International Monetary Cooperation
On 1 May 2004 10 new countries will join the European Union. Several of them wish to participate in EMU, and envisage early participation in ERM II.
The proposal for Swedish euro participation was rejected by a referendum in September 2003.
2003 saw negotiations about the future course of the EU under the auspices of first the Convention and later the Intergovernmental Conference. After the EU Summit in December 2003 the European Council declared that so far it had been impossible to reach an agreement on a constitutional treaty for the EU.
Insufficient consolidation of government finances in the years 1999-2000 together with the decline in growth in recent years have resulted in budget imbalances in several euro area member states. Especially France and Germany do not comply with the provisions of the Stability and Growth Pact.
The IMF granted new large loans to Argentina and Brazil in 2003.
Enlargement of the EU
On 1 May 2004 10 new countries[1] will join the EU. The enlargement negotiations were completed at the European Council in Copenhagen in December 2002, and in April 2003 the Accession Treaty was signed in Athens. All acceding countries, except Cyprus, have held a referendum on EU membership, which was approved in all cases. At the European Council in Copenhagen, Bulgaria and Romania were given the prospect of becoming members of the EU in 2007. A decision will be made in 2004 as to whether accession negotiations will be initiated with Turkey.
The acceding countries will join the Economic and Monetary Union (EMU) as "member states with a derogation". They will initially maintain their own currencies and monetary regimes. Several of the acceding countries have stated that they wish to participate in EMU and envisage early participation in the EU's exchange-rate mechanism, ERM II, cf. Box 9. The acceding countries may apply for membership of ERM II at any time after joining the EU. The applicant country, the euro area member states, the ECB and the non-euro area member states participating in ERM II will jointly fix the central rate.
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Box 9
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| Note: At the beginning of 2004 the Hungarian government announced that an analysis of the Hungarian strategy for EMU participation would be concluded in March 2004. Special Drawing Rights, SDR, is a composite currency calculated from a basket of the following currencies: euro, Japanese yen, pound sterling and dollar. Source: European Commission. |
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The introduction of the euro will require compliance with the convergence criteria[2], including participation by the member state in ERM II for at least 2 years without severe tensions. In ERM II a standard fluctuation band of +/- 15 per cent around the central rate is fixed for each participating currency vis-à-vis the euro. Presently Denmark is the sole participant in ERM II, subject to a separate agreement of a narrower band of +/- 2.25 per cent.[3]
The acceding countries are very different in terms of economic structure, nominal and real convergence and monetary system, so their strategies and progress towards membership of ERM II and the euro will tend to vary. ERM II is compatible with a number of existing exchange-rate regimes in the acceding countries, but some countries will need to adjust their monetary-policy regime with a view to participation in ERM II.
Upon joining the EU the central banks of the acceding countries become part of the European System of Central Banks consisting of the ECB and the national central banks of the current 15 EU member states, cf. Box 10. Since signing the Accession Treaty, the acceding countries have enjoyed observer status in the General Council and in the committees and subcommittees in which both the national central banks and the ECB participate.
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Box 10
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The European Central Bank, ECB, is the central bank of the Eurosystem1, and is situated in Frankfurt am Main, Germany. The national central banks are an integrated element of the ECB's work. The national central banks participate in the ECB's decision-making bodies and in the decision-making process. Furthermore, decisions are predominantly implemented via the national central banks. The ECB is owned by the national central banks. The 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 monetary-policy decisions. On 1 November 2003 Jean-Claude Trichet from France replaced Wim Duisenberg from the Netherlands as President. The Governing Council is the ECB's supreme decision-making body and consists of the central-bank governors of the 12 euro area member states and the ECB's Executive Board. The Governing Council normally meets every two weeks. Monetary-policy decisions are taken by the Governing Council, including decisions to adjust the Eurosystem's interest rates. Such decisions are normally taken at the first meeting of the month. 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. The practical execution of the decisions of the Governing Council is predominantly the responsibility of the national central banks. The weekly allotment of liquidity is a case in point. The General Council is the ECB's third decision-making body. It consists of the President and the Vice President of the Executive Board, as well as the Governors of the central banks of all EU member states, including Danmarks Nationalbank. The General Council normally meets every quarter. The General Council discusses such issues as the functioning of ERM II and monetary developments in the non-participating EU member states. The ECB has 13 committees and related subcommittees in which both 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 committees represent expertise within all relevant central-bank areas and contribute to the decision-making process. |
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| 1 The Eurosystem consists of the ECB and the national central banks of the 12 euro area member states. The European System of Central Banks, ESCB, consists of the ECB and the national central banks of all 15 EU member states. As of 1 May 2004 the ESCB will comprise the ECB and the national central banks of the 25 EU member states. | |
As a consequence of the EU enlargement, the European Council adopted an amendment in March 2003 of the voting modalities of the Governing Council of the ECB[4], based on a recommendation by the ECB. The amendment is expected to be ratified by the present EU member states in 2004, but will only come into force when the number of euro area member states exceeds 15.
