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98 EN Official Journal of the European Communities C 157/65

Opinion of the Economic and Social Committee on the ‘Commission staff working paper
entitled “External Aspects of Economic and Monetary Union”’

(98/C 157/16)

On 13 May 1997 the Commission decided to consult the Economic and Social Committee,
under Article 198 of the Treaty establishing the European Community, on the ‘Commission
staff working paper entitled “External Aspects of Economic and Monetary Union”’.
The Section for Economic, Financial and Monetary Questions, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 10 March 1998. The
rapporteur was Mr Robert Pelletier.
At its 353rd plenary session of 25 and 26 March 1998 (meeting of 26 March) the Economic
and Social Committee adopted the following opinion by 63 votes to 19 with 19 abstentions.

1. Introduction omits to mention, or refers to only in passing as

participants in an increasingly lively debate in inter-
national bodies.
1.1. The Commission working paper published
in April 1997, which is the result of a long process of
analysis and consultation, sets out the Commission’s
first thoughts on the future role and position of the euro 2. Preamble
in the international monetary system.

2.1. The Committee has already commented on the

1.2. The Commission is to be congratulated on its economic and monetary problems associated with the
synthesis of highly complex problems concerning the single currency, for example in its October 1995 Opinion
relationship between the economic and monetary union on the Green Paper on the practical arrangements for
and the rest of the world. the introduction of the single currency (4). At the time
the Committee pointed out that there was a specific duty
— both for the ESC and the Community authorities — to
1.3. The Commission analyses the international look at the situation realistically. This draft opinion is
consequences of the transition to the euro. It looks in based on the same principle, and its purpose is essentially
succession at the economic weight of the euro area in to bring the Economic and Social Committee into the
the world economy, transitional issues, economic policy debate, without calling into question its support for the
and the exchange rate of the euro, and finally Europe’s introduction of the single currency. At this stage the
place as an international partner. intention is to raise questions and pinpoint problems
rather than to propose solutions.
1.4. On a number of points the Commission does
not put forward proposals, but outlines the problems
without expressing a view. Thus it has opened a debate 3. General Comments
which will be fundamental to monetary equilibrium in
the world, as the euro is destined to play a decisive
international role alongside the dollar. 3.1. Section A of the Commission document, which
sets out the main economic indicators for assessing
1.5. The efforts made by the Commission to promote the weight of the euro area in the world economy,
particularly relative to that of the United States and
the euro, should probably be backed up by more detailed
Japan, clearly shows that this new area will, if it extends
technical analysis in order to respond to the problems
to all the Member States, have an economic and
identified by the United Nations Economic Com-
mission (1), the International Monetary Fund (2), the commercial weight comparable to that of the United
OECD and various well known EU economic research States. Moreover, economic and monetary union will
and forecasting institutes (3); these the Commission very quickly create one of the largest government bond
markets in the world.

(1) Economic Survey of Europe in 1996-1997 — United Nations 3.2. However, at this stage of monetary union it is
— New York and Geneva — 1997. necessary to place in its proper perspective the compari-
(2) World Economic Outlook — May 1997 — IMF (a survey son between 1) the European Union, with its marked
by the staff of the IMF).
(3) In order to avoid polemics, observations made by national
differences from one Member State to another in
institutions have not been mentioned in this document. It
should be pointed out however that as a rule these
comments coincide to a great extent with those of the
international institutions. (4) OJ C 18, 22.1.1996.
C 157/66 EN Official Journal of the European Communities 25.5.98

economic structure (GDP varies on a scale of 1 to 4) and 3.7. Euro financial market
in the fundamental rules governing the operation of
the Member States’ economies (state intervention, tax
system etc.) and social relationships, and 2) the United 3.7.1. The Commission rightly stresses the new
States or Japan, which benefit from a higher degree of dimensions of the financial market, for example with
homogeneity throughout their territory despite signifi- the creation of one of the largest government bond
cant regional differences. markets in the world, even if national bonds retain their
individual characteristics.

