Banking and investment services: Bilateral exchange rates for EMU

United Kingdom

While commentators in the UK muse over whether EMU will happen, whether it will happen on time, whether it will work and what the UK government should do, movement towards EMU carries on relentlessly.

On 12-13 September, an informal Council session of finance ministers in Mondorf-Les-Bains (Luxembourg) agreed to fix the exchange rates between currencies joining the Euro from 1 January 1999 (the "ins") at the same time as the first ins are selected, namely May 1998. The aim is to discourage currency speculation in the months between the selection of the ins and the introduction of the Euro. It is also hoped that there will be progressive convergence between May and December 1998 towards the fixed rates.

But numerous obstacles to EMU remain. Debate in Germany is fierce, and Germany will have great difficulty in meeting the Maastricht budget deficit criteria. Unemployment is still rising and growth is lower than expected, so government spending remains high and tax revenues low. Additionally, despite recent corporation tax hikes, France faces an uphill struggle to qualify.

The current timetable for the implementation of EMU is:

  • by the end of february 1998 the Commission and the European Monetary Institute will receive the data for Member States 1997 economic performance.

  • by the end of March 1998 the EMI and the Commission will report on the degree of convergence based on the Maastricht criteria and recommend countries for membership;

  • these reports will then be debated in national Parliaments;

  • the first countries to join EMU will be selected in early May 1998 at the same time as the decision on their fixed exchange rates; and

  • EMU members will lock exchange rates together irreversibly from 1 January 1999.

Whether EMU succeeds will depend, to some extent, on how prepared operators are. Many banks, companies and public administrations are under-prepared: only 12% of small companies in Europe have begun to think about the Euro according to one survey, while another found that many multinationals are not yet ready either, although things are changing.