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1998 In Review: EMU Takes Next Step By Fixing Conversion Rate

Prague, 14 December 1998 (RFE/RL) -- For all its historic import, the birth of the European Union's euro on January 1 will have few immediate practical effects on most citizens of the 11 countries initially joining the single currency.

The big change in their daily lives will come three years later (Jan. 1, 2002), when the new currency's bills and coins are introduced and, six months afterward, when they entirely replace national monies.

The next 36 months will constitute what the EU calls Phase Three --the final phase-- of its Economic and Monetary Union (EMU). The first phase started eight years ago, with agreement on EMU, the lifting of restrictions on capital movements among member states and increased coordination of economic and monetary policies. The second phase, begun four years later, created the European Monetary Institute, the forerunner of the European Central Bank (ECB), which will begin fully functioning over the New Year's weekend.

The third phase will start with a momentous action --the fixing by the ECB, sometime late on December 31, of permanent conversion rates between the euro and participating currencies. Until then, the euro remains under the guise of the old accounting-device ECU (European Currency Unit) that it will replace. Today, the ECU is worth about $1.17 --or, more pertinently, about 1.96 German marks, 6.56 French francs and 1,937 Italian lira.

The rates the ECB sets on New Year's Eve are expected to diverge somewhat from current levels. That's because the ECU's value has been determined on the basis of all 15 EU member states' currencies, while at the outset the euro will be calculated on only 11 monies. (The four non-euro EU members are Britain, Denmark and Sweden --which opted not to join at the outset-- and Greece, which was found to be economically unqualified.)

With the conversion rates in place, stock and other financial markets will begin doing all their business --most of it electronic-- in euros. Until 2002, if there is common consent among them, businesses are encouraged --but not required-- to conduct affairs with each other in euros. Workers and consumers are to be educated about the euro through EU- and nationally sponsored brochures, seminars, videos and media ads.

The start of Phase Three will also immediately end the taking of commissions by banks on currency transactions within the euro-area. That is certain to please the frequent intra-euro traveler and, just as surely, cost banks in the 11 nations $3 billion a year in foreign-exchange revenues. Banks are expected to lose additional money preparing themselves, and their clients, for the euro's arrival. Germany's giant Deutsche Bank, for example, has budgeted $300 million for its preparation work.

For the next three years, national currencies will remain legal tender, with the use of the euro optional, not obligatory, in banking transactions. Supermarkets, department stores and other large retail shops have been asked to display prices both in euros and national currencies, and in some countries this year many retailers began to do so. Similarly, many cash registers are now adjusted to compute in euros, as are computers in many large businesses. Checks in the new currency have also started to appear and, as of January 1, they and euro credit-card payments will be accepted. But the new money's full impact will not come until the first day of 2002, when 13,000-million euro notes and even more coins are introduced in the 11 countries. They will be allowed to circulate along with the local currencies for six months, during which time the entire note and coin issues of the participating nations will be permanently retired.

Banks and shops will distribute the new money, which could create a logistical nightmare, especially for retailers. They will be in the midst of January sales, when shops are busiest, during the first days of the euro crunch. Preparing for their role in distributing the euro will also be costly for shopkeepers. Eurocommerce, a lobby group for EU retailers, estimates that preparations will cost retailers close to two percent of their gross annual intake --or, some $24 billion across the EU.

There will be seven euro notes, in different colors and sizes. They will be are denominated in 500, 200, 100, 50, 20, 10 and five euros. The EU says their designs do n-o-t represent any existing monuments, but rather symbolize participating countries' various architectural heritages.

The EU has devised a graphic symbol for the single currency, one to which euro-area computers as well as banks and check-writers will have to convert. It looks like the Latin "E" but is more curved (or C-like), and is marked clearly with two parallel horizontal lines.

Few businesses in Central and East Europe, where 10 nations are candidates for EU membership, have made any preparations for the birth of the euro. That could turn out to be a big mistake because, in transactions with the euro-area, Eastern businessmen, like their Western counterparts, will have to stop computing in marks, francs and lira and switch to the single currency.

But Central and East European central banks and big commercial banks boast they are ready for the euro. And governments in the area have already taken steps to adjust their exchange policies once the euro appears. In most cases, this is easy: The role played today by the German mark as a "peg" --that is, reference point-- in currency dealings will simply be taken over by the euro.

(Third of a series on European Monetary Union.)