Accounting and the European Single Currency

By Moya, Soledad; Somoza, Antonio et al. | International Advances in Economic Research, November 2000 | Go to article overview

Accounting and the European Single Currency


Moya, Soledad, Somoza, Antonio, Vallverdu, Josep, International Advances in Economic Research


SOLEDAD MOYA [*]

ANTONIO SOMOZA [**]

JOSEP VALLVERDU [*]

This paper considers some accounting problems in the period leading up to the introduction of the European single currency, the euro. Taking into account two different scenarios regarding the economic and monetary union (EMU) from its first stage, different aspects concerning the area of accounting have been revised. These include exchange differences, financial states comparison, financial states conversion, increase in capital, discriminatory treatment of active and passive monetary and nonmonetary assets, accounting records, annual accounts or rounding. This paper will point out some of the problematic areas that may arise from the introduction of the euro. Although several aspects have been taken into account, as the EMU approaches, many other issues will need to be discussed. (JEL M41)

Introduction

The integration process taking place in Europe has played a leading role in recent decades. It has begun an influential phenomenon in the social, economic, and political world. The culmination of this process will be the economic and monetary union (EMU). Economic literature about this phenomenon is copious when trying to ascertain the consequences that the member states will have to endure. Great uncertainty exists regarding many of the practical consequences from the introduction of the single currency.

This paper considers some accounting problems in the period leading up to the introduction of the European single currency, the euro. Practical issues are dealt with and some speculative material is presented, given that only time will tell what the real impact will be.

As stated in the Maastricht Treaty, signed by member states in February 1992, the single currency will be implemented into each member state on January 1, 2002. However, the process is already taking place. As a first step, on July 1, 1998 at the latest, a decision was made as to which of the states would take part right from the beginning of the EMU. This point is controversial.

On January 1, 1999, exchange rates had to be fixed irrevocably between participating currencies and then legislation for the introduction of the euro (juridical nature, continuity of contracts, rounding off, and the like) would take effect, as pointed out in the Madrid European Council [1996] on December 15-16, 1996.

Finally, between January 1, 2002 and July 1, 2002, the transition stage must be completed and then the EMU will be definitely implemented. On January 1, 2002 at the latest, euro banknotes and coins will be put into circulation as legal tender alongside existing national currencies which will be withdrawn progressively, passing Out of circulation within a six-month period [Madrid European Council, 1996]. Achieving such a project entails great difficulties, particularly in the area of accounting.

We have briefly laid out the main steps that the European integration process is going to follow until national currencies are substituted by the single European currency. However, not all member states are going to join the EMU. Those countries who wish to enter the EMU must fulfill the so-called convergence requirements, established in the Maastricht Agreement as follows:

1) the average inflation rate, measured against the consumer price index in the year previous to the exam, must not exceed more than 1.5 percentage points of the three countries with the steadiest price evolution;

2) long-term interest rates, measured against the long-term public bonds or similar titles in the year previous to the exam, must not exceed more than 2 percentage points of the three countries with the steadiest price evolution;

3) the public deficit rate, defined as the relation between the general state average expense and gross domestic product (GDP), must not exceed 3 percent;

4) gross national debt, defined as the relation between the nominal amount of debt at the end of the year and GDP, must not exceed 60 percent; and

5) active participation is required for at least two years in the European monetary system exchange mechanism, inside the close margins. …

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