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Europe: What Happens On Day One Of Monetary Union?

Prague, 2 September 1997 (RFE/RL) -- The introduction of the European Union's single currency is now clearly visible on the horizon: it looks increasingly likely that the "euro" will come into use in most EU countries on the due date, January 1, 1999 -- less than 16 months away.

Economists and politicians have been engaging in heated debate about whether the launch of the euro will go well or badly, and as usual have not come to a clear conclusion. But so far, the ordinary men and women in the street have given hardly a thought to how their lives will change on the appointed day.

The same question in due course will face the people of those Central and East European states which are seeking first-wave membership in the EU. And behind them, the other countries in the region which are candidates for membership.

Just what will initially happen under the euro? Well, a senior EU official, who requested anonymity, told RFE/RL this week that in principle it's a non-event -- the day-to-day basics of citizens' financial lives will not change. Certainly that's the idea that EU wants to project: don't panic, don't start storing gold or other money-substitutes under the floorboards.

The change at macro-economic level will in fact be enormous. At one stroke will come into existence a currency which can reasonably be expected to be the second most important in the world, after the U.S. dollar and ahead of the Japanese yen. That's because the EU accounts for almost a third of world economic output, and its exports exceed that of the United States. Not all EU states will participate in the euro from the outset, but enough will to give the Euro a key international profile.

On that January 1, the euro will become the only legal tender in participating countries. Present national currencies, take the Belgian franc for example, will become "sub-units" of that one currency. As the EU official explained, you will still go into your local shop and buy things with your francs -- not least because coins and notes for the Euro will not be introduced until the year 2001. So there's no Euro cash to spend immediately.

But all cashless transactions can be carried out in the euro, bank accounts can be held in euro, legal contracts signed. Investments can be arranged anywhere in the euro zone -- a move with huge implications for banks and investment houses, in that a German investor will suddenly find that putting money into a promising Portuguese company is more attractive and less opaque in euros than in escudos.

The actual investment risk remains the same, but the psychological factor which is a key ingredient of personal investment strategy, is enormously improved. And one actual danger is removed: the possibility that the escudo might fall in value against the deutschemark, thereby wiping out the gains of the investment to the German.

That's because the exchange rate of all participating national currencies against the euro -- be it escudos, marks or any of the others -- will be fixed in stone from Day One. They will never vary. The euro may go up or down against "outside" currencies like the dollar or even the Algerian dinar, but that won't directly affect the euro profits of our example investor.

This irrevocable fixing of EU currencies against the euro has important implications for East and Central European candidate countries. It means that candidate countries with weak currencies -- take the Czech Republic as a present example -- would enter the EU single currency area with a lower exchange rate, and therefore a lower living standard vis a vis other member states. That's pre-supposing of course that the new member countries want to be the single currency system and can meet the fairly tough budgetary standards set for membership.

To explain this mechanism in more detail: say one euro were to be set irrevocably at the rate of 50 Czech crowns. Under monetary union employees and companies will be nationally paid in euros. this means they will receive their usual amounts as seen in crowns, but will have less money to spend in other EU states than if the euro had been fixed at 40 crowns. To improve their comparative living standard they have to increase productivity and profitability of their companies, so that they can pay themselves more.

Note too that under this system of irrevocable fixing there will be no more "easy solutions" available to participating countries, like a national currency devaluation to restore industrial competitiveness and to attract investment.

This is the essence of monetary union, namely that diverging economies among members are barred: all must go in the same direction on pricing, wages and finance issues -- towards integration. That's the purpose: namely to create a huge, real single market. As such, monetary union will impact on the daily lives of everyone in the participating countries.