Address at the World Trade Center of New Orleans

On january 1st, 1999 eleven European countries gave up their national currency to share a common currency : the EURO.

The creation of a single currencycreation of a single currency in Europeccreation is an important step in the process of European integration.

Among the ruins, after two world wars in Europe, integration was the most fruitful way to guarantee peace in Europe.

The European integration has provided Western Europe with peace and stability for more than fifty years by allowing the people of these countries to work together and to understand one another.

The first practical step on the road to European integration was taken in 1951 with the signing of the Treaty establishing the European Coal and Steel Community (ECSC). Then, in 1957, the six countries involved in ECSC, Belgium, France, Germany, Italy, Luxembourg and the Netherlands, signed the treaty of Rome establishing the European Economic Community (EEC) commonly called the common market.

On january 1st, 1973 Denmark, Ireland and United Kingdom became members. On january 1st, 1981, Greece joined the EEC as did Spain and Portugal on january 1st, 1986. On november 1st, 1993 the Maastricht treaty took effect, creating the economic and monetary Union (EMU).

The treaty of Rome and subsequent treaties commit the member States to achieve an ever closer Union. The EMU must be seen as one part of this enduring political commitment.

EURO is not a leap in the dark. It is a step in a longstanding process.

The history of the Monetary Union started in the early seventies, almost thirty years ago.

At that time, great changes occured rapidly on the financial markets. The basic principles of the post war period - the system of fixed parities and the affirmation of a dollar as good as gold - were shattered. The collapse of the Bretton Woods system was followed by a return to free-floating exchange rates. Then Europe responded by seeking new ways of securing exchange rate stability.

As a british newspaper, The Economist, recalled in a last april survey « the desire for currency stability in Europe has deep roots. Some go back to the 19th century - the latin Monetary Union, German currency Union, the gold standart. Currency unstability in the 1920’s and 1930’s reinforced that desire. »

After the reevaluation of the D-mark against the French franc in 1969 the Werner report set out a blueprint for the stage by stage realisation of economic and monetary Union in 1980. This report was not implemented because of the collapse of Bretton Woods.

In the following period troubled by the oil-shocks, the most comprehensive approach to tie together the European economies was the creation of the European Monetary System (EMS) in 1978 and its exchange rate mechanism. Since then the European monetary system has been the basic framework for monetary policy coordination in Europe and so until january 1st, 1999.

The purpose of this system was twofold :

• to create a mandatory limit of 2.25 % in the fluctuation of the European currencies against each other, and to commit the Central Banks of the European countries to intervene on the market to maintain the fluctuation’s margin.
• a second aspect of this system, largely ignored, was a second stage where after a delay of two years, that is to say in 1980, a European Central Bank would be established. This Bank would take charge of preparations for a common European currency. That aspect has never been a fact.

Thus in 1979 the backdrop was set for fast movement towards the monetary Union. But Europe needed 10 more years to implement this tremendous project.

First of all Europe decided to welcome new members -Greece, Spain and Portugal - and to achieve the single market by allowing free movement of men, goods, services and capital.

In 1988 the European Heads of States and Governments mandated M.Delors to propose concrete stages leading to this Union.

On the basis of the Delors report, the European Council decided in june 1989 that the first stage of economic and monetary union should begin on July 1st, 1990 - date on which all restrictions on the movement of capital between member States were abolished .

The treaty signed in february 1992 in a little Dutch town named Maastricht, provided a legal basis for Economic and monetary Union and the single currency.

The treaty organize the process leading to the EURO in three stages.

The first one began in 1990 with the free movement of capital.

• The second stage began in january 1st, 1994 with the creation of the European monetary institute (EMI) which prefigured the European central Bank. But at this stage the EMI had no responsability for conduct of monetary policy in the European Union - this remained the preserve of the national authorities - nor had it any ability to carry out foreign exchange intervention.

More important, at this stage, was economic convergence which the European countries had done in the last years. To participate in the third stage beginning january 1st, 1999, the Europeans countries must respect the criteria set in the Maastricht treaty.

The convergence criteria laid down by the treaty are as follows :

• an inflation rate no more than 1.5 % above the average rate of the three Member States with the lowest inflation;
• a public deficit not exceeding 3 % of Gross domestic product;
• a public debt of not more than 60 % of GDP;
• a long term interest rate no more than 2 % higher than the average rate of the three member States with the lowest inflation;
• no currency fluctuations outside the normal margin of the European monetary system for two years.

