Not only does the Euro have an effect on payments, but there are other developments that will have a deeper and stronger effect on payments in the longer term. For example, banks are setting up netting, settlement innovations, continuous link settlement, and cashless settlements for foreign exchange. Basically, these banks want to settle the currencies on confirmation of deeds. They are set to drop their volume in the future. 

Concentration is the big word that comes with Euro. Banks merge in Europe every day. Mergers in European banking have taken place domestically. Now there is the first cross-border merger of a Belgian bank merging with a Dutch bank. This will happen every single week or day from now until 1999. There are 27 HVP=s, but there are only two HVP=s in the United States. That raises a question as to whether they will survive. The same question applies to stock exchanges and mercantile exchanges. There will be one big Euro market. Fierce competition among the systems vying to carry will increase. In spite of the change, the picture here still looks very much like it is today. There is a broad range of different possibilities to effect payment according to its amount, urgency, counted party involved, and convenience. Those factors will remain, and there will still be cash, prepaid cards, payment cards, deferred payment cards, checks, ACH=s and EBA=s (which are TARGET, or very high payments), and corresponding banking. In the U.K. there are ACH's and EBA=s. Further, there will be concentration and consolidation.

Unfortunately, though, an opportunity is being lost. There is a three-year transition period, where there is a currency that does not exist in the form of notes and coins. It will be a cashless currency. The question is whether Euro notes and coins should even be introduced. Advantage should be taken of this great opportunity of having, for the first time, a currency that does not exist in notes or coins. This is the Acashless society@ of which society dreams. Electronic purses are in place in each country. Many shops and even local pubs accept payment from the electronic purses. The policy makers may have lost a great opportunity. But, decisions must be made quickly.

Gonzalo Perez Piaggio: Companies that produce goods and provide services are going to have to ask themselves tough questions with the advent of the Euro. The timetable provides three years between the introduction of the Euro as an electronic currency and introduction of Euro in the form of notes and coins. During this transition period, there is no obligation to use Euro. It is expected that there will be a gradual increase in usage of Euro for payments. Companies like the idea of retaining the decision as to when to start using Euro. Companies, particularly in Europe, want clear guidelines and a clear playing field. In addition, after three years of Acashless Euro,@ there will be a six month period of dual currency.

In the retail business, customers will come in with two sets of currency. Staff will need training and registers will have to be adapted to Euro. Companies can avoid making mistakes. January 1, 2002, is the biggest selling day in a number of European countries because that is the day when Christmas sales begin. That will complicate matters, and on top of that, the banks will not open until January 4, 2002. The stores are going to have to stock two currencies and they do not like that idea.

The other issue that national companies must decide is which countries will join. That is because planning must begin now. Companies are being asked to consider various scenarios. When the beginning of the year is examined, there is a baffling 

group of countries, which includes Belgium, Austria, France, Luxemburg, Ireland, the Netherlands, and Germany. In the course of this year, the stock of Club Med joined, and a second scenario is introduced. Countries are implicated differently in terms of interest rates and the strength of the Euro, vis-a-vis the other currencies. Those indications are in terms of growth. Companies also need to take into account the scenario of Euro failure.

When a client wants to pay in Euros, a company has to be able to accept payment or lose business. Some companies have already announced that they will only make payments in Euros to their clients and to their suppliers. This changes the way that business is done. If a company is operating in the Euro zone, its currency will disappear in the year 2002. At that point, reports will change, the FAX will change, accounting issues and implications will change, and salaries will have to be paid in Euro. A cashless society might be favorable, but many people still want the option of drawing cash out of a machine. It is a complicated issue for a lot of countries.

Concentrating on the strategic issues, the main one that has companies worried has to do with price transparency, convergence, and cost transparency. Some companies manage to maintain price differentials between bordering companies in excess of 50 or 60 percent of the same product or same percent. An extreme case is that of the pharmaceutical companies who sell certain drugs in Germany at nine times the price that they sell the same drugs in Spain. Euro will not allow the pharmaceutical companies to maintain these price differences. The other issue concerns sectors and what will happen to them. In retail, the distribution channels change because companies are going to be treating the Euros in a much bigger area. In Europe, one of these objectives is creating a bigger market. In terms of supply channel, the conversion distribution channel changes. The change over to Euro is supposed to be non-inflationary, which will not be able to be passed on to the clients. If the markets are low, how are they going to treat those costs? Wholesalers are intermediaries to manufacturers. Some of those costs are going to be passed upwards into the supply chain. Price transparency will be affected. The retailer will be obligated to look at what would happen if they were using the ECU as the proxy. The French wine manufacturers are purportedly changing the size of the bottle to meet new price points that are likely to come out of Euro so that profit margins will not be affected. This maneuver will not change the value, but it will try and section price at some point. 

There are marketing issues that companies have to think about. A number of companies treat Europe as a bunch of different markets. To a large extent cultures, languages, and retail structures have allowed and encouraged them to do that. Increasingly, though, companies, particularly American companies, are treating Europe as a single market. This change of currency will provide one the opportunity to rethink the whole marketing strategy around Europe. The same thing happens in manufacturing and in goods and services. EMU removes foreign exchange risks and removes transaction costs. It might be a good idea to look slightly further afield. It might be interesting to source certain things from different countries where before there was a financial risk. Companies, like banks, enjoy hedging. The easiest way to hedge is to put costs and revenues in the same currency. That hedging opportunity will occur in all of the 11 to 15 member states. 

Two surveys over the past two years were conducted in order to determine what companies are doing and what they perceive are the major issues. These are the 300 top European companies. Roughly, equally distributed in the different countries in Europe. According to the relative weights of the economy, only 2 percent of the companies surveyed had a strategy for Euro. There are two or three large American companies that are switching everything from local currencies straight into dollars. There is not a lot of time left. A large percentage, almost two-thirds, had not yet made any cost estimate even though EMU is a significant issue.

Managing directors and finance directors were interviewed. In terms of the areas they were worried about, price transparency is increasingly seen as a major issue. Price transparency will lead to price convergence. The price in Germany is 40 percent higher than the price in Portugal. The average will not be somewhere in the middle. Some people still think prices are coming out. 

Wages are also beginning to become an issue. People are expecting wages to begin to be equalized. It is difficult for wages to come down. The expectation is that the high wages being paid will be driven up by EMU. Finally, systems impact still seems to be the biggest cost to them. A year ago, most people thought of EMU as a financial and treasury issue because of the new currency. A year later, sales and marketing issues began to dominate and became much more important. That is something different than simply adding a new currency. 

EMU can be seen as an accelerator of trends that are happening. In a number of sectors, the markets are becoming more global. EMU removes one of the barriers that enables price comparisons. Transitional costs will be significant whether the company is in the Euro zone or remains outside. A lot of companies, which have between 30 and 60 percent of their sales in Europe, have to prepare almost as much as the company in the Netherlands right now. There will be benefits for countries in terms of lower prices, exchange and stability and so on, which is the whole point of the exercise. The main beneficiaries are going to be consumers in the long term. The reaction of companies will also affect the impact of the Euro. 

There is the opportunity to take the lead. There is also the opportunity to take a step back follow. Concerning business planning, a company should see EMU as a fundamental change in the business environment. EMU brings lower transaction costs, but the combination of the different economic structures in the Euro zone, often with one of measures to meet the matching criteria, does have some implications and raises some concerns as to the likely growth rates of those countries in the next one or two years. It is important to rethink the business plans that have been made on a country by country basis. European labor costs may became an issue. Trade unions and workers= councils are beginning to compare to each other. There sill soon be an almost one to one comparison.