EU member states outside the euro area
Of the current 15 EU member states Sweden, the UK and Denmark are outside the euro area.
Denmark has participated in ERM II from the start of Stage Three of Economic and Monetary Union on 1 January 1999, and is currently the sole participant.
On 14 September 2003 Sweden held a referendum on euro participation. The proposal was rejected by 55.9 per cent of the electorate against and 42.0 per cent in favour. After the referendum the government announced that the fundamental elements of economic policy would remain unchanged. Sveriges Riksbank applies an inflation target in its conduct of monetary policy, and the Swedish krona continues to float vis-à-vis other currencies. The "yes-parties" stated before the referendum that if euro participation was rejected a new referendum would not be on the agenda until the next decade.
The UK government has laid down five economic tests to be met before EMU participation could be a possibility. In June 2003 HM Treasury published an extensive analysis concluding that significant progress has been made although only one of the five criteria has been met completely. It concerns the favourable impact on the financial sector of euro participation. The assessment of the five economic tests is described in more detail in Box 11. The government intends to implement a number of reforms in order to meet all the tests. A progress report will be prepared in connection with the presentation of the Budget in the spring of 2004. On this basis it will be decided if the five tests should be reassessed.
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Box 11
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In June 2003, HM Treasury published a report on the five economic tests to be passed before any decision on euro participation can be made. The assessment of the tests is as follows:
The assessment of HM Treasury implies that the first test, convergence with the euro area, will take centre stage in future assessments. If this test is passed, two of the other tests concerning investment and growth and stability and employment will also be met. |
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The UK government has announced that potential euro participation should be approved by a referendum. Opinion polls throughout 2003 showed a large majority against UK participation.
Negotiations on a constitutional treaty for the EU
2003 saw negotiations regarding the future course of the EU under the auspices of first the European Convention and recently the Intergovernmental Conference in which the EU member states and the 10 acceding countries participated.
The Convention
Following the adoption of the Treaty of Nice in December 2000, further development of the EU's existing Treaties was called for, and it was agreed that a new Intergovernmental Conference should be convened no later than 2004. The European Council in Laeken in December 2001 consequently decided to appoint a Convention in order to ensure that preparation for the Intergovernmental Conference was as broadly based and transparent as possible. The mandate was to consider the key issues arising for the Union's future development and try to identify various possible solutions. Early on in the process the Chairman of the Convention, former President of France Valéry Giscard d'Estaing, declared that the objective was to prepare a draft Treaty establishing a Constitution for Europe.
The Convention, which started working in February 2002, consisted of representatives appointed by the governments of the EU member states, the national parliaments, the European Parliament and the European Commission. The accession countries were represented on the same terms as the EU member states, but with limited voting rights. The debates of the Convention and all official documents were available to the public. This open process is new compared to previous Intergovernmental Conferences that were traditionally prepared by closed groups of officials.
The Convention completed its work in mid-2003 when the Chairman presented a draft Treaty establishing a Constitution for Europe. The most controversial issue in the draft Treaty concerns the EU's institutions. It is proposed that the definition of qualified majority be amended and with it the distribution of power in the Council. It is also proposed that not all member states should be entitled to have a commissioner with voting rights. Furthermore, according to the draft, decisions in the Council should in future predominantly be adopted by qualified majority and following the co-decision procedure with the European Parliament. The EMU rules are maintained by and large unchanged in the draft Treaty of the Convention, with a few amendments, however, e.g. allocating more influence to the European Parliament in a few areas and enabling the euro area member states to coordinate their economic policies more closely.
