Report and Accounts 2000 - International Monetary Cooperation

The bill to adopt the euro was rejected by the referendum in Denmark on 28 September. Denmark's fixed-exchange-rate policy is maintained within the framework of ERM II.

As from 1 January 2001 Greece joined the euro area, so that 12 EU member states have now adopted the euro. Since euro banknotes and coins will be put into circulation on 1 January 2002, the full changeover to the euro takes place in 2001.

In 2000 the demand for IMF credit declined in view of the higher growth in the global economy and stabilisation of the balances of payments of the emerging market economies. Instead, the IMF concentrated on more long-term reforms of its surveillance and emergency relief.

Denmark and the Euro

In March 2000 the Danish Prime Minister called a referendum for 28 September on Denmark's adoption of the euro, and in May the government submitted the bill.

According to the bill, if the outcome of the referendum was in favour of adoption of the euro, Denmark would be able to join the euro area as from 1 January 2002. Euro banknotes and coins would be introduced as from 1 January 2004, after which krone banknotes and coins would be withdrawn.

The Nationalbank and the financial sector would have been required to undertake a major technical restructuring up to the introduction of the euro.^[1] Other sectors in society would also have been required to adjust to the euro, but this changeover would not have had to take place until the introduction of euro banknotes and coins.

The bill was rejected by the referendum, with 53 per cent of the votes against the adoption of the euro, and 47 per cent in favour. Immediately thereafter the Danish Government and the Nationalbank issued a joint press release in which it was stated that Denmark's fixed-exchange-rate policy would be maintained within the framework of the narrow fluctuation band of ERM II, the exchange-rate mechanism of the EU.

The euro area

The euro was introduced in 11 EU member states^[2] on 1 January 1999. On 1 January 2001 the euro was also adopted in Greece. The national central banks of the 12 euro area member states, together with the ECB, constitute the Eurosystem^[3]. Box 8 presents a description of the ECB's organisation.

The European Central Bank, ECB, has three governing bodies: the Executive Board, the Governing Council and the General Council. The Executive Board is responsible for the day-to-day running of the ECB, and the implementation of the monetary-policy decisions. Wim Duisenberg is President of the Executive Board which consists of six members in total.

Monetary-policy decisions are taken by the ECB's Governing Council consisting of the central-bank governors of the 12 participating member states, and of the ECB's Executive Board. The Governing Council normally meets every two weeks. The practical execution of the decisions of the Governing Council is predominantly the responsibility of the participating national central banks. The weekly liquidity allotment is a case in point. Should the Governing Council fail to reach agreement the main rule according to the EU Treaty is that the Governing Council's voting procedure shall be by simple majority, whereby each member has one vote. In view of the enlargement of the EU the procedure for amending the voting provisions has been simplified, cf. p. 88f.

The General Council consists of the President and Vice President of the Executive Board, as well as the governors of the central banks of all 15 EU member states, including Danmarks Nationalbank. The General Council normally meets briefly every quarter. During 2000 the General Council discussed such issues as the functioning of ERM II, the monetary development in the EU member states not participating in the euro area and the ECB's convergence report on Sweden and Greece.

The ECB has 13 committees and subcommittees in which the national central banks and the ECB participate. The national central banks of the EU member states outside the euro area participate only to a limited extent. The Nationalbank's participation in these meetings varies considerably. The committees contribute expertise to the decision- making process within all relevant central-bank areas.

The ECB is owned by the national central banks, which have contributed capital. The capital contribution of each central bank depends on the member state's economy and population size. Each national central bank's share of the ECB corresponds to its contribution to the total capital. The ECB's profit or loss is distributed proportionally among the national central banks according to their ownership share.

The three EU central banks which are outside the Eurosystem, the Bank of England, Sveriges Riksbank and Danmarks Nationalbank, have paid up 5 per cent of the amount they would have contributed had they joined the Eurosystem. The interest on this amount covers the expenses related to the ECB tasks which concern all 15 member states.

