SUCCESSION COUNTRIES JOIN EUROPEAN MONETARY UNION

Succession Countries Join European Monetary Union



Succession Countries Join European Monetary Union

Introduction

What will happen when Europe enters a Monetary Union ? This question hurts the financial markets, as no clear answer could be given to it, and they do not appreciate uncertainty. As a once overall changeover into the single european currency is not possible, the third stage foreseen in the Maastricht Treaty might be divided into three subperiods. These periods are the consequences of the possible time delays existing between the happenings of three main changes paving the way for achieving the EMU. The Countries will enter an EMU through the fixing of parities, which is the main change to the present EMS. Then, a foreseeable second sub-stage would begin with the use of Ecu by the European Central Bank as means of monetary policy.

Analysis

The EMU will be only achieved when the third event occurs: the use of Ecu coins and banknotes by all citizens. "The Expert Group on the changeover to the Single Currency" predicts that a unique Big Bang is not foreseeable, what implies that there will be a succession of smaller Bangs, especially between the last two events, the main one consisting of banks and corporates being obliged to use Ecus (1). But nothing is told to the financial markets on the timing, especially on how long will last the period 3A. This period begins with the fixing of parities and lasts untill Ecus are used for monetary policy purposes. Theoretically, this is period represents by itself a EMU, but obviously this would not achieve the aim asserted in the Maastricht Treaty. Moreover, while analysing this period, we can find out that this period is the most dangerous one of the whole process. If we shall fail, then no EMU with single currency would be realised. Indeed, in order to secure the path towards the aim, two main risks must be taken into account: the credibilty of the whole system, and the policies which must be implemented.

The Maastricht Treaty asserts that parities will be fixed between choosen currencies, once we know which countries are allowed to enter the EMU. We can hold for sure that the markets will keep on speculating on the parities linking currencies belonging to the "core"-EMU (with fixed parities) and those remaining outside it and which fluctuate aside in the then new implemented EMS. But it is really difficult to foresee the influence financial markets would have on the "core" : could the irrevocably fixed parities be revised under financial market pressure ? The case is to be studied, in particular if the period between the fixing of parities and the use of Ecu as the single means of monetary policy and interventions lasts too long.

What happens if the players in the financial market estimate that the Deutsche Mark is worth more than 3,395 French Francs, for example that 3,60 should be the real parity ? This could occur because, before Ecu becomes the single ...