Subject to the foregoing, the system should support the general economic
policy set at the community level by the competent bodies. The system would be
responsible for the formulation and implementation of monetary policy, exchange
rate and reserve management, and the maintenance of a properly functioning
payment system. Lastly, the system would participate in the coordination of
banking supervision policies of the supervisory authorities (Kenan, pg. 14-15).”
Dehors also stated that three steps must be taken in three domains to avoid
economic imbalances. Competition policy and other measures must strengthen
market mechanisms, common policies should be devised to enhance the process of
resource allocation where market forces are not adequate, and macroeconomic
courses should be coordinated. The report was reviewed in 1989 at the Madrid
Summit. EMU was gathering a lot of support due to the fall of the Soviet Union
and the unification of Germany. Finally in 1991, EMU was put into law with the
signing of the Maastricht Treaty. It provided an economic, political, and legal
framework for the single currency, including three stages in the journey towards
EMU. In the first stage it will be known who will be participating in EMU. The
European Central Bank will be set in place and conditions for conducting
monetary policies will be decided. Also the production of the Euro banknotes and
coins will begin. The second phase would bring about the start of monetary
union.The rates of conversion between the Euro and the national currencies would
become irrevocably fixed in early 1999, and the Euro would become a currency in
its own right.
The European System of Central Banks (ESCB), which groups together the
European Central Bank and the participating national central banks, will then
come into the picture. It will be responsible for framing and implementing the
single monetary and exchange rate policy - in particular setting short-term
interest rates - and any intervention vis-à-vis the dollar or the yen. The
participating national currencies will no longer be listed independently on the
foreign exchange markets vis-à-vis other currencies; their external value will
be set exclusively via the Euro thanks to the irrevocable conversion rates. New
issues of tradable public debt will be denominated in Euros from the beginning
of this phase. As far as the banking sector is concerned, the transition to the
single currency will begin chiefly via monetary policy, the capital market and
the associated settlement systems. More generally, the banks will take advantage
of the time available in this phase (not more than three years) in order to
inform their customers of the consequences of the switch to the single currency
for their financial transactions. They will step up their staff training efforts
and could also offer certain products in Euros, legal and technical constraints
permitting. For example, customers' account statements could be drawn up in both
national currency and Euros. Firms could also begin operating in Euros.
Companies most heavily involved in international trade are likely to opt for
early conversion, although there will be no obligation to do so. Administrations
will also have to prepare actively for their own changeover. They will also
provide operators and consumers with the necessary information on introduction
of the single currency. For the most part, however, their transactions with the
public will remain in national currency until Euro banknotes and coins are put
into circulation.
Consumers will continue to use chiefly their own national currency because
Euro banknotes and coins will not yet be available. Public demand could,
however, prompt some banks or firms to offer services in EUROs. The gradual
introduction of dual pricing of goods and services will enable consumers to get
used to the single currency. By developing a feel for prices in the single
currency and learning to convert national currencies into Euros at a fixed rate,
they will thus realize that they do not stand to lose from the introduction of
the single currency. The third and final phase would be a definitive changeover
to the Euro. By not later than January 1, 2002 and over a short period (not more
than six months), the national currencies will be withdrawn and the new Euro
banknotes and coins will be put into circulation. This phase will deliberately
be kept short in order to minimize the complications that would inevitably arise
if national currencies were to remain in circulation for an extended period
alongside the single currency. The exchanges will, of course, have been
thoroughly prepared. In some cases (reprogramming of tills and cash dispensers,
for example) preparations will have to be made long beforehand to ensure that
software and machinery are properly adapted. Most companies are already hard at
work on this in coincidence with Y2K preparations. From the beginning of this
phase, retailers will continue to accept national currencies but will also carry
out transactions in Euros. All money-based transactions in the economy (wages
and salaries, pensions, bank balances, etc.) will be denominated in Euros.