3.3. Assessments of the place of the euro area in the 3.7.2. The Economic and Social Committee would
world economy relative to that of the United States or have liked the Commission to be more explicit on a
Japan provide a frame of reference for public opinion. number of points which the Committee considers
They are however, technically speaking, built on flimsy essential. Greater precision is needed with regard to:
foundations, as they simplify complex international
relationships and the relative weight of competing — the obstacles to real integration of the market arising
economies. from differences in tax systems and the danger of a
massive outflow of savings to the euro area countries
with the most favourable tax systems;
3.4. Although the Commission’s approach to defining — the danger that application of reserve requirements
the euro area is understandable (the Economic and by the ‘ins’ will place at an advantage ‘outs’, which
Social Committee fully subscribes to its desire to see the might subsequently join economic and monetary
current fifteen Member States participate in economic union, having secured a dominant market share for
and monetary union), assuming that the euro area themselves;
comprises the entire European Union ‘so as to avoid any
presumptions concerning the size of initial participation
does not make forecasting any easier’ (1). An analysis in — the effects of a unified monetary and financial market
the form of a variable scenario would have been more on the relative situations of existing financial centres.
appropriate. The reduction, which is considered inevitable, of the
number of stock markets and centres for financial
transactions places the future of some national
financial centres in doubt (3). The EU currently has
3.5. And yet we already know that four EU Member 32 stock markets, compared with eight in the USA.
States will not be joining monetary union in 1999, either
because they do not wish to join at present or because
they cannot fulfil the economic and monetary criteria 3.7.3. Although the Commission document submit-
laid down in the Maastricht Treaty. This uncertainty ted for the Committee’s opinion looks at the external
as to the number of ‘ins’ limits the impact of the aspects of the euro, it would be worthwhile devoting a
Commission’s working paper. Even if we accept that specific communication to the impact of monetary union
the Member States outside the euro area will be highly on the financial markets.
dependent on the single currency area by virtue of the
rules to which they will be subject and the area’s
influence, it is not true that all fifteen Member States 3.8. Internationalization of the euro
will be conducting a single policy in these areas.

3.8.1. The Commission believes that the international

use of the euro, for example by non-EU firms trading
3.6. It is difficult to be sure even if the possibility with the euro area, will increase, as will its use in
exists, that tensions between the European currencies transactions outside the euro area.
will disappear. However, if there is complete conver-
gence, as in the case of Denmark, or if convergence
efforts are made in a credible manner, as in the case of 3.8.2. On the other hand, the Commission considers
Greece, or if there is the political will to join the euro that, for reasons of stability-orientated fiscal and mone-
bloc at an early opportunity, for which there are ever tary policy, use of the euro as a reserve currency should
clearer indications, for example in the United Kingdom, be encouraged by economic operators and central banks.
there will be little room for tensions and arbitrage. The
existence of ‘in’ and ‘out’ currencies will leave the
foreign exchange markets almost daily opportunities for 3.8.3. The idea, not specifically stated but nonetheless
arbitrage (2). possible, is that the euro could in effect at least partly

(3) See interview with David Clementi, deputy governor of

(1) See point 3 of Introduction to Commission document. the Bank of England, in which he argues that London,
(2) See also the Bank of England publication entitled ‘Practical although outside the euro area, will become the leading
issues arising from the introduction of the euro’. euro financial centre (Financial Times, 20 January 1998).
25.5.98 EN Official Journal of the European Communities C 157/67

replace the dollar as an internationally held investment The Commission and the European Mone-
asset. tary Institute ought to carry out a detailed study of the
dangers inherent in weakened control of the monetary
aggregates, which would mean loss of control of the
3.8.4. This view, which figures prominently in all the euro money supply (2).
literature aimed at promoting the euro, deserves further
analysis: The role of the dollar as a reserve currency 4. Transitional Issues — Section B
held by central banks has been less the result of a choice
than of an obligation imposed partly by the United
States’ trade deficit and inadequate domestic savings,
and partly by the inability of the central banks to sell 4.1. The Commission says that, while the longer-term
their dollars on the foreign exchange markets without outlook for an international monetary scene with the
causing the exchange rate to collapse. The example of euro is favourable, there are however a number of
Japan, with its ‘glut’ of US Treasury bonds — a quid transitional issues associated with the introduction of
pro quo for its trade surplus with the United States — the single currency. They refer to a potential risk either
is a perfect illustration of this phenomenon. of exchange-rate instability between the euro and other
major currencies, or of a deviation of the value of the
euro from what is considered appropriate. This is clearly The idea that the status of reserve currency a real danger in the current international monetary
brings only advantages also needs to be qualified. If the system, unconnected with the transition to the single
euro comes to be regarded as desirable for its intrinsic currency in Europe. However, the external value of the
qualities, it will be highly valued by the foreign exchange euro will be much less important for the European
markets in relation to its major competitors, the dollar economies than was the external value of their respective
and the yen. national currencies. This is a major step forward. The handicap which a euro overvalued on

