed 3 per cent of GDP. Most of the EU member states, especially the small euro-area member states and the non-euro-area member states, showed a budget surplus. Later in 2001 the rate of economic growth proved to be significantly lower than expected when the national programmes were submitted at the beginning of the year. This means that there is prospect of deteriorating public finances, and this situation can be considered a "litmus test" for the Stability and Growth Pact. The slowdown in growth leads to a deterioration in public finances via e.g. lower tax revenue and higher expenditure on unemployment benefit. In general, the member states did not seek to pursue a fiscal policy conducive to growth in 2001, so that fiscal discipline is still a dominant issue. Nevertheless, several member states may still encounter problems. In December 2001, Germany and Portugal submitted their programmes stating that a significantly larger budget deficit than before is now expected. Particularly in Germany's case the situation is serious. Germany's budget deficit is estimated at 2.5 per cent and 2.0 per cent of GDP in respectively 2001 and 2002 (this represents an upward adjustment by 1 percentage point in relation to the previous programme). This brings Germany close to the 3 per cent limit stipulated in the EU Treaty[40]. Portugal likewise risks approaching the 3 per cent limit. The European Commission therefore initiated the warning procedure in the Stability and Growth Pact by calling on the Ecofin Council to issue an early warning to Germany and Portugal. After the two countries had undertaken not to exceed the limit, and that the member states aimed to achieve budgetary balance in 2004, the Council of Ministers refrained from giving the early warnings. The Broad Economic Policy Guidelines The recommendation to Ireland was made in February 2001 despite that member state's sound budget surplus and compliance with the Stability and Growth Pact. At that time, the Irish economy was characterised by very high growth and an inflation rate significantly above the EU average. The budget for 2001 nevertheless included several expansionary measures. The Ecofin Council found that these measures increased the risk of overheating of the economy, which was in conflict with the Broad Economic Policy Guidelines. Ireland's situation was discussed again in November 2001, and the Ecofin Council stated that the recommendation had partly been complied with through the implementation of the budget. It was found that unexpected events (e.g. the global slowdown in growth and the outbreak of foot and mouth disease) dampened the economy and thereby also the inflationary pressure, so that the imbalances in 2001 were more moderate than expected. However, the Ecofin Council emphasised the need for continued monitoring of Ireland's fiscal policy in view of the previously noted overheating of the economy. The international monetary fund, IMFBox 8 Denmark's IMF representation
1 The USA has the largest share of votes at 17.16 per cent, followed by Japan at 6.16 per cent, Germany at 6.02 per cent, and the UK and France at 4.97 per cent each. The slowdown in the global economy also affected the emerging market economies and the developing countries. During 2001 Argentina and Turkey in particular needed substantial IMF credits. Despite the large loans to Argentina and Turkey the IMF's liquidity is still good. This is first and foremost related to the increase of the member countries' capital contributions (quotas) in 1999, and to the redemption of loans ahead of schedule by countries such as Russia, Korea and Brazil. There are two principal IMF facilities for low-income countries. They are the Poverty Reduction and Growth Facility (PRGF), and debt relief for the countries subject to the debt-relief initiative (HIPC), the Heavily Indebted Poor Countries Initiative. In February 2002, 25 countries had received assistance under the debt-relief initiative, and the IMF had granted PRGF loans to a total of 36 countries. The annual meeting of the IMF is traditionally held at the end of September or beginning of October, but was cancelled in 2001 due to the terrorist attacks on 11 September. Instead, the IMF's consulting body, the International Monetary and Financial Committee (IMFC), held a short meeting in Ottawa on 17 November. The IMFC in particular discussed the global economy, the IMF's role in the fight against money laundering, and measures to prevent financing of terrorist activities. Immediately after the terrorist attacks on 11 September the IMF's Managing Director Horst Köhler issued a press release emphasising the IMF's willingness and opportunities to alleviate some of the problems that could potentially result from the slowdown in the global economy. Argentina The current crisis in Argentina is the result of a number of structural factors in the economy, sustained government-budget and current- account deficits, and the generally more difficult terms of access for the emerging market economies to obtain financing from the international financial