At its meeting in Thessaloniki in June 2003 the European Council announced that the Convention's draft Treaty formed a good basis for starting in the Intergovernmental Conference.
The Intergovernmental Conference
The Intergovernmental Conference opened at the EU Summit on 4 October 2003. Heads of State or Government from the acceding countries took part on equal terms with the present EU member states, whereas Bulgaria, Romania and Turkey participated as observers.
It quickly became clear that the Convention's draft Treaty could not be approved by the Intergovernmental Conference without further deliberation. Especially the proposals to amend the definition of qualified majority and the composition of the European Commission gave rise to intensive negotiations. Furthermore, the proposal to include a reference to Christian values also took up much time. After a short meeting on 12-13 December the European Council announced that at this stage it was impossible to reach an agreement on a draft Treaty. It is now up to the Irish Presidency to bring the negotiations forward in 2004.
The breakdown of negotiations in December 2003 could make it extremely difficult to follow the original schedule according to which the Constitutional Treaty should be signed shortly after the acceding countries have joined the European Union on 1 May 2004 and before the elections for the European Parliament in June 2004. The Constitutional Treaty comes into force when it has been ratified by the 25 member states.
The current EU Treaties will continue to apply until a new Treaty is in place.
The stability and growth pact
According to the European Commission's autumn forecast of October 2003 most member states failed to comply with the objectives for the government budget in 2003 as stated in their stability and convergence programmes[5] at the start of the year[6]. The budgetary development shows major differences between the individual member states, cf. Chart 28. According to the Commission's autumn forecast, in 2003 less than half of the member states met the requirements in the Stability and Growth Pact of a budgetary position close to balance or in surplus.[7] This is primarily a result of insufficient consolidation of government finances during the years of high growth, 1999-2000, and of low growth in recent years.
France and Germany both had government deficits exceeding 3 per cent of GDP in 2002 and 2003 and thus did not comply with the provisions of the Treaty and the Stability and Growth Pact as described in Box 12. In 2004 both countries are expected to have government deficits of around 4 per cent of GDP. In the autumn of 2003, the European Commission therefore recommended that the Council of Ministers of Economic Affairs and Finance, Ecofin, impose on France and Germany to implement fiscal tightening measures in 2004 and 2005 to reduce the budget deficit to below 3 per cent of GDP by 2005 at the latest. Although the recommendation of the European Commission took a very lenient approach to the provisions of the Stability and Growth Pact in view of the low economic growth, it failed to muster the necessary majority at the Ecofin Council's meeting on 25 November 2003. Instead, the Ecofin Council adopted a set of Council conclusions that contained slightly more lenient consolidation requirements for Germany and France in 2004 but maintained the requirement of correcting the excessive deficits by 2005. Moreover, the Ecofin Council suspended the excessive deficit procedure for the two member states but emphasised that the procedure might be continued on the basis of recommendations from the European Commission if the two member states did not live up to the obligations in the Council conclusions.
