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1.2.3.1.1. At what point on the path toward the euro is there no turning back?

As could be imagined, there were numerous expressions of doubt regarding the obligation to implement the EMU during its preparatory phase. Nevertheless, the Union Treaty - also called the Treaty of Maastricht, after the name of the city in the Netherlands where it was signed - was ratified by constituted democratic procedures in all member states, in the period after 1993.  It stipulated that the EMU would take place.  It was, therefore, a matter of fact.  The text of the passage relating to the third phase of the EMU states: "The High contracting Parties affirm that the signature of new passages of the Treaty with respect to the EMU confers an irreversible character of progress toward the third phase of EMU."

1.2.3.1.2. What milestones marked the road toward the EMU?

Announcement of the launch of the ecu by VGE

The principle stages were:

• July 1990 : since 1957, the recommendations of the Treaty of Rome regarding the liberalisation of capital markets remained without significant progress toward implementation.  As a consequence of the Single Act this liberalisation occurred in the majority of member states of the Union by 1990.  Thus began Phase I of the march toward the EMU.

The Treaty of Rome  

• 1992 and 1993 : referendums in Danemark and France ; these revealed a lack of confidence amongst the people regarding the way in which the Monetary Union was taking place.  The Treaty of Union was ratified but relevant authorities gave their weight to the importance of the wider participation of citizens in the process of European integration.

• January 1994: the beginning of Phase II.  Creation of the European Monetary Institute (EMI) with headquarters in Frankfurt, Germany.  It is the precursor of the ECB, destined to manage the single currency.

• December 1995 : Madrid summit; the name of the single currency is changed - to be called henceforth the "euro" - and the acceptance of the scenario of adoption by 1999.

• December 1996 : Dublin summit; acceptance of the legal status of the euro, the arrangements for the conversion from the ECU at a rate of 1 to 1, and the Stability and Growth Pact which defined the limits of potential divergence between the budgetary policies to be pursued by member states of the future EMU.

Jacques Rueff  
" Europe will have its single currency or it will have no future."
Jacques Rueff*, former president of the Bank of France.

1.2.3.1.3. Which considerations prevailed in the choice of the name for the single currency?

It was the European Council at Madrid (15 and 16 December 1995)  that decided to name the future single currency the "euro":  "The Council considers that the single currency should have the same name in all the official languages of the European Union,  bearing in mind the existence of the different alphabets."   The "euro" is its complete name - not a prefix which precedes the names of national currencies.  The Council stipulated, moreover that the specific name "euro" should be used rather than the generic name "ECU", employed in the Treaty to designate the European monetary unit." (Extract from the conclusions of the Madrid Summi, 15-16 December 1995).
 
In the versions of the Treaty in languages of Latin origin, the single currency is called "ecu", with masculine gender, referring thus to the accounting unit as well as the currency.  In other languages the term is written "ECU", referring uniquely to the official ecu, the unit of account.  The fifteen heads of state assembled at the Madrid Summit ended this ambiguity by replacing the generic names "ecu" and "ECU" with "euro".  This authorised "interpretation" of the text underlines the radical difference between the ECU (a basket currency) and the European money - a currency in its own right.  In fact, opinion polls at the time indicated that the majority of the European population, including Germany, would have preferred the name "ecu".

1.2.3.1.4. When was the change to the EMU expected to take place?

The European Treat foresaw two potential dates: 

• 1 January 1997,  if the majority of countries fulfilled the convergence criteria (as decided by the Council which is to evaluate the report of the CE and the EMI - Article 109 J.3) ;  

• 1 January 1999, for the countries to achieve the convergence criteria (Article  109 J.4). The meeting records stipulate, in regard to the passage to the third phase of EMU:  " If, at the end of 1997, the date of commencement of the third phase has not been fixed, then the member states concerned, the Community institutions and other concerned bodies will put into effect, with diligence, all the preparatory work during the course of the year 1998, with the object of permitting the Community to enter definitively into the third phase of  EMU on 1 January 1999."

At that date, the countries which have achieved the convergence criteria are expected to participate automatically in the EMU, with the exception of those who have negotiated special conditions ("opt-out clause").  There is no minimum number of participating countries.