markets since the crises in Asia and Russia in 1997-1998[41]. During 2001, the IMF extended loans to Argentina on two occasions. In January, the IMF extended a credit arrangement of 13.7 billion dollars to Argentina, and in September the IMF increased this credit arrangement by more than 8 billion dollars to 21.5 billion dollars. The planned disbursement of 1.2 billion dollars in December 2001 under the credit arrangement was cancelled due to non-compliance with the conditions for the credit facility. The overall objective of the IMF support was to restore confidence in Argentina's economy, but it turned out that the support only "bought time" by postponing the suspension of payments. In January 2002 Argentina's repayment to the IMF of an instalment of more than 1 billion dollars was postponed by 1 year. Since then the IMF hasinformedArgentinathatanynewcreditarrangementswould be subject to the condition of Argentina's presentation of a viable economic- policy programme. Turkey In May 2001, the IMF's Executive Board approved an increase of the financing facility from 11 billion dollars, to a total of 19 billion dollars. Most of this loan was disbursed to Turkey during 2001. The crisis in Turkey became exacerbated after 11 September in view of e.g. declining revenue from tourism, while sustained high real interest rates have impeded financing of the government budget. In February 2002 Turkey gained a new loan agreement with the IMF for 16 billion dollars, equivalent to 1,330 per cent of its quota. Like the credit arrangement in 2001 this substantially exceeds the IMF's normal credit limits. In return for the credit arrangements Turkey agreed to tighten its fiscal policy, privatise certain enterprises in public ownership, reform the banking sector and reduce inflation. The Turkish government has generally complied with the requirements. In June, foreign banks renewed their agreement with Turkey of December 2000 on maintaining their credits to Turkey. The banks only partly complied with this agreement, and the efforts to involve the private sector in resolving Turkey's financial crises have not made any further progress. Involvement of the private sector in financial crisis resolution There is a risk that the large IMF loans to crisis-stricken countries may lead to less cautious strategies in the financial markets, because in several cases funds made available to a country by the IMF have been used to bail out private investors. This has led to increasing demands for private investors to become more involved in the resolution of financial crises, enabling the financial markets to assess credit risks more realistically. Against this background the IMF has initiated discussion of the objectives, conditions and implications of an international scheme for suspension of payments, including more formal rules for the involvement of or allocation of losses to private investors. Such provisions are already included in many countries' legislation on liquidation or suspension of payments. With regard to international legislation applying to sovereign states, the issue is that there is no supranational authority to enforce these rules at international level. The IMF's Management has proposed to give the IMF a more formal role in monitoring compliance with a certain code of conduct when a country can no longer service its international debt commitments. A central aspect is how to create a formal debt-restructuring mechanism that empowers the official sector (i.e. the IMF) to protect a debtor against actions from creditors. However, this model is associated with a number of practical problems. The US Treasury Secretary has put forward similar proposals. The discussion is still at an informal and initial stage. Europe has previously supported a more formal set of rules to involve the private sector in the resolution of financial crises. These views were last expressed at the IMFC meeting in Ottawa in November 2001. It is emphasised that IMF loans must be subject to maximum limits. This clarifies the conditions for activation of a possible formalised mechanism for suspension of payments compared to the present system. The European view is that exemption from the IMF's access limits should be limited to one of the IMF's credit facilities (SRF, Supplementary Reserve Facility), and require a special open letter from the IMF staff explaining in detail why the exceptionally large loan has been granted. Furthermore, special voting procedures are required. Simplification of the IMF's conditionality Ownership of a programme is important to achieving good results. A recipient country should be involved at an early stage in the design of the economic programme. The IMF's surveillance can also contribute to increasing ownership in the longer term. The Executive Board of the IMF believes that the IMF should be prepared to postpone or discontinue financing should doubt arise concerning the implementation of the programme as a consequence of insufficient support. The IMF has conducted external consultations on its conditionality with