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Box 12
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The EU Treaty's provisions on EMU are the fiscal basis for EMU. Article 104 of the Treaty constitutes the key prevention of irresponsible fiscal policy. It lays down the prohibition against "excessive government deficits" and the procedure to be implemented if a country violates the rule. The Treaty (Protocol 20) defines "excessive government deficits" as a deficit exceeding 3 per cent of GDP or a government debt ratio exceeding 60 per cent of GDP. Although all EU member states are subject to the prohibition (except the UK with a specific derogation for as long as it does not participate in the euro area), sanctions can only be imposed on the euro area member states. The Stability and Growth Pact, which has been in force since the introduction of the euro on 1 January 1999, formally consists of a Council resolution and two Council regulations adopted in June 1997.1 The objective of the Stability and Growth Pact is to encourage sustained fiscal discipline, and it obliges all EU member states to seek to ensure a budgetary position close to balance or in surplus in the medium term. The member states must prepare programmes stating how they plan to achieve this objective. The programmes are discussed by the Ecofin Council, which subsequently publishes opinions with an assessment of whether the member states comply with the Stability and Growth Pact. In practice, the European Commission has in recent years interpreted the obligation of the Stability and Growth Pact to mean a cyclically-adjusted budget balance of at least zero, subject to a margin of uncertainty of 0.5 per cent of GDP.2 During a normal downturn the budget should give sufficient scope for the member state to avoid conflict with the limit for government budget deficits of 3 per cent of GDP set out in the Treaty. By way of explanation and clarification of Article 104 of the Treaty, the Stability and Growth Pact furthermore lays down a relatively tight schedule for implementing the procedure from establishing that a member state has an excessive deficit to imposing sanctions. The procedure may take maximum 10 months unless the member state concerned undertakes measures to correct the deficit. |
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| 1 European Council Resolution, OJ C 236, 2 August 1997. The two regulations: OJ L 209, 2 August 1997. 2 For member states with cyclically sensitive government budgets (Denmark, Finland, Netherlands, Luxembourg and Sweden) the European Commission is of the opinion that as a minimum a small surplus on the cyclically-adjusted budget balance of 1 per cent of GDP is required with an allowed margin of uncertainty of 0.5 per cent of GDP. |
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The decision by the Ecofin Council to suspend the tight schedule of the Stability and Growth Pact led to several small euro area member states expressing concern about fiscal stability in the future. In January 2004 the European Commission decided to bring the decision by the Ecofin Council before the European Court of Justice.
With a deficit of 4.2 per cent of GDP Portugal in 2001 exceeded the limit stipulated in the Treaty, which led to implementation of the excessive deficit procedure. The European Commission estimates Portugal's budget deficit to be below 3 per cent of GDP in 2003, as in 2002. However, this is primarily the result of non-recurrent measures. Moreover, it is estimated that in 2004 Portugal will again exceed the limit of 3 per cent of GDP. Against this background the excessive deficit procedure for Portugal has not been terminated.
In 2003 and 2004 the UK, Italy and the Netherlands are estimated to have government deficits close to 3 per cent of GDP. In order to avoid exceeding the limit of 3 per cent of GDP the Netherlands achieved considerable consolidation of public finances in 2003. The consolidation process is expected to be continued in 2004.
The International Monetary Fund, IMF
In 2003 the IMF's most considerable lending was to Argentina and Brazil. The IMF's loan commitments to these two countries and to Turkey totalled SDR 49.2 billion (kr. 434 billion) in 2003, equivalent to approximately 90 per cent of the IMF's total loan commitments under its General Resources.
The situation in Brazil, Argentina and Turkey
In 2003 Brazil experienced weaker economic development than expected. On the other hand, favourable conditions in the international financial markets made it possible to extend the maturity of the country's government debt and reduce the interest costs. Despite the weak economic development Brazil has complied with the requirements in the latest economic-policy stability programme agreed with the IMF. In December, Brazil's loan agreement with the IMF was extended by 15 months. The authorities do not intend to draw on the new credit facility. Should this become necessary – contrary to expectations – and if Brazil draws the maximum amount, the IMF's total loan commitment of approximately SDR 27.4 billion (kr. 242 billion) will be used, corresponding to 902 per cent of Brazil's capital subscription to the IMF, i.e. its IMF quota. Outstanding loans to Brazil already account for approximately one third of the IMF's total lending.
In 2003 Argentina experienced positive GDP growth for the first time since 1998 following an accumulated decline in real GDP of 18 per cent in the period 1998-2002. In September 2003 the government entered into an agreement with the IMF on a new 3-year programme of nearly SDR 9 billion (kr. 79 billion). One of the key conditions of the agreement is for Argentina to negotiate an agreement with private-sector creditors, which so far has been unsuccessful. Prior to concluding the agreement Argentina had defaulted on a payment of SDR 2.1 billion (kr. 19 billion) to the IMF. This was the largest amount of arrears in the history of the IMF, and Argentina was also the first major country to default on its commitments to the IMF.
