EMU - LOOKING
AT THE LONG-TERM
What's NewS Issue 7 July 1996
info exchange
17
Europe is on track for a broad-ranging economie and monetary union
(EMU) with the enthusiastic support of its banking community.
Although banks like Rabobank will face the heavy up-front costs
associated with implementing the single currency, they hope to reap
the even more considerable long-term economie rewards.
EMU will crown a long march towards
European integration that gained
momentum when the Treaty of Rome was
signed in 1957 and whose most recent
milestone was the 1993 creation of a
^^inglc European market in goods, services,
and capital. The decisive phase of this
integration will start in 1998 and end in
2002 (see box).
PRICE STABILITY
In principle, the introduction of the euro
will mark the definitive transformation of
Europe from a collection of closely
associated states into the world's strongest
integrated economy. Plans call for both its
currency and bond markets to be unified.
Its monetary policy will be coordinated by
a single central bank. Based in Frankfurt,
it will seek a unified, credible, and
restrictive policy that puts top priority on
the maintenance of price stability. Thus, if
all goes as planned, the euro may well
emerge as a formidable competitor to the
^^lollar as the currency of international
^^rade. However, several real hurdles
remain on the road ahead. Some
countries, the UK and Denmark in
particular, are still profoundly divided
about the economie, democratie, and
social policy implications of a single
currency. At the same time, the success of
the entire EMU exercise depends on a
coordinated economie policy and
adherence to the so-called 'convergence
criteria'.
HARD WORK
The convergence criteria define the
acceptable level of public debt, inflation,
currency stability, deficits, and capital
market interest rates. In order to meet
these criteria, governments are currently
planning new austerity measures with
•>owerful political overtones. The recent
ipsurge in national protest strikes against
high unemployment and cutbacks in social
security and other benefits, especially in
countries like Germany and France, thus
suggest political developments may yet put
a brake on further economie integration.
The success of EMU, far from being
assured, still requires a lot of hard work.
HIGH DEFICITS
At present, only Luxembourg and Ireland
meet all of the convergence criteria.
Germany, France, Holland, Austria,
Finland, and the UK are all operating with
unacceptably high public deficits. Public
debt is considered excessive in the
Netherlands, Belgium, Austria, Finland
and Denmark. These countries could still
qualify in 1998 if adequate policy
measures are taken now. In Italy, Portugal,
Spain, and Sweden the divergences are so
extreme that these countries have no
realistic chance of participating in EMU in
the foreseeable future.
LOSS OF INCOME
Apart from the profound policy challenges
associated with introduction of the euro, it
will also immediately pose several
EMU TIMETABLE:
1998
establishment of the European Central
Bank (ECB)
decision on EMU membership
1999
the fixing of relative exchange rates
among participating countries
ECB-decided monetary policy to be
denominated in euro
money markets in euro
currency markets in euro
public debt expressed in euro
creation of Target, a unified euro clearing
system
first banking products denominated in
euro, initially for corporate clients
2002
January: public introduction of euro
coins and banknotes begins
July: introduction complete; national
currencies cease to be legal tender
practical and competitive concerns.
Although EMU will theoretically bring
currency stability and thus more
transparency and security to the market, it
will also deprive banks of an estimated 25
to 50 percent of the income now derived
from (inter-European) currency trading
and derivative products. Moreover, as a
unified euro replaces national monies,
banks that operate in areas where tourism
is an important industry will lose retail
currency exchange business.
CUSTOMER REASSURANCE
In addition, banks will confront the
considerable costs of modifying their
existing data and payments processing
facilities. Rabobank executives at every
level will have to acquaint themselves with
the fundamentais of the new currency so
that they can fluently explain its
implications to clients. Business people
will need reassurance that contracts will
remain valid in detail and that their
essential worth will be maintained. Finally,
the creation of a single financial market
will leave Rabobank as a relatively smaller
player in a much bigger whole. This
should be viewed both as a challenge as
well as an opportunity.
COST CONTROL
Competition will intensify. Foreign banks
will be more inclined to compete on the
Dutch domestic market - provided that
they can negotiate favorable access to the
Dutch payments and settlements system -
and Dutch banks to move abroad. Shifts
in the balance of European banking power
can be expected as banks seek to profit on
divergences in interest rate margins
between member countries. With time and
competition, overall interest margins and
commission income will decline. The focus
will be on cost control and on creating
innovative products and services. A new
wave of banking mergers can be expected
as well.
ASSESSING BEST METHODS
Because of the complex and far-reaching
nature of EMU, several dozen Rabobank
professionals are devoted to studying
questions raised by the transition.
Associated with the Economie Research
department, this EMU working team is
considering the competitive, legal, and
practical implications of EMU on
Rabobank, it is assessing the best methods
for handling systems' conversion, and it is
deciding what products should be offered
to which clients according to what sort of
timetable. With EMU, as with all else,
God lies in the details.