EMU faces delay on currency transition

PAUL WALLACE

London

and IMRE KARACS

Frankfurt

The European Monetary Institute, forerunner of a possible European central bank, has unveiled plans for the transition to a single currency. But the recommendations fall short of the steps which the European Commission said in May were needed to make the process credible to financial markets.

The report spells out for the first time the precise way in which Europe's central bankers believe the unprecedented changeover from national currencies should take place. Bearing the clear imprint of German influence, it has emerged as a compromise between those attempting to speed up the process and those wishing to delay it.

According to central banking sources, the design for the notes of the new currency will go out to competition as early as next year. These are expected to incorporate a national feature for each participating country.

The monetary institute report came as the Five Wise Men, the German government's council of economic advisers said that Germany would breach one of the key criteria for participation in European Monetary Union (EMU) this year. They said that Germany would run a budget deficit of 3.1 per cent of GDP in 1995, just above the 3 per cent ceiling set in the Maastricht Treaty, and up from 2.9 per cent last year. The Five Wise Men also predicted growth of just 2 per cent in 1995 and 1996.

The institute says that it will take six months to complete the changeover to the new legal tender, although national currencies will continue to circulate indefinitely.

During the changeover, retailers will have to offer dual pricing. Banks should not be obliged to use the new European currency in the three-year transition period - from the date when exchange rates are locked together to the introduction of notes and coin.

In a key statement of principle, the institute said that from the start of Stage Three, banking and business should be free to use the European currency but should not be obliged to do so before the end of the changeover period.

By contrast, the thrust of the EC's Green Paper earlier this year was that banks should participate as fully as possible in the changeover, creating a critical mass of ecu activity in the money and capital markets.

Instead, the Institute says that it will deal through conversion facilities with national currencies. This followed pressure from Germany, anxious to protect small savings and co-operative banks.

The institute also insists that a full year is required between the decision by the Council of European leaders on who should participate in EMU and the start of Stage Three.

This creates a potential roadblock for the Maastricht timetable, under which Stage Three begins automatically on 1 January 1999.

The Germans insist that the full economic data for 1997 - which won't become available until well into 1998 - be used to appraise whether countries comply with the Maastricht criteria.

The institute is currently investigating whether the first two or three quarters of any one year offer a sufficiently clear picture to get round the road-block.