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.

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blad 'What's news' (EN) | 1996 | | pagina 17