During the discussions on the new credit programme in the Executive Board of the IMF the Nordic-Baltic director abstained from voting in favour of the programme together with representatives from a number of other countries, as the programme fails to meet a number of key conditions normally applied to countries in economic crisis. For example, the IMF's lending to Argentina will not be reduced during the period of the programme, and the programme only contains general statements of intent concerning the necessary reforms of e.g. the public finances and the banking sector. Furthermore, the Argentine authorities have not concluded any agreement on the restructuring of central-government debt to private creditors. This debt has not been serviced since December 2001. Against this background the programme is not found to sufficiently contribute to restoring confidence in Argentina among international creditors and investors. Moreover, Argentina's programme implies a risk that other IMF borrowers may be induced to expect similar lenient terms in the future. In connection with the first review of the programme in 2004 the Nordic-Baltic assessment was that progress was still insufficient.
Despite weak economic prospects in Turkey at the beginning of the year there are signs of an upturn. Turkey satisfactorily fulfils the economic-policy stability programme agreed with the IMF. The IMF's loan commitment to Turkey amounts to SDR 12.8 billion (kr. 113 billion).
Reconstruction of Iraq
Iraq has not yet been granted a loan. However, at a donors' conference in Madrid in October 2003 the IMF's Managing Director, Horst Köhler, indicated that the IMF could provide loans totalling from 2.50 to 4.25 billion dollars to Iraq over a period of three years. The assistance would be subject to a number of preconditions, e.g. the clearance of Iraq's arrears to the IMF and an internationally recognised government in place. Since the conclusion of the war in Iraq, the IMF has provided technical assistance and helped to establish basic banking functions and to set up a budget system for the public administration sector, among other macroeconomic activities.
Rules for debt restructuring
At the meeting of the International Monetary and Financial Committee in April 2003 it was concluded that despite several years' efforts sufficient backing was not found to establish internationally agreed mechanisms requiring private creditors to write off overdue debt in crisis countries with unsustainable debt[8]. Instead guidelines are under preparation for a code of good conduct in connection with debt restructuring. Moreover, in the spring of 2003 new procedures were adopted for exemptions from the IMF's lending rules when very large loans are required, cf. Box 13.
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Box 13
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In an increasing number of cases over the last few years the IMF has had to grant loans exceeding the normal access limits to stabilise the economies of crisis-stricken countries. Under the normal access limits each individual country may only borrow up to 100 per cent of its quota (the country's capital subscription to the IMF) within a single year. On an accumulated basis over a number of years the country may borrow up to 300 per cent of its quota. The rules of the IMF envisage exceptional circumstances when it may be necessary to depart from the access limits, but a more stringent practice was required. There were fears that the IMF's very large loans would lead to imprudent behaviour in the international financial markets in that creditors would lower their credit rating standards, expecting the IMF to step in in the event of a crisis. Moreover, the authorities might be tempted to postpone necessary economic-policy measures which could prevent excessive accumulation of debt. In the spring of 2003 the IMF approved the following principles for waiving the IMF's access limits:
At the same time it was decided that the IMF's Executive Board should be informed as early as possible of negotiations with a country where it may be necessary to exceed the access limits. |
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Transparency in the IMF's surveillance
In 2003 the IMF's Executive Board adopted a series of measures regarding increased transparency that e.g. put greater pressure on the member countries to allow publication of IMF reports on their economic development in connection with the IMF's surveillance and lending.
The decision by the Executive Board implies that as from 1 July 2004 it is presumed in advance that a country's authorities approve publication of the IMF's reports. If a programme concerns a loan exceeding the normal lending limits, the IMF's management will recommend that the Executive Board approve the programme only if the authorities have indicated in advance that the staff reports will be published. The authorities will still be permitted to delete market-sensitive information although in the future the Executive Board is expected to discuss whether the deleted information is sensitive and thus might harm the assessment of the country's economy.
In 2003 Denmark put forward a request to the IMF to include it in the Financial Sector Assessment Program, FSAP. FSAP is the core of the IMF's financial surveillance and contains analyses of financial stability as well as assessments of the compliance with internationally recognised standards for the financial sector. So far FSAP has been implemented in approximately 60 of the 184 member countries. The IMF applies 12 internationally recognised standards, but not all are assessed for the individual countries. In Denmark a review is expected to comprise the standards concerning banking, securities and insurance supervision, payment and securities settlement systems, transparency in monetary and financial policies, anti-money laundering and combating the financing of terrorism.
