Euro hour

by Teresa Acklin
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As the deadline approaches for a common European currency, agriculture policies await sweeping change.

By Diane Montague, European correspondent

   A fundamental change in the operation of Europe's Common Agricultural Policy is being planned in the wake of the introduction of the single European currency on Jan. 1, 1999. Green currencies, regarded by some as the cornerstone of the C.A.P. and by others as “the original sin for which we have been doing penance ever since,” will disappear.

   The advent of the euro provides the means to sweep away the mechanisms of green currencies, which have proved to be both highly complex and extremely expensive to operate. The green money system was designed to protect farm incomes from the fluctuations of national currencies against fixed farm support prices, but instead have caused trade distortions between member states and have failed, in many cases, to help those farmers who most needed it.

   The European Commission views the introduction of the euro as an opportunity to force agriculture to operate at commercial currency rates. There will be no specific provisions for the farm sector afterward. The euro will enable the European Union to make a major step towards its Agenda 2000 reforms by reducing agricultural support through price mechanisms and switching to direct income aids that can be more precisely targeted.

   For the 11 countries switching to the euro — Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain — all monetary gaps will be closed by a one-for-all revaluation or devaluation on Dec. 31, 1998. Compensation will be paid if revaluations cause prices to fall by more than 2.6%. Payments also will be made for reductions in arable aids, livestock headage payments and structural or environmental payments if the figure is lower in 1999 than in 1998. All payments made to cover the changes will be funded by the E.U. for the first year.

   For the four countries that will not be joining the single European currency next January — Denmark, Greece, Sweden and the United Kingdom — the basic elements of the old green money system will only be used where absolutely necessary. This will apply particularly in the United Kingdom, for instance, where a strong pound means that without some form of adjustment, farm support prices could fall by around 11%. The European Commission said it hoped that details of the changes would be agreed to by November.


   The abolition of the E.U.'s green money system is just one part of the huge change taking place in the switch to a single currency system on Jan. 1, 1999. From that date, all major financial transactions will be done in euros and the currencies of the 11 member states will become sub-units of the euro. Retail buying and selling will continue in national currencies and their coins and notes, but their value will be based on a fixed and permanent rate of exchange.

   The exchange rate will be calculated on Dec. 31, 1998, on a straight 1:1 value against the Ecu. The Ecu is the national currency unit used by the E.U. for all financial accounting on a community basis, one of which was to calculate farm support prices and based on the combined value of a basket of currencies against the American dollar.

   On that date, national central banks will provide the dollar exchange rates of all the currencies used to calculate the value of the Ecu, including sterling. This will establish the value of the euro and irrevocably fix the conversion rates for the 11 countries in the system, which will operate until full conversion to the euro in 2002.

   From Jan. 1, 1999, prices can be quoted in either euros or national currencies or both. Euro notes and coins will start circulating on Jan. 1, 2002, and national currency coins and notes will be phased out over the following six months.

   All major financial operations are expected to move quickly to dealing in euros, but retail banking will continue to provide both currencies according to demand. Most large companies in the four countries outside the European and Economic Monetary Union (E.M.U.) also are expected to operate largely in euros.

   In addition to the one-for-all fixing of exchange rates, all 11 countries joining the E.M.U. will have to bring their interest rates into line. These interest rates have varied widely for much of the early part of 1998, from nearly 7% in Ireland to 2.5% in Austria. Experts believe the European rate will settle at around 4%, rising possibly to 4.6% by the middle of 1999. At the same time, all new government debt will be issued in euros and monetary and foreign exchange policy will take place in the single European currency.

   The single monetary policy will be operated by the hugely powerful European Central Bank. Operating within the bank will be two councils — a governing council representing the countries in the euro area and a general council representing all countries in the E.U. As a central bank, the E.C.B. will have a high level of independence and will concentrate on establishing credibility by building the euro into a strong international currency and keeping down inflation.


   These, so far, are the known facts. The way in which the new system will operate and its likely advantages and disadvantages are still a matter for speculation.

   On the positive side is the creation of a new and more powerful economic bloc. The 11 countries adopting the euro will account for 5% of the world's population, 23% of its Gross Domestic Product and 17.5% of its trade. The E.U.'s share of global foreign currency holdings is expected to rise to 35% by 2010 from 27% in 1995,while the U.S. share is expected to fall to 40% from 56% over the same period.

   Some experts believe the euro could replace the dollar as the world's dominant currency and that the euro and the dollar will each end up with a 40% share of international financial transactions.

   The 11 countries within the E.M.U. will certainly benefit from much easier cross-border trading without the added complications and costs of currency adjustments. Markets will be much more transparent (although this will remove the much exploited opportunities to charge according to local market conditions) and it will be possible to plan product marketing on a wider scale. This is expected to lead to an even bigger increase in cross-border trading than has happened so far and to create a trading bloc able to compete more effectively with the Asian economies.

   The disadvantages are the unknown effects of forcing currencies to operate within fixed exchange rates. This may force up unemployment as the only means of keeping down interest rates.

   At the same time, there are the huge social costs built into many European countries, which add substantially to the cost of employment. This is one of the main reasons why the United Kingdom has so far decided to stay out of the first stage of the change. British employment costs are lower, the labor market is more flexible and unemployment levels are lower than in most other E.U. countries.


   Dec. 31, 1998   Currency values of the 11 member states plus the United

            Kingdom against the U.S. dollar will be supplied to the European

            Central Bank at 11:30 a.m. These will be used to calculate the

            official value of the euro and their exchange rates will remain

            irrevocably locked at these rates.


   Jan. 1, 1999      The launch of the E.M.U., including the introduction

             of the euro as a currency in its own right.


   Jan. 1, 2002      Euro notes and coins introduced.


   June 30, 2002   National notes and coins removed from circulation.

Members of the European and
Economic Monetary Union, as of Jan. 1, 1998:
Austria • Belgium • Finland • France • Germany • Ireland •
Italy • Luxembourg • Netherlands • Portugal • Spain
Non-members as of Jan. 1, 1998:
Denmark • Greece • Sweden • United Kingdom


   E.M.U.:   European and Economic Monetary Union


   E.R.M.:   European Exchange Rate Mechanism


:   European Monetary System, came into operation in 1979.


   Ecu:      European Currency Unit was introduced with E.M.S. in

         1979 as the unit of account for the whole community. It is

         made up of a basket of specified amounts of currencies

         of member states at their exchange rate against the dollar

         and included in proportion to the size of their economies.

         All agricultural prices are expressed in Ecus and their

         conversion rates to national currencies are known as green



   Euro:      New European currency with exactly the same value as the Ecu.

         Its value will be calculated on the exchange rate of 12 European

         currencies, including sterling on account of its importance as an

         international currency, on December 31, 1998.


   European Central Bank based in Frankfurt will be the sole issuer

         of the new currency. The E.C.B.'s main objective is to ensure price

         stability. It will work with national banks in the European System of

         Central Banks (ESCB). The E.C.B. will take policy decisions, while

         the national central banks will carry out the operational functions.