the foreign exchanges could represent for all the euro 4.2. The document states that instability could arise
area’s firms is rarely mentioned. The Economic and before 1 January 1999 or during the transitional period
Social Committee would like to see this question for four main reasons:
made the subject of a detailed study (1). Moreover,
undervaluation would be quite as damaging as overvalu-
ation. It is perhaps the international monetary system — a perception by economic operators that the Euro-
which needs a radical overhaul. The dollar and the yen pean Central Bank would in future have to adopt a
have experienced extreme exchange-rate fluctuations tight monetary-policy stance;
and it is possible that the same thing might happen to
the euro. One positive aspect of monetary union however — looser fiscal policy on the part of the Member States;
is that is that the external dependence of the Member
States will diminish greatly as the bulk of trade will be — a dollar overhang at the central banks;
transacted in euros between the participating countries.
The external value of the euro will therefore be much
less significant than hitherto, for example, the external — the unpredictability of market transactions resulting
value of the French franc for France or the Belgian franc from the introduction of the euro into investors’
for Belgium. portfolios. In point 10 the Commission looks, unfortu-

4.3. Although the Commission offers reassurances
nately too briefly, at the fundamental problem of
on the first three points, it admits to uncertainty as to
monetary policy, namely control of the monetary aggre-
the behaviour of investors during the transitional period.
gates, trends in which will be influenced by the decisions
of foreign operators.
4.3.1. In the light of the Commission’s analysis, a Logically, the development of the inter- scenario could be imagined in which the euro exchange
national role of the euro should also lead to the rate is initially fixed at a level quite different from that
accumulation outside the euro area — as has happened suggested by the fundamentals of the European economy
with eurodollars — of euro deposits serving as a basis in all its diversity.
for the granting of loans, the amount of which will be
beyond the control of the European Central Bank or
any other supervisory authority.
(2) Mr Duisenberg acknowledged the problem in a meeting
with the Section for Economic, Financial and Monetary
Questions of the Economic and Social Committee but said
(1) The European Parliament warns against the deflationary that it was up to the monetary authorities of the countries
effects of over-valuation of the euro (see Resolution of outside the euro area to control any movements of euro
13 January 1998). deposits.
C 157/68 EN Official Journal of the European Communities 25.5.98

4.3.2. The European Central Bank could in effect be at $350 bn (1). Foreign exchange market transaction
obliged to impose an excessively tight monetary policy volumes will diminish as a result of the disappearance
and to raise interest rates in response to financial market of national currencies in the euro area, but the foreign
scepticism as to the objective of price stability arising as exchanges are, and will continue to be, dominated by
a result of the policies pursued by certain countries. dollar transactions.
During the transitional period therefore all actions must
be avoided which might damage the credibility of the
European Central Bank.
4.8. Despite the convergence of the fundamental
indicators, the euro area could be temporarily exposed
to turbulence on the foreign exchanges. The tensions
experienced by the European Monetary System as a
4.4. The dollar reserves held by the European central result of fluctuations in the value of the dollar will be
banks, already overweight, could prove excessive if the transferred to the euro. Whilst it is likely that the
fixed parities of currencies participating in the euro and European Central Bank will be in stronger position to
a sharp fall in trade and financial transactions in resist such pressures than under the present system of
currencies other than the euro, with two thirds of trade consultation and mutual support between central banks,
being intra-Community, were to reduce the need for the dislocating effects of the floating exchange rate
foreign currency reserves. regime will not however really be totally eliminated (2).