Finally, planning recommendations must be made. Companies should take a very practical approach and should also start thinking about collections information. Steering groups should be set up to begin to ascertain the impact of business units and functions. Companies must establish what needs to be decided in terms of changeover dates. One changeover date for a large corporation looks very difficult to manage -- particularly with the year 2000 issue. A company must make a strategy going to be of the company in terms of communication. Seamans was the first company that sent 400,000 letters to all its main customers and suppliers saying from a certain date, it will make all the payments, and will receive payments only in Euros. There needs to be a strategy, which should be developed for each of the markets. The costs and opportunities in terms of shifting markets need to be determined. Actually, the changeover to Euro makes it easier to make this determination. The top two to ten people in a company should be asked what they think should be changed. These people should be asked how many resources, people, managers, market manages and strategy planners will be needed. Additionally, the opportunities and the risks should be considered. Set a date, say of 2001, where the general ledger and all of the price lists will be changed. Do not use dual price lists and have the company work towards that date. It might not be optimum, but it has worked in several corporations. 

Finally, we must establish when all of the decisions need to be made, because 1999 is less than 14 months away.

Joly Dixon: EMU is an area of growing interest. Those who have been trying to put the monetary and economic affairs of the European Union in better shape feel that it has been a long time coming. Probably this is not in some ways the first attempt. There were talks about economic and monetary union in the European community from the 1970's onwards. However, the EMU that is coming about is really on track, and this year has been an incredibly important year for developments in EMU. A lot of progress is being made. The progress made has demonstrated to everybody that this EMU is going to happen. The clearest demonstration of that is the graphs that have been made. These graphs demonstrate longer term interests rates, and the way the interest rates are coming together. The markets believe it is going to happen. This increase in credibility in the economic and monetary union was achieved largely during 1997, which was an important year. 

Additionally, 1998 will be an equally important year because in May or late April of 1998, the initial participants will be chosen. Also, the coming into existence of the ECB will be an important event. EMU is on track and it is something that is not only happening in Europe. It is something of enormous importance to the rest of the world. Four main points need to be made. First, the Euro, the currency of EMU will become a major world currency. Second, the European Union=s responsibilities for running EMU are affected by EMU=s far reaching general effects. 

Third, exchange rates will be impacted by EMU. Fourth, institutional issues for the world economy and for the international monetary system will be impacted.

Euro will become a major world currency. There are three main reasons why Euro can be expected to become a major world currency. The first reason is the size and stability of what can be called Euro land. The economies of the full participants in EMU are going to make a large economy indeed. It is an economy whose has been discussed right from the beginning. Even if the initial group is not limited to the European union, which it will not be, the economy will be large. Markets predict eleven out of the fifteen countries will initially participate in EMU. The combined size of this economy is much bigger than that of Japan. Not only its size is important if Euro is going to become a major currency. In addition to the size of the economy, this region is very stable. The ground rules for the running of Euro land will ensure that the Euro land is not only a large economy but a stable economy. The combination of size and stability is the first of the reasons to believe that the Euro will be a major economy and a major currency. 

The second reason is very much linked to the stability question. The Euro will be a credible currency right from the beginning because the Euro is growing out of existing economies and the existing currencies. Although the ECB, which will have full control of the monetary policy which will be behind the Euro, will only be set up next year. This is true even though the ECB will be a new institution in the legal sense. This reflects the existing central banks, monetary policies, and stability orientation in the European union. The economic and monetary union will begin when inflation rates in the European union are at 35 year low. The combination of having achieved this low inflation and a central bank which uniquely placed to pursue price stability is advantageous. The ECB is uniquely able to pursue price stability, because of its independence and commitment to price stability. This institution will not just suddenly appear. The faces at the ECB will be the faces those which markets have seen for the last years. This continuity will make the Euro immediately credible. 

The third reason the Euro will be a major world currency is that it will be backed by deep and liquid financial markets. The financial and capital markets of Europe are relatively fragmented, because of some differences in practice. Most of all, however, they are fragmented by currency. Currency risk is a large element in the fragmentation of the markets. This currency risk, of course, will go away once there is EMU that will allow the markets to fuse together much more than they are now. Of course, once they fuse, then the Euro markets will be extremely large indeed. 

If the separate markets of the Deutsch market, French market, and the commercial and government bond markets, these numbers are very large, and there is no reason not to expect them to increase. There will be a very large financial markets when they become more fully integrated than they are now. It is to be expected that they will develop in the product mixes and will be expanded. 

The markets of the Euro market will be as broad and deep as the dollar denominated market. For those three reasons, the Euro will become a major world currency. Of course, if one makes forecasts or predictions, it is unwise to also say when things are going to happen. Nonetheless, it is difficult to forecast exactly what will occur and at what time. One might expect, however, that the Euro will quickly assume its role as a major world economy. On the other hand, as the past has shown, the currencies gaining international status tend to have done so slowly. Undoubtedly, there are certain factors which point to a slow process, and others that contradict that prediction.

If the Euro is indeed to become a major world currency, and the EMU is going to be a major economy, there are going to be very large economic implications. Major economic implications will result, and Europe must act to assume its responsibilities. First of all, in terms of general economic implications, the European Union has done an enormous amount of work on this and tried to look at the costs and benefits of economic and monetary union. EMU provides the potential to really draw the full benefits of what was called Europe 1992 or the single market. The single market and the efficiencies of the single market can be much more readily reaped. The benefits can be more readily reaped by a single market with a single currency. Positive economic effects from the EC 1992 program are evident. Further positive effects are to be expected from the lower transaction costs and so on, but the bigger effects really come from the deepening of the single market. 

The second point regarding the general economic point of view relates to whether the restrictions promulgated and endeavors undertaken to reduce budget deficits will lead to a low growth area in Europe. Some have stated that in the achievement of currency stability and low inflation, low growth in Europe will result. There has been some misunderstanding about both the excessive deficit procedure and about the growth and stability pact, which has been agreed to by the member states this year.

The excess deficit procedure and growth and stability pacts are designed to get public finances back on to a sound footing. They are not designed just to be completely restrictive. Countries of the European Union have been running budget deficits that have been completely unsustainable and far too high. Even without EMU, Europe needed to get the budget deficits down a long way. In 1993, the average state in the European Union had a budget deficit of nearly 6.5 percent of GNP. Now to even begin the EMU, the budget deficits need to be brought below 3 percent. The EU wants to do much better than that. The EU wants to get its budget into broad balance or even surface. The aim of the growth and stability pack is to get this broad balance or even surface. 

When a budget is at that low level, the budget can be used as a stabilizer in the economic cycle. At the moment, that is not the case in Europe. It is fascinating to look at those countries with the highest budget deficit that are not even allowing automatic stabilizers to work. They are pursuing restrictive budget policies even in times when there is a slowdown. The growth or full application of the growth and stability pact will allow more flexibility rather than less flexibility. A greater understanding of that concept will counteract the idea that perhaps there is too much emphasis on restriction, and not enough emphasis on growth and stability.