Inclusion of Greece in the euro area
On the selection of the first euro area member states in May 1998 Greece did not fulfil the economic criteria for participation, the convergence criteria. Since then, however, Greece has achieved a higher degree of economic convergence with the euro area member states. Against this background, in the spring of 2000 Greece applied to join the euro area. The ECB and the European Commission each prepared a convergence report on Greece, pointing out such factors as the significant reduction of the Greek inflation rate (CPI) from 20.4 per cent in 1990 to 4.8 per cent in 1998, and 2.6 per cent in 1999. The European Commission's report concluded that Greece now fulfilled the convergence criteria for full participation in the third stage of EMU.

In connection with the European Council in Portugal in June the ECOFIN Council approved Greek participation in the euro area as from 1 January 2001. At the same time, Greece was granted immediate access to participate in the meetings of the ECB and the Eurogroup, which is the informal forum for the Ministers of Economic Affairs and Finance of the euro area member states. At the same time, the ECOFIN Council fixed the conversion rate between the Greek drachma and the euro as from 1 January 2001. The conversion rate was fixed as the drachma's existing central rate in ERM II. When Greece joined the euro area on 1 January 2001, the drachma's exchange rate was thus fixed irrevocably at 340.750 drachma per euro.

The last leg of the changeover
In 2001 banknotes and coins are still denominated in the euro area member states' national currencies (D-mark, French francs, Finnish marks, and so on). It is possible to hold accounts and transact electronic payments in euro in connection with e.g. securities trading.

Until 1 January 2002, when euro banknotes and coins are put into circulation, the national currencies are to be regarded as various sub-denominations of the euro. For example, the D-mark is exactly 1/1.95583 euro^[4].

The financial markets in the euro area already use the euro, while private individuals in the euro area have encountered the euro via e.g. price tags in both the national currency and euro. As from the beginning of 2002 all areas of society in the euro area must be ready to use the euro, even for day-to-day transactions. In 2001 very extensive information campaigns will therefore be launched in the euro area in order to prepare citizens for the changeover. In most euro area member states during the last two weeks of 2001 the general public will be offered start kits containing euro banknotes and coins.

The euro banknotes will be identical throughout the euro area, while the coins will have a common and a national side. All participating member states have published the design of the national side of their euro coins. The final design and security features of the banknotes will be published from September 2001. There will be 7 different euro banknotes (5, 10, 20, 50, 100, 200 and 500 euro), and 8 different euro coins (1, 2, 5, 10, 20 and 50 cent, as well as 1 and 2 euro). Up to 1 January 2002, when the first euro banknotes and coins are put into circulation, around 15 billion euro banknotes and 50 billion euro coins are to be manufactured.

For a short transition period of up to two months after 1 January 2002 there will be dual circulation of euro banknotes and coins alongside banknotes and coins denominated in national currencies. By 1 March 2002 at the latest the last national banknotes and coins will be withdrawn from circulation, and from this date at the latest they will no longer be legal tender. After this date business entities will only be obliged to accept payment in euro. However, after the expiry of the transition period national banknotes and coins may still be exchanged at the banks of the participating member states (for a few months) and at their central banks (for many years).

The period up to the introduction of the euro banknotes and coins will present the major task of transporting euro banknotes and coins to the banks. As from September 2001 the banks will be able to receive euro banknotes and coins in order to build up the necessary initial stocks. The retail sector will also be able to receive euro banknotes and coins before the transition period begins.

Significance to EU cooperation
Economic-policy issues have gained a more prominent role in EU cooperation after the changeover to the euro and the single monetary policy.

With regard to economic-policy cooperation, Denmark is a full member of the ECOFIN Council where all formal decisions are made. However, a steadily increasing proportion of the discussions, e.g. the exchange of views on economic trends, now takes place within the informal forum for the Ministers of Economic Affairs and Finance of the euro area member states, the Eurogroup.

