Implications for International Business of European Economic and Monetary Unification

By Billoud, Guy D. | Business Economics, January 1998 | Go to article overview

Implications for International Business of European Economic and Monetary Unification


Billoud, Guy D., Business Economics


On January 1, 1999, major transactions among European financial institutions will be denominated in euros. Progressively, payments between companies in Europe will be made in euros. After June 2002, the euro will be the only legal tender in the countries participating in the European Economic and Monetary Unification (EMU). This paper discusses the macroeconomic and financial aspects of EMU, the likely scenario of its implementation and the implications for corporate strategy. It also analyzes the most important aspects of EMU, from both a macroeconomic and business standpoint, and points readers to sources of valuable information about this dramatic change.

Although observers focus on the short term effects of EMU (soft or hard Euro? more or less short-term growth?), primarily the EMU is about peace and stability in Europe. It is the outcome of a long historical chain of events started at the end of World War II. The political and technical background of EMU is quite sophisticated as is reflected by the Maastricht Treaty. If the European Union (EU) ever becomes the federation of European states that some envision, the Maastricht Treaty will certainly be seen as its earliest constitution.

Article B of the Treaty's Title I is very clear in this respect. Such wording as "creation of an area without internal frontiers," "establishment of economic and monetary union," "single currency," "assert its identity on the international scene," "common foreign and security policy," "eventual framing of a common defense policy," "introduction of a citizenship of the Union," or "develop close cooperation on justice and home affairs" clearly asserts the willingness eventually to create what could be called the United States of Europe, although the distance from this goal is still substantial.

It is important for corporations having business with the EU to be aware of the main provisions of the treaty, the expected first-wave participants and the European Central Bank's (ECB) monetary policy. EMU will have significant effects on Europe's economy and on trading with the EU. It is equally important for companies to understand how they should prepare for the advent of monetary unification from both a logistic and a strategic standpoint.

THE EMU PROCESS

The EMU will come into being on January 1, 1999, when the third stage of the process set forth in the Maastricht Treaty is launched. Countries satisfying the Maastricht criteria (see box) will enter the single currency zone, giving up their monetary policy to the ECB and committing to keeping their fiscal policy in line with the limits described by the Stability and Growth Pact. Through the criteria and the signature of the pact, the EU states that the euro is intended to be a strong, stable currency that will not be floated to play short-term competitive devaluation games, and the financial community can trust Germany to see that this rule is respected. Incidentally, the ECB will be located in Frankfurt, a few blocks away from the famous "Buba."

The decision regarding who will participate in EMU, although based on objective criteria, will have a political dimension because it will be the outcome of a meeting of Prime Ministers and Finance Ministers scheduled on either April 25-26 or May 2-3, 1998. Ironically, this important meeting will take place in the United Kingdom, which made it clear it did not want to participate in EMU, at least initially.

The countries embarking on EMU (the "Ins") will see their currency's exchange rates blocked with respect to each other and to the euro bloc as of January 1, 1999. In September 1997, it was decided to determine in June 1998 the rates into which currencies will be locked. The burning question is what will those rates be? It is unclear yet. The European Monetary Institute (or EMI, forerunner of the ECB) has proposed three-year averages (1996-98), averaged over half of 1998. Governments have proposed using the current central rates of the ERM. …

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