Within the EMU, policies will need to be run policy coordination. More economic policy coordination than in the past. The first point to make about that though is that all the instruments for policy coordination are already there. The Article 103 of the treaty, the most important provision is Paragraph 2, which contains broad guidelines. Also in paragraphs 3 and 4, there are further powerful instruments for policy coordination. In paragraph 4, the treaty contains instructions for the council to make recommendations on economic policy to the individual countries. Article 104 of the treaty contains provisions dealing with the excessive deficit procedure and growth and stability pact. Finally, in Article 109(b) provisions outline a dialogue between the European Council of Ministers and the ECB. The instruments for policy coordination are there. It is a question of using those instruments better than they are being used now. 

The debate on instruments within the European Union will heat up. How can the instruments be applied, and the finance council be better run? How can the new committee, which will service the finance council, and the economic and financial committee that will replace the monetary committee, work? Also, the policy coordination issue between the Euroland countries and the EU as a whole must be settled. The coordination instruments refer to the EU as a whole. The Council of Finance Ministers refers to of all 15 member states. It has been agreed within the union that it is necessary to have a new body which will be comprised of just the members of the EMU. More work needs to be done to coordinate the interaction between the new body and the finance council of the 15 member states. These issues are on the table now. The provisions set forth how the economic policy within the EMU will ensure that the economics aspect side as well as the monetary aspect will produce a well run European economy geared towards both stability and growth. Exchange rate issues are relevant to EMU. Is exchange rate an issue of strength or an issue of weakness? First, there may be a direct link between the strength of the Euro and the size of Euroland. However, it has been decided that the EMU will begin with the economies that are ready to start when the heads of state make the necessary decisions in May of next year. Countries will be invited or will join the EMU if they have achieved sustainable convergence. Therefore, one should not necessarily think that there is any real correlation between the size of the area EMU starts with and the likely strength or weakness of the Euro. The second point that needs to be made is that the Euro is going to become a major international currency. Over time, there will be large portfolio shifts of both private portfolios and public portfolios. Those portfolio shifts are not going to be important in the determination of the exchange rate. The determination of the exchange rate is really going to be more determined by what the markets see as the likely monetary and fiscal policies of the area. Exchange rate will be determined especially by what are going to be the relative policy mixes. Exchange rate is the relative price between one currency and somebody else's currency, and what the markets are looking for is relative policy mixes. When the markets look at the Euroland's policy mix, well, then there will be a staple currency.

The other day, Larry Summers said that he believes the same thing for the dollar. If the United States sticks to strong and credible policies, the dollar will remain a sound currency. 

The same words can be said for the Euro. If the EU sticks to sound and credible policies, Euro will be a sound currency. It is more important to concentrate on sound and credible policies rather than these issues of weak or strong. 

The second point on exchange rate is that some people have suggested that volatility exists between the Euro and the other major currencies of the world. However, that is not necessarily true. The EU will be concentrating on sound policies and that will help. Also, the EU will be looking at exchange rates, and there is no doubt about that. There is no reason to assume that the exchange rate and the Euro will have to be considered differently than the exchange rates of the United States or perhaps Germany are considered now. Of course, there is a legal basis for doing so. Article 109 and especially paragraph 2 of the treaty states that the Council may lay down broad guidelines for exchange rate policy. Article 3(a) of the treaty states formally that there will be an exchange rate policy. 

So, if the major currency areas are taking account of the external value of their currencies in the same sort of way, and if they are each running domestically stable policies, it does not seem that the policy setting is likely to lead to any more volatility. There is a second point to be made regarding volatility. Looking at how volatile exchange rates have been in the past, there has been more volatility between the dollar and yen rate than between the dollar and Deutsch mark rate. That may very well be because of the lack of the debt of some of the yen financial markets. If that is a strong reason, then this factor will not be created by the Euro because the Euro=s financial markets will be very deep and liquid. That adds to the belief that the currencies can avoid this volatility. 

The final point to touch on is the area of institutional consequences of having the EMU within a large international dimension and with its own large, healthy currency. What are the institutional consequences of having within a large international dimension and with its own large, healthy currency. 

First of all, it will make the Europeans think some more. It will force the international system to evolve to some extent. The Europeans think about both the position that they take, and the decisions in the major areas of importance to EMU. Then they have to think about how they will achieve it. It must be decided who is going to represent the EMU on the world stage. The procedures for dealing with this are dealt with in Article 109 of the treaty and especially in paragraph 4 of that article. 

Paragraph 4 states that the European Finance Council should make common positions on issues of particular relevance to EMU. These decisions are made by a qualitative majority on the basis of a proposal from the commission and after consulting the ECB. 

Now Europe needs to work on the range of areas that the treaty states are of particular relevance to the EMU. Presumably, Title 6 of the treaty contains the economic and monetary policy. Title 6 would include a number of things like related to the liberalization of capital movements, which is in Article 73. 

On the representation issue, the treaty states that the decisions have to be made unanimously rather than by a qualified majority, and that the representation should take account of the various areas of economic and monetary responsibility. The ECB is a new institution and it is a president. The President of the Executive Board is obviously the representative of the monetary area in Europe. 

The EMU concerns monetary and economic issues. The economic side of union is much more complicated than the monetary side because it involves a combination of union level and member state level issues. The EU is seriously discussing ways to achieve fair representation. The necessary and major decisions regarding the participants of EMU will be made in May, 1998. Those outside EMU will be affected, including G7. A more immediate will affect the International Monetary Fund (the AIMF@) because it has to ensure a well-functioning exchange rate system and international monetary system. The IMF must take note of this new player on the international monetary stage. How is that going to be done? Some of the IMF=s business is directly affected by the EMU. Initially, the task of policy surveillance will change. First, bilateral surveillance will affect Article 4's "Consultations", one of the major instruments of the IMF. These are Article 4 consultations with individual members who are both members of the EU and the IMF.

These members will participate in the EMU, which will have a large say in the areas of economic and monetary policy. Thus, the IMF will have to consider this in its Article 4 consultations. In general, the IMF goes in for overall surveillance, rather than with each individual country. Here too, the dollar and Euro exchange rate will be important. The Euro will be a major currency. The IMF will have to consider the Euro currency in its examination of the global economies. The institutional implications of this is unclear. One option would be to leave everything as it is now, and allow the EMU to be represented only by its member states. This would be convenient for the IMF, whose Articles agree its members are member countries. However, this would present problems where the IMF has to deal with the EU as a whole. The other option would be for the IMF to deal with the EU as a whole and not with the individual member states. These options are extreme and should be ruled out: intermediate ones are preferable. These are just an illustration that profound changes have to be made on the institutional side of the international monetary system in view of the EMU. 

In conclusion, the Euro will quickly become a major world currency. The EU has an important obligation to run its economy in a stable way, to achieve reasonable growth to make it an acceptable world partner. Hopefully, the instruments are in place to do that.

Len Berkowitz: The United Kingdom's Preparation for Single Currency

There have been significant changes in the United Kingdom (the AUK@) in the recent past. The UK government=s policy in relation to EMU needs to be addressed briefly to provide a background to its preparations for the EMU. The implications of its opt-out from EMU and the recent structural changes in the conduct of monetary policy in the UK should be considered as well. The City of London will be implicated. 

The starting point is the Chancellor of the Exchequer's statement to the House of Commons on Monday, October 27, 1997. 

