Transaction to a Common Currency: Journey to an Unknown Destination?

Diplomarbeit von Gabriele Tacke

Abstract:

"One Market - One Money." On paper the future of European Monetary Integration never looked more promising than now:

·The Maastricht Treaty has finally been ratified by all twelve member governments in mid October 1993, even the most sceptical states Denmark and the U.K., so that the aim of European Monetary Union (E.M.U.) rests on a solid legal basis now.

·On January 1, 1994 the European Monetary Institute (E.M.I.) began its operations with a goal of intensifying monetary coordination in Europe.} In addition, the E.M.I. will prepare the conceptual groundwork for the activities of the future European Central Bank (E.C.B.).

·The " Road to a common Europe" has been opened and monetary policy roadsigns point in the direction of European Monetary Union with a single currency.

In reality, the prospects of the achievement of E.M.U. have deteriorated in the course of 1993 and under present conditions the likelihood of a failure of the Maastricht Treaty is quite high.

The European currency crises in September 1993 led to realignments within the European Monetary System (E.M.S.) and fluctuation margins were widened to +/- 15 per cent. These events and a breakdown of cooperation between national monetary authorities have raised doubts about the feasibility of the timetable for moving towards full monetary union.

This thesis provides an overview of the progress towards a monetary union, including a common currency, in the European Community (E.C.).

In addition, it examines whether the approach to monetary union remains viable and if so, the circumstances under which monetary union will eventually happen.

Table of Contents:

	Acknowledgements	IV
	Abbreviations	V
	List of Tables and Figures	VI
	PART I
1.	Introduction	1
2.	Developments and Purposes to European Honetary Union	4
2.1	Definition of a Monetary Union	4
2.1.1	Background to the current Initiative on European Monetary Union	5
2.1.2	Why European Monetary Union now?	8
2.2	Characteristics and Objectives of European Monetary Union	10
2.2.1	A Single Currency	10
2.2.2	Free Movement of Capital	11
2.2.3	Coordination of Macroeconomic Policies	12
	PART II
3.	The Institutional Framework and Transition to a Common Currency	12
3.1	The Maastricht Treaty - A "Three Stage Approach"	12
3.1.1	Stage One	13
3.1.2	Stage Two	13
3.1.2.1	Introduction of the European Monetary Institute	14
3.1.2.2	Characteristics and Tasks of the European Monetary Institute	15
3.1.2.3	Frankfurt - Home of the European Monetary Institute	16
3.1.3	Stage Three	17
3.1.3.1	Introduction of the European Central Bank	18
3.1.3.2	Constitution of the European Central Bank	18
3.2	Monetary Policy in Stage Three	21
3.2.1	Convergence Criteria	24
3.2.2	The Problem of Non-Participation	28
3.3	Institutional Implications of a Common Currency	31
3.3.1	Independence of the Central Bank	31
3.3.2	Nature of the Transition to a Common Currency	34
3.3.2.1	The Gradual Currency Approach	35
3.3.2.2	The Parallel Currency Approach	36
3.3.2.3	The "Monetary-Reform" Approach	38
3.3.2.4	The "Two-Speed" Approach	39
	PART III
4.	Future Developments in European Banking and Financial Systems,necessary for the Process to European Honetary Union	41
4.1	Current Trends in European Banking	41
4.2	Aims of European Banks in Face of the Internal Market	42
4.3	Factors underlying the E.C. Banking Harmonisation Process in Financial Services	43
4.3.1	The Second Banking Directive	44
4.3.2	Competition and Competitors	45
4.3.3	The Centralisation Trend Towards the European Central Bank	46
4.3.4	Fiscal Issues	47
4.4	Changes in European Banking in the Past as Prerequisite Conditions to European Monetary Union	48
4.5	Required Changes in the Banking Sector	49
4.6	Effects on Banks	50
5.	Evaluation and Limitations of the Achievement towards full EuropeanHonetary Union	52
6.	The European Fianancial Landscape of the Future: An Approximation from Today's Perspective	54
7.	Conclusion	56
	Bibliography	59
	Appendix