The Eurogroup has gradually gained a stronger role, and has now also become more visible by holding press conferences and issuing press releases. Furthermore, the number of issues on the agenda at meetings is planned to be increased in order to enhance the coordination of economic policy in the euro area. When a non-participating member state has the EU presidency, the next member state to have the EU presidency will serve as President of the Eurogroup. During the Swedish EU presidency in the first half of 2001 Belgium is President of the Eurogroup, since the EU presidency passes to Belgium in the second half of 2001.

The other non-participating eu member states and the candidate countries

Two other EU member states besides Denmark, the UK and Sweden, do not participate in the euro area. The EU is negotiating membership with 12 countries. When these countries join the EU they will not be able to introduce the euro until they have participated in ERM II for a period.

The UK
Like Denmark, the UK has invoked its Treaty-bound right not to participate in the third stage of EMU. The British government has reserved the right to participate at a later stage if this is found to be economically beneficial to the UK. The government has prepared five economic tests to be passed before a decision on participation can be made. For example, sustained convergence must be achieved between the UK economy and the economies of the euro area, and the implications to the financial sector should be evaluated. According to the British government the economic tests will be assessed at the latest two years after the next parliamentary election, which must be held by May 2002. Furthermore, the British government has stated that participation must be endorsed by referendum.

Sweden
In Sweden the Riksdag (Parliament) in December 1997 adopted the government's recommendation that Sweden does not participate in the third stage of EMU from the start. The Riksdag also adopted the decision that practical preparations for the euro should be made in all sectors of society in order to preserve Sweden's scope for manoeuvre should it decide to participate at a later date.

At the extraordinary congress of the Social Democratic Party in March 2000 the party confirmed that it wished Sweden to participate in the euro, but from a later date. Like the UK, the timing of Sweden's participation will depend on when it is assessed to be economically beneficial. In this connection the government has set out certain criteria. These include a certain convergence between economic development in Sweden and the euro area. Sweden's Prime Minister has stated that there will be no referendum on Sweden's participation in the euro before the next elections to the Riksdag in September 2002.

In the spring of 2000 the European Commission and the European Central Bank conducted a convergence assessment of Sweden. The European Commission finds that Sweden fulfils all of the economic criteria for participation in the euro area, apart from the exchange-rate criterion, since the Swedish krona does not participate in ERM II. The Swedish government has stated that linking the Swedish krona to ERM II will be a logical initial step if Sweden decides to adopt the euro.

The candidate countries
12 countries from central and eastern Europe and the Mediterranean area have initiated accession negotiations with the EU^[5]. The EU initiated negotiations with Cyprus, Estonia, Poland, Slovenia, the Czech Republic and Hungary in March 1998, and with Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia in February 2000.

No official date for the first enlargement has been fixed. However, at the European Council in Nice in December 2000 there were hopes that the first new EU member states would be able to participate in the next elections to the European Parliament in 2004. The conclusion of the European Commission's annual progress report on the accession process from November 2000 is that Cyprus, Estonia, Malta, Poland, Slovenia, the Czech Republic and Hungary are ahead in fulfilling the accession requirements. They are followed by Latvia, Lithuania and Slovakia, while the accession process for Bulgaria and Romania will probably be longer.

On accession to the EU these countries will be given the status of derogation countries in the Economic and Monetary Union, EMU. This implies that they will not introduce the euro from the start. In the longer term the countries will be under an obligation to introduce the euro on condition of fulfilment of the convergence criteria for participation in the third stage of EMU. In accordance with one of the criteria the countries are expected to participate in the exchange-rate mechanism, ERM II, for at least two years prior to introduction of the euro. The ECOFIN Council has stated that ERM II is a flexible arrangement providing in principle for participation with e.g. a currency board if this is found to function satisfactorily^[6]. Floating exchange rates, crawling pegs and fixed-exchange-rate regimes vis-à-vis other currencies than the euro are found to be incompatible with ERM II. The ECOFIN Council has also stated that unilateral introduction of the euro by means of currency substitution ("euroisation") is incompatible with the spirit of the Treaty's EMU provisions.