The FSAP review in Denmark is planned to take place in late 2005, although the preparations will start in 2004. Danmarks Nationalbank will act as coordinator between the IMF and the relevant Danish institutions.
IMF initiatives for developing countries
The IMF has two facilities for low-income countries financed separately from bilateral donor contributions and from IMF's own reserves. One facility is for low-income countries and can be used to promote growth and combat poverty. The second facility, HIPC, is aimed at debt relief for highly indebted poor countries, cf. Box 14. In 2003 yet another country, the Democratic Republic of Congo, was approved for HIPC debt relief, bringing the number of approved countries up to 27. Nine of these countries have finished the implementation of their HIPC programmes and have obtained final debt relief.
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Box 14
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Denmark contributes bilaterally to the IMF's facilities for low-income countries. The contributions consist of loans to finance lending under the special Poverty Reduction and Growth Facility (PRGF) and of support for interest relief on PRGF loans and financing of the IMF's debt relief to HIPC (Heavily Indebted Poor Countries). According to an agreement with the IMF of 3 May 2000 Danmarks Nationalbank has extended a loan of SDR 100 million (nearly kr. 900 million) to finance lending under the PRGF. The IMF's accumulated drawing on the loan in the period 2001-03 is shown in the Table below. On 1 December 1999 the Parliamentary Finance Committee endorsed the government guarantee to Danmarks Nationalbank against any losses on the loan (cf. legal document 96 1/12-99). According to the loan agreement with the IMF, all drawings must be executed before the end of 2003. Also, repayment of each drawing must be initiated after 5½ years and be completed after 10 years. The loan will be fully repaid in 2013 when the government guarantee to Danmarks Nationalbank expires. |
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In addition, Denmark supports interest and debt relief. The interest relief enables the IMF to reduce the interest rate on lending via the PRGF to 0.5 per cent per year. Debt relief is given to countries according to the HIPC initiative. Debt relief here only includes debt relief concerning IMF loans to the countries concerned; in other words, the IMF supports debt relief on the IMF's own loans only. The Danish contribution to the PRGF-HIPC fund is paid via the Ministry of Foreign Affairs' special assistance framework and endorsed by the Parliamentary Finance Committee according to legal document 144 of 29 March 2000. At the close of 2002 Denmark had fully paid its commitment for the PRGF-HIPC fund in the period 2000-04. |
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[1] Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.
[2] The convergence criteria relate to the government deficit, government debt, inflation, and long-term interest rates. A further criterion is participation in ERM II.
[3] According to special agreement with the ECB and the euro area member states, ERM II member states may have a narrower fluctuation band. On 18 December 2003 the Governing Council of the ECB announced that such agreements are exceptional as the standard fluctuation band is seen as appropriate for member states at the beginning of the convergence process with the euro area. Agreements on narrow bands can only be used at an advanced stage of the convergence process.
[4] Voting modalities are described in further detail in Danmarks Nationalbank, Report and Accounts,2002 pp.75-77.
[5] The EU member states each year prepare national programmes describing how they intend to comply with the Stability and Growth Pact. For the euro area member states these programmes are called stability programmes and for the other EU member states convergence programmes.
[6] Parliamentary elections in Austria and the Netherlands meant that the stability programmes were only presented in March and June, respectively, and discussed at the meetings of the Ecofin Council in May and July 2003, respectively.
[7] Reference is made to the annual article on the development in the interpretation of the provisions of the Stability and Growth Pact and the member states' latest programmes in Danmarks Nationalbank, Monetary Review, 2nd Quarter. The latest article is Niels Bartholdy and Lars Falkenberg, The Stability and Growth Pact – Status 2003 (in Danish), Danmarks Nationalbank, Monetary Review, 2nd Quarter 2003.
[8] See Ole Hollensen, New mechanisms for Restructuring Public Debt in Crisis Countries, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2003.