Economic and monetary Union is a necessity fully endorsed by the european nations. The commitment of the member states towards endorsing the disciplines consistent with this policy framework has been fully demonstrated by the impressive degree of convergence we have reached in the EU. This convergence has certainly exceeded the expectations of many outside observers. It has sometimes been painful, but the short term costs are now behind us, and we look forward to reaping the long term benefits. In this respect, EMU has the character of an investment; a good investment, I should add.

Not all member States have taken part in Economic and monetary Union on January 1st, 1999, but all of them could join as soon as possible. Eleven of them complied with the criteria - Belgium, Netherlands, Luxembourg, Ireland, Austria, Finland, Italy, Spain, Portugal and Germany and France. They were admitted by the European council in may 1998. Since the first of january 1999, eleven European countries have a single currency, the EURO.

The creation of a single currency in Europe by a political will of 11 nations might seem amazing to you . But if you look back into the American history, the creation of the dollar as a single currency is not very old. It is not until 1863 and the National Bank Act that Congress ended the era of free banking by the different States and paved the way for the United State’s single currency. And it was the President Franklin Roosevelt who ordered, in 1933, all Us citizens to exchange their gold coins for dollars and created by a political move the currency we use today in all the fifty States.

From now on, Europe, as United States, has a single currency, the EURO.

The exchange rates of the currencies of eleven member States are irrevocably locked to the EURO and the European Central Bank conduct - as the Federal reserve does - a single monetary policy. Henceforth, EURO is the France’s currency, the Germany’s currency, the Italy’s currency, the Spain’s currency, the Netherland’s currency and so on for eleven countries.

For most people it will become part of their everyday lives from 1 january 2002 at the latest when euro notes and coins will become available. However, the EURO is legal currency from 1 january 1999, enabling it to be used in financial markets and for non cash transactions.

For the EURO is enforced in 3 phases.

Since 1 january 1999, the EURO is the single currency of eleven european countries. Commercial banks and securities markets deal in EURO and no longer in Franc, Mark or domestic currencies. For the retail market, domestic currencies continue to be used until 2002.

Period from 1 january 1999 to 1 january 2002 is called the transitionnal period.

On 1 january 2002, eurobanknotes and coins will be introduced on the market while the national currencies will continue to have legal tender.

There are 7 euro notes. In different colours and sizes they are denominated in 500, 200, 100, 50, 20, 10 and 5 EUROS. [The designs are symbolic for Europe’s architectural heritage. They do not represent an existing monuments. Windows and gateways dominate the front side of each banknote as symbols of the spirit of openness and cooperation in the European Union.]

There are 8 euro coins denominated in 2 and 1 EUROS, then 50, 20, 10, 5, 2 and 1 cents. Every EURO coin will carry a common European face. On the observe, each Member State will decorate the coins with their own motifs. No matter which motif is on the coins they can be used anywhere inside the Euroland. For example, you will be able to buy french bread in Paris using a euro coin carrying the imprint of the King of Spain.

By 1 july 2002, at the latest, national currency banknotes and coins will be withdrawn from circulation. These banknotes and coins you see will be the currency used in Europe.

The legislation on the EURO has entered into force and foreign exchange and money markets have switched over during the night of 31 December and 1st January. Now the European Central Bank define and conduct monetary policy.

A new European Exchange Rate Mechanism has been set up. It is to link the EURO to the currencies of the countries that have not yet entered monetary union (the United Kingdom, Denmark, Sweden and Greece and as soon as possible Poland, Hungary, and each Central european country which has applied for the European Union.

All fifteen European Union member States have signed up to join the EURO zone as soon as possible - which means as soon as their economies are in a fit state. Only Denmark and the United Kingdom have negociated an opt-out from committing themselves straight away. However, the UK Government and business prepare intensively during this Parliament so that Britain would be in a position to join the single currency, should it wish to, in the next Parliament.  

In short, do you have to handle the EURO from 1 january 1999 ?

No from that date the EURO will be Europe’s currency but not yet available in notes and coins.

Another question. How can the EURO be a real currency when it does not exist in the form of notes and coins ?

Monetary Union can start on 1 january 1999 because a lot of economic activities are done without cash. Stock markets or bond markets for instance. Many transactions can be made and settled in EURO, but without notes and coins. The exchange rates between the EURO and national currency units has been irrevocably fixed, so national currency is, from now on, only a non decimal denominations of the EURO , for example french franc is equal to 0.15 EURO. This means that a given sum of money can be expressed in EUROS and cents or in french Francs and centimes or in D mark and pfennig.

Today you can write a cheque in euros and your friend in a national currency unit but both cheques are in fact in the same currency, merely in different denominations of that currency.