Given the lack of sufficient convergence in 1997, the transition to the single currency was postponed until 1999.

1.2.3.1.5. What was the actual timetable for the implementation of the EMU and the transition to a single currency?

1997 : reference year for the examination of convergence.

May 1998 : beginning of  Phase III-A. Examination of the current state in the light of the convergence criteria in order to establish which countries will participate in the single currency. The heads of state and the government of the European Union announced, on the basis of the recommendations of the European Commission (EC) and the European Monetary Institution (IME), which countries will participate in the Economic and Monetary Union (EMU) starting on 1 January 1999. Previously, their proposals had been discussed within the European Parliament (EP).  The countries finally chosen for the launch of the Euro were: Germany, Austria, Belgium, Spain, Finland, France, Ireland, Italy, Luxembourg, the Netherlands and Portugal.

On 2 May, the rates for cross conversion between the currencies participating in the EMU were fixed.  The members of the Board of the ECB were named, with Mr Willem Duisenberg* from the Netherlands, as president.


Willem Duisenberg

Also in 1998, the United Kingdom and Denmark made use of the "opt-out clause" granted by the European Union Treaty and postponed joining.  This was the final year of alignment of exchange rates*, and in particular, the entry of the Greek Drachma (GRD) into the EMS, with a view to participating in the EMU in January 2001, after having satisfied the convergence criteria.  Sweden, which entered the EU in 1995 with the option of joining the EMU later, confirmed its position.

A from 1 January 1999 : beginning of  Phase III-B of EMU.  The setting up of the European System of Central Bank (ESCB) and the Europan Central Bank (ECB), the establishment of regulations pertaining to them, the irreversible fixture of the rates of exchange rates in euros for the currencies of the member states of EMU, centralised monetary policy, the issue of certificates in euros and the creation of a critical mass of euros.

Thus, as from January 1999, the currencies of the participating states were replaced by the euro, which became a currency in its own right.  The ECB began to exercise its monetary policy in euros.   The countries issued certificates and stamps in euros, which, just as taxes, could be paid for in euros.  Private individuals could have accounts in euros and transfer money in euros: the euro is a currency in scripted form.  The banks and stock markets use only the euro for operations amongst themselves.

In a referendum on 28 September 2000, the Danes confirmed their refusal of the euro.

From the ECU to the euro
© Promeuro - Illustration 1.2.3.a 

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1.2.3.2.1. How was the euro introduced?

The euro was introduced with a double "big bang", i.e. two steps on two precise dates.

• First, on 1 January 1999, the euro became the official currency of the 11 countries of the EMU (Greece joined them on 1 January 2001) with the notes and coins national currencies becoming  the visible monetary form of the euro.  The relation between these became fixed and determined by the official fixed rates.

Rates of exchange with repect to the euro.
© Promeuro - Illustration 1.2.3.b 

• Secondly, on 1January 2002, beginning of Phase III-C : introductions of the euro notes and coins, which circulated for a few weeks in parallel with the national notes and coins. The euro thus becomes a parallel fiduciary money*, whilst for scriptural transactions, also called book money* the euro becomes obligatory.  The treaty foresaw a complete replacement of the national notes and coins by 30 June 2002, at the latest.  In fact, this date was put forward to 28 February for the majority of countries, in Germany (officially 31 December 2001 - in practice up to 28 February 2002), the Netherlands up to 27 January, Ireland up to 9 February and  France up to 17 February.

 
Jacques Santer  

 " Within a period of 12 months, maximum, after the decision to launch the monetary union, all preparations for transition ought to be completed.  On 1 January 1999 at the latest, the Union will have a currency in its own right with a single monetary policy, operated in the European currency.  Nevertheless, as national currencies will continue to be used at the level of retail commerce, the banks will install systems which will permit the combination of access to financial markets in European currency with accounts in the national currency for their clients."
 
Jacques Santer r*, président de l'UE.