The government believed in principle that British membership of a successful single currency would be beneficial to Britain and Europe. There was no constitutional bar to British membership in the EMU. The key factor in the UK=s determination was whether the economic benefits of joining for industry and business were clear and unambiguous. Applying the economic tests that the Chancellor of the Exchequer outlined, it was not in the country's interest to join in the first wave of the EMU starting January 1, 1999. Barring some fundamental and unforeseen change in economic circumstances, it was not realistic for the Parliament to decide to join. It was, however, essential that government and businesses prepare intensively during this Parliament, so that the UK would be in a position to join, should it wish to do so early in the next Parliament. The statement was very significant politically and economically, and with respect to the timing, if not the scope, of the work needed to be done to prepare the UK for the EMU. Clearly, the government was committed to prepare the UK for prospective membership. It has created a Standing Committee on Preparations for EMU led by the Chancellor of the Exchequer, the President of the Confederation of British Industry, the Governor of the Bank of England and the President of the Board of Trade. 

It is necessary to analyze the institutional implications of the position the UK has taken in order to review the preparations by the UK for the EMU. The analysis will be confined to some of the provisions of the relevant Treaties and Protocols. The political and economic implication are very important but outside the scope of this paper. The starting point is the Chancellor's statement that the UK would be notifying its European partners, in accordance with the Maastricht Treaty, that the UK would not seek membership of the single European currency on January 1, 1999.

In doing so, it would bring into operation the so-called "opt-out" contained in 11th Protocol to the EC Treaty. That notice was actually given in October. The relevant terminology is important to appreciate the effect of ht e notice. Member states which do fulfill the necessary conditions for the adoption of the single currency are referred to as member states without a derogation or more colloquially as "ins." They and their respective national central banks are bound by all the relevant terms of the Treaty and ESCB Statute. Member states which do not fulfill the conditions are referred to as member states with a derogation or more colloquially as "outs." Certain provisions of the Treaty and the ESCB Statue in the field economic and monetary union do not apply to the "outs." 

The position of the UK following exercise of its opt-out is different from the other "outs." In effect, the provisions that do not apply to "outs" will also not apply to the UK. But in addition, a number of other provisions will also not apply to the UK. Among the more significant provisions of the Treaty that do not apply to "outs" and the UK, but that do apply to the "ins" is first, Article 104c(1) which requires that member states avoid excessive government deficits. "Outs" are bound by this Article, but are not bound by the Treaty provisions for sanctions in the event of breach. However, the UK continues, according to the Protocol, to be bound by Article 109c(4), which only requires the UK to endeavor to avoid excessive government deficits. This obligation is incumbent on all member states in stage 2. It is very interesting to note that the Chancellor has indicated that the UK will aim to comply voluntarily with a more stringent requirement than the requirement that applies generally. 

Second, Article 107, which precludes member states from seeking to influence the decision making bodies of the ECB or of the national central banks in the performance of ESCB tasks, does not apply to UK. Third, Article 108 which requires each member state to ensure, by the date of the establishment of the ESCB, that its national legislation including the statutes of its national central bank is compatible with the Treaty and the Statute of the ESCB.

In common with the "outs," the UK will retain its powers in the field of monetary policy in accordance with national law and will not be bound by regulations made by the ECB in order to carry out task entrusted to the ESCB. Also, in common with the outs, the Bank of England will be obliged to collect certain statistical data for the ECB, but will not be directly involved in ECB's open market, credit operations, imposition of minimum reserves, or other monetary policy operations. Similarly, the UK will not be bound to transfer foreign reserve assets to the ECB or require the approval of the ECB when dealing with their remaining foreign reserve assets. The UK will not be bound to contribute to the capital of the ECB except to the extent considered necessary to fund the operational costs of the ECB, and will not participate in the arrangements relating to monetary income of the ESCB or the net profits or losses of the ECB. 

As for the "outs," the UK will not have the governor of its central bank on the Governing Council of the ECB. The Governing Council of the ECB comprises the members of the Executive Board and the Governors of the "ins." The UK=s central bank will, in common with the "outs," be represented on the General Council of the ECB, which comprises the President and Vice President of the ECB and the governors of all the national central banks. The General Council of the ECB will have an important role in facilitating the conversion of member states from "out" to "in" status, and thus be available to facilitate the U.K.'s joining in the event of the United Kingdom Government deciding to opt-in. 

All of this should be considered in light of the Chancellor's statement, particularly, in the context of commitment to growth with low inflation and supervision of the UK's inflation target in light of the practices of the ECB. The Chancellor has set the government's aim to ensure that its fiscal rules and its deficit reduction plan will be consistent with the terms of the Stability Pact, thereby underlining the government's commitment to avoid any excessive deficit under Article 104c of the Treaty. Finally, the UK Protocol provides that the UK may change its notification at any time after the commencement of the third stage. In that event, the UK would have the right to move to the third stage if it satisfies the necessary conditions, pays up its subscribed capital to the ECB, and contributes its foreign reserves to the ECB on the basis of the Statute. Under Section 2 of the European Communities Amendment Act 1993, no such notification may be given unless a draft has first been approved by Act of Parliament. Of course, the UK has the public commitment to a referendum. 

The Chancellor=s statement, taken together with the non-applicability of Article 107 and 108 to the Treaty to the UK, has given additional significance to the reform of the Bank of England announced in May 1997. The most important feature was the government's decision to give operational responsibility for interest rates to the Bank of England. This was done essentially to establish operational independence for the central bank. This significant reform took effect immediately and will be put on a statutory basis by legislation introduced in the House of Commons on the October 28, 1997, which is expected to come into effect in the first quarter of 1998. The framework, put in place with this announcement and now reflected in the Bank of England Bill, has been carefully constructed. Four features of this legislation will be important to its effectiveness. First, the price stability objective the Bank of England is to pursue, a low inflation target of 2-1/2 percent, is set by the government. Second, it is then the responsibility of the Bank of England to achieve this low inflation target -- principally through management of interest rates. Decisions on interest rates are made by a Monetary Policy Committee in the Bank, consisting of nine members. Five of the members come from within the Bank and are the Governor, the two Deputy Governors and the two Executive Directors responsible for monetary policy operations and analysis respective. The other four are economists of high reputation and recognized experts in their field, appointed by the Chancellor of the Exchequer.

The Monetary Policy Committee meets monthly and announces its decision each month as soon as its meeting concludes. Third, the monetary policy is implemented with a high degree of transparency. The minutes of its meetings are published within six weeks and include details of how each member voted. In addition, the Bank of England publishes a quarterly inflation report, which gives a full account of its monetary actions, and their effect, over the past quarter, and a detailed assessment of the forward outlook for inflation, including a projection looking 2 years or so ahead and an assessment of the relevant upside or downside risks. Closely related, is a fourth key feature: the high degree of accountability by the central bank for its actions in this field to Parliament and the government. It is recognized that these arrangements would not be compatible in all respects with the requirements of the Treaty and Statute if they were to apply to the UK. At the most fundamental level, the UK government will still be responsible for setting the target for price stability, which the bank must seek to meet. The bank will be accountable to the government and Parliament for its actions, both of which would be incompatible with the formulation of monetary policy by the independent ECB. However, the handing over of operational independence for monetary policy to the bank is certainly a large step on the way to monetary policy independence. 