That is consequence of total equivalence principle which rule the transitionnal period.

To pass from EURO to national currency unit you have to use the conversion rates. These rates has been fixed on 31 december 1998, All rates take form of six significant figures expressing the value of one EURO in the various national currencies. All six figures must be used for all calculations : this is crucial to respect the principle of total equivalence. To convert from one old currency unit to another you must use the conversion via the EURO using the euro-conversion rates rather than directly use the bilateral rates. This guarantees a reliable high degree of precision.

Moreover there are precise rules on rounding off : if the third decimal is less than five, the second decimal is not changed, but if it is equal to or greater than five, the second decimal is rounded up to the next unit.

Two other principles guide the transitionnal period :

1 - The optional use principle, which means that no-one can be forced to use the EURO, nor can anyone be prevented from using it. For example a customer with a bank account denominated in national currency units may work for a company that has chosen to pay its employees in EUROS. The customer may switch to a EURO account if the bank offers this as an option but the bank may not convert an account against the customer’s wishes.

Regulation provides for exceptions to the optionnal-use principle :

[ - where payment is made by crediting an account (distance payment), the customer is free to choose the denomination used.

- if a company decides to pay its employees in EUROS, they must accept it.

- unless the authorities allow euro-denominated tax returns, taxpayers will have to use the old denominations even they are paid in EUROS.

- anyone wishing to buy shares must use EUROS as all financial markets has switched over to the EURO on 4 january 1999.]

Actually you may hold a EURO account, but payments in EUROS are subject to the consent of either the debtor or the creditor.

In practice, payments by cheques or credit cards in EUROS have already been accepted. And that is made easier by the fact that european banks accept to carry out free of charge the compulsory conversions and re-denominations.

2 - The continuity of contracts principle, which forbids the contracting parties from altering or terminating the contract because of the introduction of the EURO. Generally, the conversion to the euro will take place on 1 January 2002, unless both parties to the contract agree to do so beforehand

In concrete terms, the transition to the euro will not make anyone richer or poorer

The changeover to the euro will not affect the value of your salary or the value of the money in your bank accounts.   The changeover to the euro does not affect the value and terms and conditions of your savings.

After conversion at the fixed rate, only the figures change, not your purchasing power.

Government bonds you are holding now are quite likely redenominated in euro as from 1 January 1999. But their value has not changed, nor any other characteristics like interest rates or maturity dates.

Likewise, some companies have choosen to convert their legal capital into euro and pay their dividends in euro before 2002. As a holder of securities these changes do not concern you, as banks are responsible for converting any relevant payments in euro into national currency, and vice versa. During this period, holders of securities will receive their premiums in the currency chosen for their account (in euro unit or national currency unit).  

The introduction of the euro do not have any effect on the value or the cost of loans you have taken out. Where they are governed by contractual obligations, these, like all contracts, cannot be unilaterally modified or cancelled just because of the euro. Loans not repaid during the 1999 -2001 transitional period will continue to be serviced in national currency. If you wish, and if the other contracting party agrees, you may change to the euro before 2002 at the fixed conversion rate, but in any case, the loan will automatically be redenominated in euro from 1 January 2002.  

EMU offers opportunities for businesses

The basic objective of EMU is to foster a more prosperous economy by ensuring an environment of macroeconomic stability. The foundations upon which EMU is built guarantee the highest standards of macroeconomic stability and allow investors and consumers to plan with a greater security.

Moreover a single currency is actually necessary to reap all the benefits of the single market. You are all probably aware that the level of economic integration is very high in Europe. In some areas - for example financial services - it is even higher than in the United States. Globally, about 60 % of each country's external trade is done within the European Union. A common market in Europe is of great interest for the United States. A greater market integration made the European Union a more attractive location for investment and offered new opportunities to business on both sides of the Atlantic.

- For companies operating in Europe, the benefits of the Euro will manifest themselves on four levels :

• This first base level will mean an end to the cost of converting currencies used in cross-border trade. It has been estimated that the global savings for this could reach 65 Billion dollars per year. For a big company like Daimler Benz the number is approximately 55 Million dollars per year;

• The next level up will focus on lower prices for supplies. A single currency makes it easier to compare costs across borders and push prices down. The common currency will immediately highlight pricing disparities, helping strong companies to snatch markets.

• The third level, gaining in importance, involves greater savings from economies of scale. The single currency will allow companies to consider Europe as a single market and therefore to limit the number of factories or offices they have in any given European country. With currency risks gone, companies won’t need to operate in as many countries as today. They will be able to sell products in the European market from their most efficient production plants, localized in the most competitive regions. Bigger regional operations means leaner marketing budgets as well.