1.2.3.2.2. What particular mechanisms prevailed during the transitional period?

The transition period took place between 1 January 1999 and 1 January 20002.   The length of this period had been fixed at the request of the central banks, in order to enable them to produce and put into circulation a considerable volume of notes and coins in euros.  During three years, the euro is the official currency of first eleven, then twelve, countries of the "Euro Zone".  The parity between the currencies of the national currencies of the countries of the EMU and the euro was fixed "irrevocably" for each participating country (cf. illustration 1.2.3. b).  It, therefore, became unimportant in which currency holdings were denoted.  During this period, public debts were denoted in euros and stock market quotations where changed into euros.  No one could be either obliged or prohibited from using the euro: the principle of "neither obligation nor prohibition".  Banks and businesses began double bookkeeping with a double (triple, if one included unit weight prices) display of prices.

In applying the principle of "neither obligation nor prohibition" each individual is free to convert his account to euros, starting on 1 January 1999.  In fact, relatively few people took advantage of this possibility: by mid-2001, less than 10% had made the decision to change their accounts to euros.  The balances in the accounts, as well as salaries, pensions, etc. were thus automatically converted to euros at the end of 2001.  The debts and claims expressed in national currencies were converted into euros, without affecting other contractual arrangements, specifically the rates of interest.

In June 2002 at the latest, according to the Treaty, and in practice by March 2002, the euro had become the unique means of payment*, with liberation value in all of the EMU countries.  The national currencies of the participating countries had, as a consequence, completely disappeared.

The remaining national coins and notes ceased to become legal tender*, could be returned to commercial banks or central banks* up to a date set by national timetables for the transition.  Up until 30 March 2002, all central banks* would exchange for euros, without charge, notes of any country member of the EMU.

The timetable for the imlementation of the euro is posted on the "Europa" website of the European Commission: europa.eu.int

1.2.3.2.3. At what rates are national currencies converted into euros?

It is a case of conversion rates and not rates of exchange.  In fact, beginning in 1999, the various monies of the countries in the EMU and the euro all form part of a single currency.  There is not an exchange rate in the sense that the rate can no longer vary.  For this reason it is correct to speak of a "rate of conversion". Because of the absence of risk, the rates for buying and selling are identical and the conversion can take place without imposing a commission for the "exchange".

The rates of conversion for the national currencies into euros were fixed on 1 January 1999. Before that date, the only rate of exchange known with certainty was that for the ECU, which was replaced by the euro at the rate of 1 ECU for 1 euro.  The method of fixation of the rates for national currencies was not disclosed in advance, but everything indicated that the method would be that adopted for exchanges for one European account unit* for another.  The principle adopted was one of maintaining the exterior value of the national monies.  In transposing the exchange rates, as of 31 December 1998, for national currencies into ECU into a rate for conversion into euros, it was possible to ensure that the relation between the currencies and foreign currencies remained unaltered.  That explains the strange rates of conversion between national currencies and the euro.

The legal framework for the euro stated that the conversion should be implemented to an accuracy of six significant figures, in order to prevent rounding to the advantage of one or the other of the contracting parties.  Moreover the conversion should take place from the national currency into euros, and not the inverse. All conversion between national currencies should pass via the official rates of exchange for the euro.

1.2.3.2.4. How were currencies converted into euros (and vice versa) for financial and contractual transactions?

These questions were settled in 4th and 5th articles of Regulation number 1103/97 of the Council of 7 June 1997.

First, the necessary starting point was the official conversion rate expressing the value of a euro in the national currency of each member state (1 euro = X in exchangeable national currency*  and not the inverse).  These conversion rates were made, as a requirement, from six significant figures (number of decimal places = 6 - number of digits for the whole number), for example 1 euro = 40.3399 LUF or four (6 - 2) decimal places.

It follows, therefore, an amount expressed in national currency needs to be divided by the conversion rate in order to obtain the equivalent in euros.  To convert from euros to national currency it is necessary to multiply by the conversion rate.  It should be noted that when one converts the Irish pound into euros, the numerical value expressed in euros is greater than in the national currency.

All sums of money to be converted from one national currency to another ought to be converted first into euros.  This sum cannot be rounded to less than three decimal places, then reconverted into national currency.  No other form of calculation is permitted, unless it produces the same results

1.2.3.2.5. How are amounts converted into euros rounded?

Amounts in euros are always expressed in figures to two decimal places (i.e. in cents).  During the conversion a digit of 0 to 4 in the third decimal place is rounded down and a digit of 5 to 9 is rounded up.