The intergovernmental conference

The European Council in Nice on 7-9 December 2000 concluded the intergovernmental conference. The objective of the intergovernmental conference was a revision of the Treaty provisions concerning the composition and functioning of the EU institutions in view of the future enlargement of the EU. The principal conclusions of the intergovernmental conference concerned the size and composition of the European Commission, the weighting of votes in the EU Council, the extension of qualified majority voting and review of the provisions on closer cooperation. The new Treaty requires ratification in all 15 member states before it can enter into force.

Among the results of the intergovernmental conference was that each member state shall have one commissioner as from 2005 until the EU membership comprises 27 member states. On the admission of the 27th EU member state, a rotation system according to an equality principle will be introduced, so that the first commission to be appointed hereafter shall have fewer members than the number of member states.

Another result was that the weighting of votes, as well as the decision-making procedure in the EU Council, were amended in several respects. Further provisions for closer cooperation among a group of member states within certain areas were introduced. Under the new Treaty, legal instruments based on approximately 30 EU Treaty provisions now require qualified majority voting rather than the previous unanimity procedure. A single amendment concerning the ECB was made to the ESCB Statute annexed as a protocol to the Treaty. Amendment of the voting procedures in the Governing Council is now made easier under the new Treaty. The voting procedure may now be amended by the Council, meeting in the composition of the heads of state or government, acting unanimously on a recommendation from the European Commission or the ECB. Amendment of the Treaty is thus no longer required.

The stability and growth pact

For the second consecutive year all EU member states comply with a Treaty requirement of a government budget deficit not exceeding 3 per cent of GDP. Budget surpluses are found in several member states, including Denmark, and no member states are close to the 3-per-cent limit.

The Stability and Growth Pact entered into force simultaneously with the introduction of the euro and imposes an obligation on all 15 EU member states to aim for a budgetary position "close to balance or in surplus in the medium term". This provision has been interpreted as a budgetary position sufficient to enable the member state to comply with the 3-per-cent limit, even in the event of a normal cyclical downturn. Each EU member state must prepare a national programme for compliance with the requirements set out in the Stability and Growth Pact in the following three years. The programmes are discussed by the ECOFIN Council, followed by the Council's opinion.

In May 2000 the ECOFIN Council completed its review of the updated programmes of all EU member states. With the exception of Austria all programmes were found to comply with the provisions of the Stability and Growth Pact. The Austrian programme envisages a government budget deficit of 1.4 per cent of GDP in 2002, which was found to be insufficient to ensure that the 3-per-cent limit is not exceeded in the event of a cyclical slowdown.

The second review of the updated programmes began in November 2000. The ECOFIN Council's conclusion on the German programme was that Germany will not comply with the requirement of a government budgetary position "close to balance or in surplus in the medium term" until 2002. This is due to a temporary deterioration of Germany's government budget in 2001 in connection with the implementation of the tax reform.

In Ireland there is prospect of sound government budget surpluses in the coming years, in compliance with the requirements of the Stability and Growth Pact. However, the Irish economy is subject to very high growth rates, at 10 per cent in 2000, and inflation considerably above the EU average. In the Broad Economic Policy Guidelines adopted by the ECOFIN Council in June 2000, the Irish Government was encouraged to counter the risk of overheating. In December 2000 the Irish Government put forward a budget which e.g. via a number of tax cuts (from an already low tax level) would increase the demand pressure on the economy. On this basis, in February 2001 the ECOFIN Council adopted a recommendation to Ireland that the expansionary budget for 2001 would increase the risk of overheating and is in conflict with the Broad Economic Policy Guidelines.

The International Monetary Fund, IMF

The demand for IMF credit declined in 2000 due to accelerated growth in the global economy and stabilisation of the balances of payments of the emerging market economies. The IMF's liquidity also improved considerably as a result of the increase of the member countries' capital contributions (quotas) which entered into force in 1999.

In December 2000 the IMF approved a financing facility of SDR 8.7 billion to Turkey, and in January 2001 a financing facility of SDR 10.6 billion to Argentina.