Having outlined the structural background in the UK, the Bank's role in preparing the UK must be addressed before an overview of the current state of UK financial sector preparations for the Euro. The financial sector is implicated because it is primarily this sector which will need to make preparations in order to be ready for January 1, 1999 introduction of the Euro. This is equally vital whether or not the UK is out or in. Although best known for its work helping the City to prepare, there are two other aspects to the Bank's contribution to the practical. First, the Bank has devoted, and expects to continue to devote, a great deal of resources to the ongoing preparations in Frankfurt to turn the European Monetary Institute into a fully functioning ECB. Indeed, many key staff are involved in representing the bank on each of the myriad of sub-committees, working groups, and task forces up to the Alternates Committee and EMI Council. The UK can bring to the table a unique perspective from one of the three global international financial centers in the world. This can be brought in a pragmatic, market-friendly approach which may not always be the obvious starting-point for other countries. 

The UK=s has made an absolute commitment to prepare an operational framework for the ECB and ESCB which will technically work. The UK stakes in these areas has been reduced by the existence of the opt-out, and this has not been changed now that the opt-out has been exercised.

Second, until October 27, 1997, the UK had been preparing the Bank so that it could participate as a full member in the European System of Central Banks starting in 1999, in the unlikely event the government would decide to opt-in. Now, the UK will focus primarily on the tasks which must be completed by January 1, 1999, without losing sight of the need to prepare more fully. As for the Bank's more prominent role in helping prepare London for the Euro, the Bank is continuing in the way it has been for the last two years. The Bank is coordinating the preparations where necessary and serving generally as a catalyst to stimulate the preparations of the necessary infrastructure. In addition, the Bank is promoting consensus in those areas where it believes that a harmonized approach makes sense, and promoting discussion on the relevant issues between the EMI and national central banks with market participants across Europe. Finally, and most importantly, the Bank is communicating, as widely as possible, the state of the developing preparations, both in London and in Frankfurt, so that all individual financial institutions and other firms can plan and implement their own in-house preparations on a fully-informed basis throughout ESCB. 

The significance of the Bank=s communication efforts is seen in the success of our "Practical Issues" series, a quarterly publication. It has a circulation of some 32,000, of which 4,000 copies go directly overseas. There is increasing evidence that financial institutions in the UK are now taking the steps necessary to ensure that they are ready for the introduction of the Euro. In the summer, the UK invited a representative sample of firms to confirm that their preparations were on track to be ready for January 1999. The response and subsequent informal updating was broadly reassuring, although a number of firms made it clear that they could be held up unless decisions in various areas were made soon. The Bank of England understands this and is doing all that it can to expedite the process. The urgency of the need to prepare is widely recognized and has been confirmed in the banking sector by a recent BBA survey. The Bank of England has also taken stock of the preparations at the infrastructure level by inviting all those market associations with whom we are in touch and through whom we are working, the BBA, LIBA, ISDA, IPMA, ISMA and so on, and those responsible for the payment and settlement systems, including APACS and Euroclear/Cedel, to confirm that work is in hand on all the issues of concern to them. It is reassuring that no completely new subjects raised although, inevitably, the greater the detailed preparation, the more technical questions will be raised.

The main messages from the Bank of England=s consultations seem clear, including the immediate priorities for the practical work in the next few months. First, market participants agree on the need to be able to trade the full range of Euro-denominated instruments in London . Second, the Bank also agrees on the need for an appropriate payment mechanism to carry out transactions in Euro between parties within and outside the UK. Third, efficient, cost-effective, mechanisms for settling transactions in Euro-denominated securities also need to be available. Fourth, harmonized market conventions for the issuing and trading of Euro-denominated instruments are needed. Fifth, a sound legal basis is needed for Euro transactions. This will provide legal certainty and ensure continuity of contract. Sixth, the UK supervisory authorities should clarify the provisions for the co-existence of national currencies and the Euro as different denominations of the same currency during the transition period, for capital adequacy and other supervisory purposes. 

There is work going on in each of these areas and good progress on many of them. For example, on market conventions, with the Bank of England=s assistance, the main international market associations together with the two International Central Security Depositories (Euroclear and Cedel) have agreed on the harmonized approach that they would like to see adopted for the issuing and trading of financial instruments in the Euro money, bond and foreign exchange markets. The EMI has recently been very helpful in stating that it welcomes and supports the market association's initiative. Efforts by all those involved, market associations and the authorities, are still required to promulgate as widely as possible the desired approach in order to ensure harmonization becomes a reality. We will be playing our part in this process. Another area of good progress relates to the law. The work done by practitioners, market participants and others in the United States and elsewhere has been greatly appreciated. 

In the area of banking supervision, the Bank has recently issued its preliminary guidance on the implications of introducing Euro for the capital adequacy framework. In the future, there needs to be a particular focus on three additional, related areas. Although these are not peculiarly UK issues, the UK has a very material interest in their resolution. First, price sponsors need to clarify urgently how they propose to replace disappearing price sources. Second, and it is not yet clear precisely how, the redenomination of securities from National denomination into Euro will take place. The redenomination is not necessary to trade securities in Euro from the start of the EMU. 

Where redenomination does take place, it would help to avoid confusion and error if a limited number of methods could be used. 

Third, there is a potential for confusion and error in the area of securities settlement. The development of the payments system lies at the heart of the UK's preparations for the Euro. The UK's sterling RTGS system is being developed to accommodate the Euro, so that from the beginning of 1999 Euro wholesale payments may be made in as safe, efficient and cost-effective a way as sterling payments can be made now. That development remains on schedule, and it is encouraging that a number of overseas banks have recently expressed interest to join CHAPS. The UK Euro system - CHAPS Euro - will allow payments to be made both between parties within the UK and cross-border to and from the UK through its link to TARGET. The Bank is contributing a great deal to the technical development of TARGET using the knowledge and expertise it has acquired through developing and operating by far the largest RTGS system in Europe. This is a project we wholeheartedly support because it extends, cross-border, for the first time, the benefits of RTGS systems by reducing the risk in payments.

In order to maximize its benefits in reducing systemic risk, the Bank also wants to see that the TARGET is as efficient and cost-effective as possible, so that it becomes the payments system of first choice for banks. The Bank has to recognize that TARGET will be competing with alternative Euro payments mechanisms, including correspondent banking and the EBA net end-of-day settlement system. Consistent with this view, the Bank believes it is essential not to place within the system artificial restrictions on access to intra day liquidity so that payments can flow freely throughout the system. The Bank of England does not believe that any monetary policy implications would arise, including where intra day liquidity is granted to an "out" central bank, so long as adequate mechanisms are in place to prevent such intra day liquidity from becoming extended, i.e.,spilling over into overnight credit. This remains one of the few areas where so far agreements have proved elusive at the EMI; the Bank may need to wait until next summer for ECB's decisions on the terms and conditions for access to intra day liquidity, including to "outs". 

What are the implications for the City of London outside EMU? Given that the UK intends to stay out of EMU at the start, the impact on the City of London's future position as a financial center is that the final issue that needs to be addressed. The Bank believes that London is a global international financial center rather than just a European center, with much of its business generated around the world outside Europe. London has always thrived in the area of financial innovation, and competition between financial centers is not a zero sum game. Since London is the major interface with the rest of the world in the European time zone, if the financial activity continues to develop in Frankfurt and Paris, this is likely to lead to more, not less, activity in London,. The economics of international financial activity continue to point strongly in favor of concentration in one center in each time zone to benefit from economies of scale and better management control. 