interested parties and encouraged discussion with the general public by inviting comments on publications at the IMF's Web site. The IMF is also working with the World Bank on a clear division of responsibilities and systematic cooperation on conditionality. Extension of the IMF's supervisory role – surveillance of member countries' compliance with financial standards Since the major financial crises in Asia, the IMF has cooperated with the World Bank on extending the IMF's supervisory role. This has resulted in Financial Sector Assessment Programs (FSAP) whereby the IMF and the World Bank assess the member countries' compliance with central financial standards. These reports are very resource-intensive. Financial experts from other member countries accompany experts from the IMF and/or the World Bank on missions to the member countries concerned. So far it is found that approximately 30 member countries per year may be subject to the FSAP programme. The selection of FSAP countries is based on the country's systemic role and the requirement of an appropriate geographical distribution of the countries. Furthermore, countries at various development stages are to be included. Besides an overall assessment of the stability and soundness of a member country's financial sector, separate reports are prepared for the IMF's Executive Board concerning the member country's observance of one or more central financial standards. These reports are called Reports on the Observance of Standards and Codes (ROSCs). The most important standards in these surveys are BIS' Basle Core Principles for banking supervision, the IMF's standards for transparency in money and financial policies, and data preparation and publication standards. In the case of many countries observance of the principles of the standards for payment systems is also assessed. In general, the reports to the IMF's Executive Board are published, although the authorities may remove market-sensitive information from the reports before publication, subject to agreement with the IMF. Any information which makes it possible to identify individuals or individual institutions may also be omitted from the published versions. The IMF's role in the fight against financing of terrorist activities will primarily be to monitor via its extended surveillance that countries implement the measures adopted by the Financial Action Task Force. This committee held an extraordinary meeting in Washington on 29 and 30 October when a number of specific rules were adopted concerning the performance of this work in practice.
Footnotes[32] Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. [33] The euro banknotes and coins are presented in more detail on Danmarks Nationalbank's Web site www.nationalbanken.dk [34] The development up to the introduction of euro banknotes and coins is discussed in Euro 2002, Danmarks Nationalbank, Monetary Review, 1st Quarter 2002. [35] Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia. At the Helsinki European Council in December 1999 Turkey was also accepted as an accession country, although accession negotiations have not yet been initiated. [36] The Copenhagen criteria were adopted by the European Council in Copenhagen in 1993. The political criteria cover areas such as democracy, human rights, the rule of law and respect of minorities. The economic criteria are that the candidate countries must be well‑functioning market economies, and that the economies must be able to withstand the pressure of competition and market forces in the EU. [37] The convergence criteria relate to the government budget deficit, government debt, inflation and long‑term interest rates. A further criterion is participation in ERM II. The Ecofin Council has stated that ERM II is a flexible arrangement in which participation in principle can be via e.g. a currency board – see Danmarks Nationalbank, Report and Accounts 2000. [38] See also Tina Winther Frandsen, The Stability and Growth Pact – Status in 2001, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2001. [39] The development in a country's economic activity directly affects the government budget via the automatic stabilisers. In a boom, the budget balance will be improved automatically via lower expenditure on e.g. unemployment benefit and higher tax revenue. This also contributes to dampening fluctuations in growth. On the other hand, during a recession the budget will deteriorate, which again will dampen growth fluctuations. [40] If this limit is exceeded, according to the EU Treaty sanctions may be imposed. The Stability and Growth Pact specifies that such sanctions must always include a deposit which can later be converted to a fine if the deficit is not reduced to less than 3 per cent of GDP within a specific period. [41] The development in Argentina's economy over a longer period is described in further detail in Morten Roed Sørensen, Argentina's Crises, Danmarks Nationalbank, Monetary Review, 4th Quarter 2001.
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Version 1.0 March 2002 Nationalbanken. |