4.9. It would be unwise to exclude the possibility of

4.4.1. In view of the favourable risk/reward ratio for a divergence between the value of the euro and that of
the euro, reinforced by greater market liquidity, investors the currencies of the Member States remaining outside
will increase their euro holdings. the euro area. It is unhelpful to conjure up the notion of
competitive devaluation to illustrate this risk.

4.5. The role of the European Central Bank will thus 4.10. Although over the last few years the central rates
be decisive and the risks inherent in an overvalued euro have shown growing convergence and great stability, one
or a desire on the part of the European Central Bank to scenario which has to be considered is strong market
impose a strong euro by means of high interest rates pressure, which the European Central Bank and the
cannot be underestimated. associated national central banks would be powerless
to control by intervention. The European Monetary
Institute acknowledges the existence of this risk, but
believes that it would be able to deal with it via interest
rates and open market intervention.
4.6. Other uncertainties which could give rise to
speculation concern the future external value of the
single currency against other currencies. This value
will be a function of the economic capacity of the 4.11. The resulting threat to the cohesion of the
participating countries and investors’ confidence in the economic and monetary union must not however, be
European Central Bank. Any monetary grouping carries underestimated. It could not withstand a wide disparity
with it uncertainties which on the financial markets will in competitive conditions resulting from disordered
be translated into higher risk premiums. exchange rate adjustments. The Economic and Social
Committee feels that the matter needs further study.

4.12. The impact of a euro area on the prospects for

4.7. Turbulence caused by massive speculation is a enlargement of the European Union to the Central and
real danger, despite the reassurances of the monetary Eastern European Countries also needs to be studied. It
authorities and the views expressed in certain authorita- is difficult to imagine these countries joining the euro
tive financial circles. Although conditions now are area within the timescale envisaged for enlargement.
different from those prevailing at the time of the events
of September 1992, the monetary authorities might have
great difficulty in containing abnormal pressures on one
or more currencies. Although it is dangerous to compare
flows and stocks, it should be borne in mind that the (1) See annex 1 to Commission document.
volume of daily transactions on the foreign exchanges (2) In its resolution of 13 January 1998 on the Commission
is estimated at approximately $1 300 bn. This figure document which is the subject of this opinion, the European
Parliament stated that during the period immediately
varies significantly from day to day however and following its introduction the euro was likely to experience
needs to be scaled down to take account of intra-day exchange rate instability ... and that this period of instability
transactions. Even a much scaled down figure however could last some time, as the disappearance of intra-
still by far exceeds the total foreign currency reserves of European exchange rate volatility would probably be
the European central banks, which the IMF estimates counter-balanced by greater euro exchange rate volatility.
25.5.98 EN Official Journal of the European Communities C 157/69

4.12.1. On the other hand, the benefits in terms of 5.2. The Commission states that ‘Among the long-
competitiveness which these countries are likely to term considerations, the euro exchange rate will reflect
derive from the weakness of their currencies against the the functioning of EMU. In particular, the challenges
euro need further study. of greater competition must be met by appropriate
structural policies. Greater labour market flexibility,
tax and social security reform in the direction of the
4.13. The Committee is acting as spokesman for the most efficient systems will help the European economy
views of the social partners and the European Union’s to adapt to global challenges. If these reforms were to
citizens and firms. It is essential that the monetary continue, EMU would contribute to a structural reform
authorities adopt concrete measures to ensure that the which would ultimately have a positive impact on
pessimistic scenarios mentioned above are not realized. employment’ (1).
Clearly, it is not necessary for these measures to be spelt
out in detail, as speculators would be quick to take the
necessary counter-measures; it would be sufficient for 5.2.1. The Economic and Social Committee would
the market to know that measures were in place and prefer that measures with such important implications
that, in the regrettable event that they became necessary, were made the subject of detailed further analysis (2).
they would be effective.