London is clearly the preferred choice in the European time zone. That is why many firms have been moving their operations and even their headquarters to London, this despite continuing doubt over UK participation in the single currency, and the UK's ambivalent attitude towards the EU for a long time. London has a huge range of markets and ancillary services, and an associated deep skills base with some 600,000 people working in financial and business services in Greater London. London has the English language and a non-bureaucratic, rather flexible, approach to financial regulation which has been developed by working the grain of markets. London also has the benefit of being a cultural center where people enjoy living. London has a healthy future. The reality is that financial activity will be carried on wherever it can most conveniently, efficiently and profitably be carried on. 

Thus, this is unlikely to be a basis to decide whether the UK joins EMU or not. The City of London thrives on broad, liquid markets regardless of currency. Measured in these terms, the introduction of the Euro represents an opportunity not a threat. 

The government has, however, conceded that it would be easy to take advantage of the opportunity if the UK were on the inside. London does not hold its pre-eminent position by right, it has to earn it continually. London=s prospects as the international financial center for the Euro are subject to two main conditions. One relates to a stable macro-economic policy in the UK. The other relates to being well prepared for the introduction of the Euro. In relation to the first, the Chancellor said on October 27, 1997 that it was in the UK's national interest for single currency to work, and that the UK would use its position constructively and supportively and play a full part in ensuring the launch is successful. Even so, the best defense against suspicion is action, not words. The UK will take that action. The UK must continue to pursue sound macro economic policies and not behave as if there is a macro economic soft option outside EMU. In relation to the second condition, the preceding comments reviewed a lot of what is being done and will continue to be done to fulfill that condition. Thank you. 

Peter R. Fisher: Addressing the American attitude and perspective on the Euro is something of a challenge. First, why is it that Americans have been so skeptical about the EMU? Why have Americans had a hard time understanding the EMU process or becoming enthusiastic about it? These difficulties are a result of American history.

However, it is very much in the American interest for the EMU process to be as successful as it can be. 

The United States has very a different history than Europe, particularly with regard to central banks and US economic history. In the late 18^th and early 19^th centuries, the US was a loose confederation of states when it tried to have a central bank and failed. The First and Second Bank of the US were chartered. In the 1830's, the US Congress let the charter lapse. It is extraordinary that the US maintained a single unit of account, the dollar, throughout the 19^th century. The US accomplished this without any central bank. This accomplishment in laissez faire is more impressive than that of Hong Kong. Milton Friedman admires Hong Kong for its laissez faire approach to capital living, but the US made it through most of the 19^th century without a central bank. The supply of base money was determined entirely by market forces. 

A more jarring point is that the US fought a Civil War over the question of labor market mobility. The cause of the Civil War was to resolve the question whether free white labor could move into areas of economic opportunity in Kansas and Nebraska instead of slave labor. At the end of the Civil War, the US created a strong Federal Government dedicated to the proposition that the US would have the free movement of capital, labor, goods and services across the entire continent. It was a bloody Civil War that was fought to achieve the principal economic outcome. It took a long time to develop that outcome. Throughout most of the 19^th and early 20^th century, the US Supreme Court developed the commerce clause. There were still heavy restrictions, goods services, and corporate control. However, through a very slow and grinding evolution, the US came to be a truly continent-wide market in goods, services and corporate control before a central bank was created. Americans are very skeptical about central banks to begin with; historically, and to this day, the bar and body politic is skeptical about central bankers and the prerogative that central bankers have. 

The US created its first central bank in 1914 - the Federal Reserve Bank. A point was made that the Federal Reserve Bank would not exercise monetary policy. It is hard for the US today to fathom, but the idea was that there would be a central bank that would be sort of regional. The Federal Reserve would not run a continent-wide monetary policy. That was how skeptical Americans were about the central bank. The centralized monetary policy slipped in through the back door in the 1920's and the 1930's. It took the US quite a while to come to its continent-wide market and monitor with an economic and monetary union. It was a slow evolution. The evolution began with economic components, mobility of capital and labor -- long before the advent of a common central bank. Many economists and financial observers are mindful of this. Europe does not have the free labor markets or the mobility of goods and services that the US has. Europe had the 1992 project, but the US did not think it would.

As EMU has taken place, the US=s skepticism has become resignation. The resignation is a mistake for several reasons. First, the US has an interest in the EMU being successful. The U.S.=s attitude is selfish - world economic health is not a zero sum game. The current debate concerns some relatively small economies on the other side of the world, which are suffering a reduction of growth from a monetary crisis. The US is worrying about how many tenths of a percent of growth this will knock off the US's GNP in the coming year. 

The countries in Southeast Asia are not unimportant, even though the US has relatively small trading relations with those countries. The US has deeper, longer-lived, and richer trading relations with Europe in goods and services. The US has an interest in Europe having sustainable growth as high as it can be. That is in the US=s interest and has nothing to do with Europe. The US=s European colleagues worry about themselves, and the US has benefitted from their efforts. It is not going to be in the US=s interest - either in the US=s own growth or in its relations with Europe - if its major allies in the world have a project that does not go very well. That is not going to be good for the US either --. 

The US must respect the enormity of the project that its European colleagues are embarking on -- not skeptically or with resignation, but with a little more trust. 

Going back to the early 19^th century, in the newly-formed UK, there were a series of extraordinary debates in Parliament at the end of the Napoleonic Wars about questions of whether to achieve price level stability or inflation stability. The decision was made to achieve price level stability and to return to the price level that existed before the inflation of the Napoleonic Wars. That was a costly decision for workers in the early years of the 19^th century in the UK. If a worker lived in the latter part of the 19^th century in the UK, he experienced the most extraordinary periods of price stability, economic growth, industrialization, and increases in wealth that has occurred in any advanced nation in the history of the world. 

Monetary stability was achieved in the UK in a rigorous way. It was costly in a short run, but highly desirable and highly beneficial in the long run. That is the nature of the endeavor the European allies embarked on. There is no doubt that over the last eight or nine years some tenths of percent of growth have been removed from Europe that would have been there otherwise had the Europeans not been working quite so hard to converge their economies. That is an investment Europe has made for a much more stable monetary process and system for the future. 

EMU will benefit the US and the world as an exchange rate matter. There is no robust model of exchange rate determination. No one knows what exchange rates will be a month or a year from now. There are theories, but none are very good. Today, spot rate is as good a predictor of where the future exchange rate will be six months from now as any. This must constitute the starting point in determining whether there will be volatility and how much the US should worry about the exchange rate of the Euro. There will be various factors that play on both the value of the Euro and its volatility, but predicting how they turn out is what is difficult. Clearly, there will be important cyclical factors that will go into what is the dollar and exchange rate of the Euro in the first two years of its existence. There are structural issues about the state of the economy and labor markets. There will be transitional issues as the ECB earns credibility. On the first day of the ECB=s existence, there will be something of an uncertainty premium built into the exchange rate. This will decrease over time, however, it is unpredictable how long this will take. The question whether the uncertainty premium will show up in volatility or whether it will be squeezed out in the strengthening trend of the Euro over the early months and years of the Euro's existence cannot be answered now. 

The US has an awkward symmetry today in the importance the exchange rate plays in the US=s relationship with Europe. The US=s external sector is 12 percent of GEP, sum of imports and exports globally. Individual European countries have external sectors more in the range of 20 to 30 percent. Exchange rate channel is an important mechanism for them. Over the last 50 years the dollar has gone up and down from the European perspective. That has had a much bigger asymmetrical impact on European economies than it has had on our economy. It is an important channel of adjustment for both the US and Europe. It happens to be a bigger channel of adjustment for Europe. That leads Europeans to complain that the US neglects its own currency, and Americans to ask why Europeans do not grow up and look a their own affairs. Neither dialogue is very helpful. 