Examples :
1 000 FRF represents 152.449 euros, which, when rounded, is 152.45 euros ;
500 LUF represents 12.3947 euros, which, when rounded, is 12.39 euros.

1.2.3.2.6. How can we understand the new prices?

During the preparatory period and during the period of parallel circulation of the euro and national currencies, shop prices were displayed in both the euro and the national currency.  Similarly salary slips, pension statements and bank statements were printed both in the euro and the national currency.  Some businesses began as early as 2001 printing salary slips in both currencies to familiarise their employees with the value of the euro.

Businesses and banks distributed simple calculators or conversion tables which facilitated the conversion of values in the single currency to the former national currency, and vice versa.  For the period of the double circulation there were even calculators with a "duo-change" facility - which indicated the change to be given back in both national currency and euros.  Before becoming completely familiar with the euro, Europeans found themselves in a position at home similar to that of a tourist abroad, needing to convert amounts into their own national currency in order to be able to "understand" them.  After a period  of adaptation, and with prices, salaries, taxes, bank statements, pensions, etc. expressed in euros, the majority of Europeans got used to "thinking in euros" and no longer need their former currency for the purpose of reference.  The adaptation period was short for the majority of European citizens.

1.2.3.2.7. What happens to contracts in ecu or national currencies?

The transition to the euro requires no intervention as a result of the ruling on the continuity of contracts.  The amounts in national currencies or in ecus are automatically (and without any intervention) considered converted into euros at the fixed official rate of rates of conversion.  The rates of interest which form part of these contracts remain unchanged, as do other clauses in the contract.  The single change of the denomination of the money for the contract requires no other modification of the contract, unless there is a specific agreement between the parties.  The agreement regarding the legal status of the euro thus guarantees the principle of continuity of contracts, with the term "contract" covering written, oral or tacit contracts.  For example, a stamp labelled in national currency and bought in national currency and valid for a certain type of postal service will remain valid for that service after the introduction of the euro, for as long as the tariff remains unaltered.  It should be noted that certain countries have made arrangement to ease the conversion of the capital of a company, rounding the result to the nearest unity.  It should not, however, be forgotten that such arrangements are valid only for documents signed before 31 December 2001.  Any contract or official document expressed in national currency after this date is considered unlawful, because it has been contracted in a money which is no longer legal tender

1.2.3.2.8. Have our monetary assets been depreciated?

The change of monetary unit is not synonymous with inflation* or the plundering of the assets of savers, retired people, or those living from an annuity.  The "relative value" of our monetary assets remains identical after the introduction of the euro as it was before.  The single currency is managed within a rigorous institutional framework, whose objective is price stability, from which the stability of purchasing power is derived.  The independence of the ESCB is a guarantee for the respect of this objective, and shelters the euro from inflationist tendancies.  Moreover, only countries whose economies have sufficiently converged will participate in the EMU.

The monetary union is not a new monetary reform. Monetary assets - just as for credits - are simply converted to euros at the same rate as the price of goods.  Of course, nominal values of stocks and bonds will continue to vary according to market forces.

1.2.3.2.9. What has been the cost of transition to a single currency and who has supported this cost?

The cost of the transition to the euro is difficult to express in figures.  Citizens, businesses and above all banks ought to have put in a considerable effort, during a limited period of time.  Estimations vary considerably, according to the methods used and the methodology used by the bank.  The figures which have been submitted are difficult to interpret.  Some include costs related to other events occurring at the same time as the euro transition (the computer adaptation to the problems associated with the year 2000) as well as lost earning opportunities (loss of exchange commissions).  It is foreseen that citizens will not directly have a cost to support: the exchange of local currencies* into euros ought to take place without charging a fee - according to the principle proposed by the EC, that client should not be charged for obligatory transactions.

It is also important to consider that, beyond the immediate costs, there are benefits which the European citizen gains from the single currency, and will continue to gain in the future.  These efforts are less painful if the adjustments* - computer systems, for example - have been implemented with advance planning.