4.14. Adopting effective measures which do not

restrict the free movement of capital or the freedom 6. Section D defines Europe’s role as a partner at
to provide (financial) services is certainly a difficult international level
undertaking. Nor would it be possible to impose
restrictions on European markets alone, which would
place them at a disadvantage vis-à-vis competing, 6.1. A single exchange rate and monetary policy are
non-European markets. The only concrete measures direct consequences of economic and monetary union.
which could be taken are the continued application
in Europe of orthodox monetary and fiscal policies.
Speculation is generally triggered only when there are
imbalances, inconsistencies and contradictions in the 6.2. The question arises of the Community’s represen-
monetary and fiscal policies of certain states. The aim tation at international level, for example at the IMF.
should therefore be to promote specific surveillance The conclusions of the December 1997 Luxembourg
and cooperation commitments by the Member States’ European Council are rather vague, merely stating
supervisory authorities and the international central that ‘the Commission will be associated with external
banks, with a view to applying the necessary measures. representation insofar as necessary to enable it to fulfil
the role assigned to it by the Treaty’. Clarification is
needed in this area.
4.15. In the light of this the Committee considers the
Council’s decision to set irrevocable parities between
the participating currencies as early as May 1998 to be
a positive step, and notes that at the end of 1997 the
parities are not far from the probable conversion rates. 7. Conclusion

4.15.1. The announcement of exchange rates will

help reduce uncertainty. It will provide market and 7.1. The Economic and Social Committee would like
economic operators with important information regard- to participate fully in the debate on the conditions and
ing the economic operation of the union. effects of introduction of a single currency in the
economic union.
4.15.2. The announcement will spell out the frame-
work for the conduct of monetary and exchange rate
policy during the interim period (May to December 7.2. The comments and scenarios set out in this draft
1998). opinion are in no way intended to call into question the
Committee’s approval of the principle of monetary
union, but rather to contribute to the detailed study of
the practical conditions of its realization.
5. Impact of economic policies on the euro exchange
rate — Section C

(1) See point 22 of Commission document.

5.1. In view of the objectives of fiscal consolidation (2) See the detailed analyses carried out by Horst Siebert,
and full employment, it would seem desirable for President of the World Economic Institute, Kiel, and one
monetary policy in the euro area to be relatively of the German government’s five ‘wise men’, or that of
non-restrictive, without however endangering the objec- Heiner Flassbeck, Chief Economist of the Institute for
tive of price stability. Economic Research (DIW).
C 157/70 EN Official Journal of the European Communities 25.5.98

7.3. The evaluation and discussion contained in the 7.7. The convergence of all economic, monetary and
Commission staff working paper on the external aspects fiscal policies on a more rigorous approach, the weight
of economic and monetary union and the Communi- of the Maastricht criteria and the adoption of a stability
cation on the practical aspects of the introduction of the and growth pact are aimed at placing Europe on a
euro are an essential contribution to the debate on growth path, but also give rise to concerns.
economic and monetary union, without however exhaus-
tively exploring a problem which is crucial to the
7.8. The Economic and Social Committee does not
harmonious completion of an experiment without his-
at present feel that it is in a position to judge how far
torical precedent.
these fears are justified. It would merely like to see the
Commission’s analyses addressing these concerns. This
7.4. There is a disparity between the detailed studies approach, far from calling economic and monetary
of the technical conditions for the realization of econ- union into question, is intended to allay fears as to the
omic and monetary union carried out by the Com- ability of economic and monetary union to adapt to the
mission, the EMI and professional bodies and the resumption of growth which is needed to bring down
still inadequate analysis of its economic and social unemployment, and in the longer term for the success
repercussions. of the single currency itself.
7.5. Paradoxically, the most voluminous studies on
the subject are to be found in the reports of international 7.9. The Economic and Social Committee hopes to
institutions unrelated to the European Union (IMF, reinforce and enhance its participation in the fundamen-
United Nations, BIS, OECD etc.) or in work carried out tal debate on the efforts made in connection with EMU
by national economic research institutions which have by involving internationally renowned economists in its
still to be summarized. It is therefore essential that the discussions.
Commission make its views known on the subject.
7.10. The Economic and Social Committee is interest-
7.6. The majority of these reports and studies voice ed and pleased to note that many of the concerns
concern as to the effect of monetary union on economic expressed in its opinion are echoed in the European
expansion and thus on the improvement of the employ- Parliament’s resolution of 13 January 1998 on the
ment situation in Europe. Commission’s working paper.

Brussels, 26 March 1998.

The President
of the Economic and Social Committee