After the EMU is achieved, the external sector of the Euroland will be about the same as the US=s. The external sector would constitute about 12 percent if all 12 countries were in. The US should look forward to the day that the US will have symmetry and realize how important the exchange rate is on each side of the Atlantic. It will help the US in its policies to promote growth around the world, in the US and in Europe. It will also help the US to get that nanny aspect out of the debate so that there will be a common approach to the currency and a realization of the importance of the exchange rate channel in the US and European economies.

Jean-Pierre Patat: The questions of the ECB and the international Euro are important. First, the ESCB is a guarantor of the commission banks. Money is created by commercial banks, but money needs to be exited and circulated freely. This is one of the main missions of the the ESCB and the ECB. Second, no single currency needs single interest rates. The ESCB was created for these two reasons. The ECB will be created in June of 1998, just after the country which will bid on the first trade of the EMU is chosen. The ESCB will be created at the same time. It is the central bank of Europe because it is composed of European and national central banks. The ECB will promulgate the orientations and challenges to monetary policy. The national center banks (the ANCB@) will implement money markets and financial markets. This is the main task of the NCB.. 

The concept of decentralizing the implementation of monetary policy is a basic issue in the constitution of the ESCB and what will be the constitution of the ECB. The monetary policy will be composed of 15 governors of the central banks of the countries belonging to the EMU and the directorates. The monetary policy will be composed of a maximum of six members: the President, the Vice President and four members of the ECB. The Monetary Council will make the decisions on money matters. They will decide changes in interest rates and the utilization of monetary instruments. There will be one voice -- one man or one woman. There are already two women who are Governors of central banks in Europe and that number will hopefully increase.

Second, the ECB=s General Council will include the Governors of all the countries of the EU. Even the Governors of the countries which do not yet belong to the EMU will be represented. The General Council will be in charge of the management of the ECB. World strategy and objectives will be undertaken by the ESCB. The main and final objective of the ECB will be price stability. Price stability will be fully implemented in the realization of this objective, and this will be accomplished without prejudice. The ESCB will have to support the general policies of the European community. There is no definition of price stability. Nevertheless, it will consist of a commitment between the ESCB the NCB. Inflation rates shall not exceed 2 percent as is already the case with Germany and France=s monetary policies.

There are two main options in view of the objective. First, an objective could be to target monetary aggregates, as in Germany and France. A second objective could be target inflation as in the UK or Spain. In fact, experience has shown that the differences between the two strategies exist in all of the central banks in Europe. The ESCB will follow in the same fashion. 

Next, the instruments of the monetary policy must be considered. Last September, the European Monetary Institute released comprehensive documentation on the instrument that could be of the ESCB at the start of the EMU. Pragmatism was the main ingredient in this and no specific national model was used. A large range of instruments could create continuity in the transition from the current system of national central banks in Europe to the future ESCB. There are classical tenders. There is also the necessity to have a longer term financing instrument.

The EU must fine tune these preparations. There needs to be a corridor for overnight interest rates between two standing facilities like there is in Germany, France and many countries in Europe. 

Last, but not least, with the ESCB, there is the possibility of using many more reserve requirements, supported by a large majority of central banks. The implementation of the single monetary policy is a new challenge. Each national central bank will implement the national money market monetary policy, which will be decided by ECB. It is a huge technical challenge, and to respond to it, there are two responsibilities. The first will be to achieve the unification of national real time gross settlement systems known as TARGET. These payments will be made possible in a very secure and very rapid manner. TARGET will contribute to the rapid emergence of a unified money market. The single factor of TARGET will be decentralization of its implementation. The fact that national central banks are implanted in money markets will be a condition of current money policies.

The international roles of Euro will play a significant role in worldwide monetary and economic change relationships. Such a move is progressive, and there will be a traumatic change. It is clear that the emergence of Euro as a major currency will contribute to a more balanced monetary process. And contribute to more balanced monetary options. An international role of the EMU will create the implications of European banks in international affairs. The role of the European currencies in exchange market is implied for 45 percent in the exchange market. The Euro will provide to those countries who willing to benefit therefrom. In central and eastern European countries, which will do 60 percent of their trade with the EU, trade will probably be in Euro.

A certain determinant space for international currency will probably not be assumed. For example, the role of international currency as an invoicing and as reserve currency will not be assumed. There is a great deal of inertia concerning the role of Euro as invoicing currency. This inertia is sometimes linked to political factors. Concerning the role of Euro as a reserve currency, there are elements of currency which are owned by central banking. Of course, a country which repays the currency would probably receive a financial incentive. The more important condition, however, for currency to be reserve currency is perhaps the size of the economy and the size of the financial market. It is in this area that the US market remains uncompetitive. An extraordinary safe has been created by 70 years of budget deficit. Europe has known this sort of private market. Of course, if all of the financial markets in Europe are added up, one will find a respectable field. This market is still not totally homogeneous, nor will it be immediately homogeneous. If the currency risk rate disappears, the risk will remain.

There are various conditions markets. The first is a credible choice of the members which will belong to the first trial of the Euro. The second is to prefer application of the stability in the gold market. The third is homogenous market. Some of the conditions could benefit from a homogeneous market. Once again, these conditions are yet to be realized. 

Of course, in conclusion, the emergence of Euro will nevertheless change the monetary international relationships, and the rationale will be more balanced for at least two reasons. Direction of competing international currency will make the need for incorporation more acute. Gains will be much larger. There will be monetary and financial reasons to be worried. For example, in the physical area, the Maastricht Treaty provides for budget deficits of not more than 3 percent. It is very important to see that the states which have traditionally had budget deficits are implementing very drastic plans for reducing them. The budget deficits must be cut in half. It is an example where incorporation is causing harm. The creation of the Euro is the creation of a European currency. Rate Policy is a notion which has no great significance in a floating regime, and it is difficult to regulate external rates. The Euro will make a major difference in this area. The ESCB will be diligent in its mission to maintain price stability.

Hans Ulrich Wegener: The European history is longer than the American history. In the course of this long and eventful history in Europe, Europe has experienced extreme situations in the monetary field -- neither the single currency nor a wide range of currencies is unfamiliar to the old continent. Something resembling the EMU did exist in antiquity. About 2,000 years ago, one could travel from Rome to Germany and pay the same currency, the Roman dinar, along the way. For several hundreds of years, the whole thing functioned without a central bank. Instead strict military power was responsible for the manufacture and distribution of necessary progress in Europe in those ancient times. There is probably no reason today to mourn this long forgotten age because, at that time, there were no banknotes, checks, or credit transfers -instruments that are essential to a modern economy.

However, such instruments only function well if a central authority is responsible for looking after them. It is important that these means of payment are not devalued by inflation. It was this perception that ultimately led to the creation of modern central banks. The current trend towards centralization and stabilization in Europe has became increasingly important for the modern economic and monetary system with international markets. A large and growing number of citizens now regard national characteristics as less important or even disruptive. It was therefore only a matter of time before the advantages of a single European currency were rediscovered. 