After the financial crises of recent years the IMF's work in 2000 was concentrated on more long-term reforms to prevent financial crises, or limit their extent and scope, through improved surveillance and greater transparency in the member countries' economic policies.

Extension of the IMF's surveillance
The IMF and the World Bank have initiated a programme, the Financial Sector Assessment Program, FSAP, for early detection of possible weaknesses in a country's financial system. The programme is also designed to strengthen the coordination and efficiency of the financial cooperation between the two international institutions.

The international standards comprise a code of good practice for transparency in monetary and financial policies, banking supervision principles, payment systems, securities trading and insurance supervision.

The cooperation between the IMF and the World Bank on FSAP is primarily directed at the emerging market economies. The IMF undertakes to assess the soundness of these countries' financial sectors within the framework of the IMF's annual article IV consultations. The IMF's assessment is based on macroeconomic relations and the overall stability of the economies. The World Bank prepares microeconomic assessments of the financial sectors of the emerging market economies, including their banking sectors, based on specific development problems.

The IMF has also initiated efforts to improve the surveillance of the countries' external vulnerabilities via assistance to enhance debt management as well as the management of the foreign-exchange reserves, analyses of capital-account issues, and improved statistics on foreign- exchange reserves and debt.

Involving the private sector in crisis prevention and resolution
The IMF's efforts to secure greater private-sector involvement in crisis prevention and resolution were initiated in 1997-98 when the IMF granted Thailand, Korea, Russia and Brazil very large loans which exceeded the IMF's access limits. The real implication of the large IMF loans was that private creditors could terminate their credit and withdraw without losses after granting credit at relatively high returns for a number of years. Against this background the aim is to clarify to the authorities of the individual countries, as well as private lenders, that there are limits to the support given to a country by the official community, including the IMF, in the event of a balance-of-payments crisis.

This issue is still being discussed within the IMF. However, agreement has been reached on the overall precondition that private-sector involvement must be ensured. Each time a country requires balance-of- payments support the IMF must therefore analyse and describe how the country has ensured the involvement of private creditors in the solution of its financial crisis.

Establishment of an independent evaluation unit
The meeting of the International Monetary and Financial Committee, IMFC, in April 2000, approved the establishment of an evaluation unit to assess the IMF's work. The unit must be independent of the IMF's staff and management and will report to the IMF's Executive Board. The evaluation unit is free to choose the aspects of the IMF's work to be analysed and evaluated. The evaluation reports will be published. The unit can also have direct contact with e.g. NGOs and other stakeholders, and is expected to become operational during the spring of 2001.

Simplification of the IMF's loan facilities
For some time the IMF's agenda has included simplification of the IMF's financing facilities, cf. Box 9, improvement of the incentives for faster repayment of loans, and improvement of the access to assistance in the event of financial crises.

SBA, stand-by arrangements are credit facilities to alleviate short-term balance- of-payments difficulties. SBA loans are normally disbursed quarterly over a period of 1-1½ years and must be repaid over a period of 3¼-5 years. The rate of interest is proportional to the IMF's weekly interest rate for SDR, the IMF's reserve asset, calculated as a weighted average of short-term money-market interest rates in the major currencies.
EFF, Extended Fund Facility, is a credit facility for countries with balance- of-payments imbalances due to persistent structural problems in the economy. EFF loans are disbursed on a quarterly or biannual basis, normally over a three-year period, with a repayment period of 4½-10 years. The rate of interest is identical to the interest rate for SBA loans.
SRF, Supplemental Reserve Facility, is a credit facility supplementing SBA or EFF arrangements to provide financial assistance to members experiencing exceptional short-term, large-scale financing needs due to a financial crisis. An SRF arrangement runs for up to 1 year and the repayment period is 1-2½ years. The rate of interest is identical to the interest rate for SBA loans plus a premium of 300-500 basis points.
CCL, Contingent Credit Lines, constitute a commitment for precautionary financing to a member country with no current borrowing requirement, should a financial crisis occur. The repayment period and interest rate for CCL are identical to the SRF arrangement.
CFF, Compensatory Financing Facility, is a credit facility for member countries to cover short-term reductions in export earnings or excesses in cereal import costs. The repayment period is 3¼-5 years. The rate of interest is identical to that of SBA.
PRGF, Poverty Reduction and Growth Facility, is a special financing facility for a number of poor countries with persistent balance-of-payments problems. The rate of interest is 0.5 per cent p.a. The repayment period starts after 5½ years and must be completed after 10 years.
Assistance after natural disasters and civil wars. These loans will normally be converted to SBA, EFF or PRGF arrangements. The repayment period is 3¼-5 years. The rate of interest is identical to that of SBA loans.

