Questions for Europe

EMU stands for economic and monetary union. However what is due to happen in 1999 would really be better described just as monetary union. This is because it involves "one money"being introduced. In other respects member states will retain economic independence, although the very act of merging currencies together will inevitably lead to closer overall ties between member economies.

How will it happen?

On January 1st 1999, the currencies joining monetary union will be linked together irrevocably. In other words an exchange rate for each currency will be set against each other one, with the intention that these rates will never again be altered. By July 2002, at the latest, national currencies will disappear to be replaced once and for all by the euro.

So what happens between 1999 and 2002?

The euro notes and coins will not hit the streets until 2001 at the earliest they must be in circulation by January 2002 at the latest. But once currencies are locked together in 1999, the euro will be the legal single currency and a lengthy transition period will start. From that date Government debt will be issued in euros and this will become the currency for all interGovernmental payments. Also from 1999 businesses will be able to invoice each other in euros and make up their accounts in the new currency. Consumers will also be able to open euro bank accounts after 1999.

This transition period sounds like a recipe for confusion?

It may well be. For example there will be a period of dual pricing, when goods are priced in the shops in both the national currency in our case the pound and euros. But introducing a new single currency on this scale is an unprecedented venture it will make the move to decimalisation appear easy. Basically, non cash transactions can be conducted in euros from 1999 on, but cash transactions will obviously have to wait until the notes and coins appear.

So how will the big decision be made?

Early next year the EU Commission and the European Monetary institute the forerunner to the EU Central Bank will forward their recommendations on which states should join monetary union in the first group. They Will judge who should qualify on the basis of the Maastricht rules (see panel). But the final decision will be a political one, taken by the 15 EU heads of state.

This has the makings of a row, as senior German officials such as Bundesbank president Hans Tietmeyer have doubts about whether the southern EU states such as Italy should be members. But the Italians are determined to be there.

What happens to the states who don't qualify?

They will be able to put their currencies into a new EU exchange rate mechanism. What this will mean is that their currencies would not vary too much in value from the new single currency. They would of course then be able to choose to join the single currency at a later date, provided they met the Maastricht rules.

Who will run the show once EMU starts?

The European Central Bank will take over the role of setting interest rates and running monetary policy across Europe. The Central Bank of Ireland, along with all the other member central banks, will become members of this bank and have a vote on its decision making council. The central bank will be based on Frankfurt, which Germany hopes will allow it to take on some of the credibility of the Bundesbank.

What will be the advantages of the single currency ?

The single currency will remove currency instability and the cost of currency conversion amongst its members, which should create a favourable climate for trade and investment. It is also intended to create an environment of low inflation and low interest rates, which would also encourage investment. The move to the single currency is also certain to increase competition across EU economies, bringing benefits to consumers.

And the disadvantages?

Currency levels will no longer be able to vary to reflect changes in economic circumstances between member states. This could mean that the burden of adjustment falls in other areas, such as the jobs market. Monetary policy will be set centrally, and so will be unable to react to specific circumstances in different member states. It is also questionable whether labour is sufficiently mobile across the EU to ensure that available workers go to where the jobs are which is one condition which should apply in a single currency area. Also, there is no large EU centralised budget to automatically transfer resources to states hit by adverse circumstances.

What about Ireland?

Ruairi Quinn and his Government colleagues insist we will be in. A major study by the Economic and Social Research Institute found that it would be in Ireland's interest to join, even if Britain stayed out. It said that the quantifiable boost to the national economy would be a 0.4 per cent boost to national income, but that other unquantifiable factors such as the potential gains in terms of attracting inward investment swung the balance in favour of joining.