Ideas on how to establish a common currency began to emerge as far back as the 1970's. The effort to achieve the common currency which had since been disrupted time and time again by political and economic problems is now becoming a reality. The ECB will be established in 1998. It will be time to say good-bye to a whole series of national currencies. In the case of Germany's highly esteemed Deutsch mark, the EMU will coincide with the Deutsch mark=s 50^th anniversary.

It is necessary to take a general look at the relationship that will form between the soon-to-be-formed ESCB and the international central banks in Europe. All rights and duties within the ESCB will apply from the outside. This is a difficult and political area because this relationship is only now being defined more clearly in the discussions within the Council of the European Monetary Institute. The relationship between the ECB and the participating national central bank is often compared with the situation the Deutsch Bundesbank. The Deutsch Bundesbank consists of the Central Office and the Directorates at nine regional central banks There are, however, no limits to such a comparison. The comparison is appropriate if it takes into consideration that under the system employed by the Deutsch Bundesbank, the common monetary policy is pursued for the whole of Germany, and what is said is said by a common executive body, the Central Bank Council. 

Such a common council exists within the ESCB as well. This is the ECB=s Governing Council, which in due course will determine the common monetary policy to be pursued within the European Union. However, comparisons with the Bundesbank cease to apply as soon as the legal status of the institutions within the ESCB is considered. Whereas the Deutsch Bundesbank consists of a single federal entity, all institutions within the European system of central banks will retain their legal independence. 

Likewise, the ECB will be an independent legal person. However, the capital of the ESCB will be helped by the national central banks. To that extent, the ECB is, so to speak, a joint subsidiary of the national central banks, which are its shareholders. 

There are implications for the national central banks. The national central banks will continue to draw up their own balance sheets and retain their own conditions of employment. They may operate their own payment networks. They may also constitute and continue to perform duties such as making payments, supervising, and collecting monetary economic statistics which have been assigned to them under their respective national legislation. This, only applies as long as it does not adversely effect the implication of the common monetary policy set by the European Central Bank. Another important difference vis-a-vis the Bundesbank is that the statehood does not sign certain operations to the ECB and others to the national central bank. The Bundesbank Bank Act, on the other hand, makes a clear distinction between the work to be undertaken by the central office and that by the central bank. By contrast, only reference to the statehood of the ESCB relating to the question of responsibility is, to the extent deemed possible and appropriate, that the ECB shall have resources to the national central banks to carry out operations which form part of the cast of ESCB. The statute assumes in principle that those operations are carried out through the national central banks. However, the way in which the principle is to be applied to various operations still has to be settled. It is not always applicable or appropriate within the meaning of the statehood. 

Settling this principle becomes particularly difficult when operations concerning the ECB itself are involved. Monetary reserves are one of the important examples of how the areas of responsibility can be divided. Part of the monetary reserves of the participating countries -- up to an amount equivalent of ECU 50 billion -- is to be transferred to the ECB. This requires efforts in the intervention of the foreign exchange market. 

Whether the ECB itself is to manage the monetary reserves that are transferred to it, or whether it is to commission the national central banks to do so, is currently under discussion. 

One thing is certain, in the event the management is delegated to the national central banks, they will be required to act strictly in accordance with the instructions of the ECB and for the ECB's account. Delegating the management of the ECB's monetary reserves to the national central banks will be the advantageous because of the technical infrastructure that already exists at international central banks. Establishing a nexus system at great expense to the newly to be created ECB would be largely avoided, but such considerations must be weighted against other factors. 

The substantial part of the monetary reserves will remain with international central banks and will be managed by them independently. To ensure that the management of the national monetary reserves does not adversely affect the ECB's common monetary policy, the national central banks will have to respect the guidelines laid down by the ECB governing body. The situation should never arise where, for example, the ECB buys dollars in order to match the market in a specific direction when the national central banks are selling the same stuff. 

The super ordinary principle for allocating duties within the European Central Bank system can therefore be summarized. The decentralized implementation of monetary policy with the ECB governing council is to be determined centrally, and must function smoothly at all times. The statehood of the ESCB has endeavored to prevent this principle from being implemented. Thus, Article 9 provides for the responsibility for the functioning of the system. The ECB shall ensure that the task conferred upon the ECB is implemented either by its own activities or through the national central banks. These provisions are very complicated, and it remains to be seen, especially at the beginning, if the system, as designed, will work smoothly. 

Another area of concern is the relationship of the ECB with those countries which chose not to participate in EMU in the beginning. Those countries are part of the ESCB, even if they do not participate. They are exempt from meeting certain obligations. Also, they might be deprived of certain rights. The central banks will not apply the internal and external monetary policies of the ESCB. Consequently, they will not be granting loans. They will not receive any minimum oil reserves in the event of a minimum reserve requirement being imposed on the commercial banks and will not have to transfer any monetary reserves to the European Central Bank. They will not have any share in the capital of the ECB. Instead, they will retain their independent monetary policy powers. This is one aspect of their relationship with the ESCB. 

The other is that the countries concerned are part of the ESCB and enjoy certain rights. The close cooperation that will exist between the participating central banks on the one hand and the participating central banks and the ECB on the other, is reflected in the establishment of the ECB. The General Council of the ECB will be composed of representatives from every country. This General Council will take over advisory functions during the country's preparations for entering into the EMU. These functions are now being performed by the European Monetary Institute. The General Council will also be involved in statistical surveys and report requirements that apply to countries. Finally, the General Council will be involved in other matters of general interest such as the drafting of the ECB=s conditions of employment. 

The degree to which the countries are kept informed about the events within the ESCB is determined by the President of the ESCB keeping the General Council advised of decisions made by the ECB=s governing body. It goes without saying that there will be close coordination on monetary policy between the participating countries and the non-participating countries. An exchange rate mechanism is also being planned as a successor of the present European monetary system. Every effort has been made in drafting this data to enable those countries which will not be participating from the start to become full members of the union as quickly as possible. The experience gained during the time of the European Monetary Institute when new countries join the European Union will be a benefit. The European Monetary Institute gave these countries the opportunity, for example, to participate as observers in numerous working groups prior to their formal success. 

Finally, the TARGET system should be implemented as the system for large payments in the EMU. The EU central banks are preparing a common large value payment system, TARGET, for the third stage of the operation. Such a payment system is essential if central bank money is to be transferred within the EMU quickly and safely. After all TARGET constitutes the technical basis for all monetary policy operations within the system of European banks and provides the essential prerequisite for a single money market in the monetary union. During the preparation work on the project, which is extremely important from a macroeconomic point of view, there have been differences of opinion among the European central banks as to whether all central banks may participate in the system on the same terms. The point at issue was whether the nonparticipating countries should have access to the unlimited interest free interday credit in order to make their payments. 

From the point of view of the Deutsch Bundesbank, this is not advisable if it is only for monetary policy reasons because it is be equivalent to money creation outside the Euro area. According to the rules, money creation is the prerogative of those central banks which are to manage such money creation. However, these macro economic issues and principals do not bring one into conflict with the operational objectives of TARGET. According to these objectives, the system is intended to be accessible to as large a number of countries as possible. The nonparticipating countries will also benefit from this. The payment system can be used without overdraft lines. The Deutsch Bundesbank believes that TARGET's objective, to promote safe and rapid credit transactions within the cross-border payment systems, will therefore sufficiently accommodate it even in these circumstances. EMU will have an overriding influence on the future political and economic development of the continent. Furthermore, the Euro will have a chance to play a crucial role as reserve currency. The condition for such a development, the new currency, immediately markets confidence in its stability.