Over the years a number of financing facilities have been established, often special-purpose facilities. The number of facilities has become excessive, and the Executive Board has decided to simplify loan structures by abolishing a number of facilities which have not been used for some time. The purpose is to ensure equal treatment of the member countries that borrow from the IMF.

In order to avoid long-term utilisation of the IMF's facilities the repayment schemes have been tightened. If a borrowing country's balance of payments takes a favourable course, the country is expected to repay the borrowed funds sooner.

As regards pricing of the IMF's facilities, the Executive Board also decided to raise the rate of interest for the proportion of a country's total debt to the IMF exceeding 200 per cent of the country's quota. Furthermore, the commitment fees have now been harmonised for all facilities.

In 1999 a new contingency facility, Contingent Credit Lines, CCL, for countries with a sound economic policy that are threatened by circumstances beyond their control, was established. CCL has proved to be too expensive compared to other credit facilities, so that interest rates and commitment fees were reduced.

IMF facilities for low-income countries – the debt initiative, HIPC, and PRGF (poverty reduction and growth facility)
At the joint annual meeting of the World Bank and the IMF in 1999 it was decided to implement an enhanced debt relief initiative, whereby debt relief is linked to the developing countries' own efforts to combat poverty, cf. the 1999 Annual Report, pp. 91-92. The countries receiving assistance under this facility must prepare a programme for economic policy and reforms in which a poverty reduction strategy plays an important role.

Once a country has obtained a debt-relief commitment financial assistance will be subject to surveillance of its compliance with the economic programme and the poverty reduction strategy. Debt relief is effected on condition of satisfactory compliance with the programme for up to three years. However, the country may obtain debt relief sooner by implementing the reforms more quickly than expected.

At the annual meeting in the autumn of 2000, the World Bank and the IMF agreed to speed up the process, so as to enable most poor and heavily indebted countries to obtain debt relief before the end of 2000. It was also decided to keep the HIPC initiative open until the end of 2002. This provides access for countries which have not yet qualified for debt relief due to military conflicts or for other reasons.

Footnotes

[1] See p. 113f for a brief account of the Nationalbank's preparations for the changeover, and p. 74 for further details of the preliminary design of Danish euro coins.

[2] These are Belgium, Finland, France, Netherlands, Ireland, Italy, Luxembourg, Portugal, Spain, Germany and Austria.

[3] The Treaty uses the term the European System of Central Banks (ESCB), which in some contexts comprises the ECB and the national central banks of all 15 EU member states, and in others only the ECB and the national central banks of the euro area member states. The ECB introduced the Eurosystem as the name of the central-bank structure under which the ESCB carries out the tasks related to the third stage of EMU.

[4] The exchange rates between the national currencies and the euro were fixed on 31 December 1998 for the first 11 participating member states, cf. Table 13, p. 173.

[5] At the Helsinki European Council in December 1999 Turkey was also accepted as a candidate country, although accession negotiations have not yet been initiated.

[6] Participation in ERM II with a currency board will constitute a unilateral obligation on the part of the country in question, whereby the ECB has no other obligations than those specified in the existing ERM II agreement. Currency boards are described in further detail in Ulrik Bie and Niels Peter Hahnemann, Currency Boards, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2000.

	Face - Index - Top/Bottom - Previous/Next
	Version 1.0 March 2001 Nationalbanken. Published by Danmarks Nationalbank March 2001, http://www.nationalbanken.dk