• The fourth and uppermost level, which can be viewed as the sum total of the first three, is the expectation that the Euro will enhance productivity and bring growth across Europe. Competition will take place and should lead to better productivity and more growth.

Most of the financial analysts predict that the search for better productivity in Europe will be followed or boosted by a boom of mergers. Their thinking is that it seems logical to put companies together and create economies of scale when the products and the rules of production are standardized. The increasing competition between companies will also squeeze on profit margins and will force them to seek alliances. It will create opportunities for foreign investment as well.

The Euro will also benefit foreign companies who, most likely, will consider the new European market, unified and stable, as a land of opportunities for direct investments. I hope you do so.

Essentially, each company has a choice between two basic approaches :

• to make a complete "once-and-for all" changeover on 1 January 2002;
• or, to use the euro for some operations during the transitional period.

Which factors can affect company decisions on the use of the euro

The reasons why companies may wish to use the euro during the transitional period include :

• access to financial services in euro : many companies are active on capital markets and they will be affected by developments on wholesale financial markets which have switched to the euro. The creation of EMU mark the emergence of a major new international currency. Its scale imply that markets in euros have greater depth and liquidity compared with existing national currencies, and this is likely to lead to the development of new financial instruments. Enhanced liquidity and the availability of additional financial instruments could mean lower financing costs for companies. Companies may therefore wish to make early use of the euro, at least as far as their financing activities are concerned.

• simplified trade and investment throughout the monetary union: the single currency eliminate exchange risk among participating countries. companies trading and investing throughout the union may find it more convenient to denominate transactions in the single currency rather than in working in several national denominations.

• simplified internal accounting and reporting: whereas some multi-national companies today denominate the accounts of all subsidiaries in one currency (albeit with arrangements to cope with exchange risk), others denominate accounts of subsidiaries in the currency where each branch is located. The euro provide an opportunity to simplify internal accounting and reporting requirements by using a single denomination, the euro.

• competition and early mover benefits: depending upon the market in which a company operates, there may be a commercial advantage in being able to offer goods and services in the euro denomination during the transitional period. This is evident in the banking and financial sector, but could also be true elsewhere. In addition adopting a positive pro-euro position could be important for the image of companies.

• projects with maturity date after 2002: many projects have a life span of several years going beyond key deadlines in the move towards the single currency. During the transitional period, companies may prefer to develop the management accounts of projects having a maturity after 2002 in euros, and thus avoid an unnecessary redenomination.

• to avoid logistical and personnel bottlenecks: enterprises, particularly large companies have hundreds if not thousands of information and management systems which will have to be adapted to the euro. The scale of the task may be such that a complete changeover, say over a long weed-end, would result in logistical bottlenecks and shortages of key personnel. Companies may therefore find it necessary to phase-in the changeover over a longer time period.

You should also give due consideration to reasons for delaying the use of the euro until January 2002. These include :

• retail transactions will remain in national denomination until 2002: in the absence of euro notes and coins, it is evident that the vast majority of retail transactions will remain in national currency units until 2002. Companies whose dealings are predominantly with individual citizens have little incentive to make an early move to the euro given that their clients will continue to operate only in the national denomination.

• cost of developing systems capable of working in two denominations: as mentioned above, a company is not able to switch over to a complete "euro environment" until 2002, and hence have to have some systems capable of handling both denominations. That is not to say that dual accounting systems is required, but rather that converters or switches have to be developed akin to those being considered by the banking community. Such converters will become redundant after 2002, thus concentrating development and investment costs over a short life cycle.

• benefit from standard changeover packages: all companies face similar problems in changing over to the single currency. Over time, it is hoped that enterprises can benefit from the experiences and plans of other companies. Business associations have a key role to play in this regard.

Actually, competition will be the driving force. The attitude of banks will also play a key role in the changeover of companies via the supply of conversion facilities. The other major factor for the changeover of companies will be the willingness of public administrations to accept fiscal declarations and other statutory requirements in the euro.

• The euro cannot be approached in a piecemeal manner: it represents a strategic challenge for companies and a project management approach is required to manage the changeover. Responsibility must lie with senior management. Individual managers, say for finance or IT departments, should not pursue independent changeover plans. Representatives from all departments need to be brought together to form a "Euro Working Group" responsible for developing a detailed changeover plan for the company as a whole.

A second important point is the importance for companies to address the single currency challenge without delay. Many companies still consider the success of EMU to be uncertain and are reluctant to commit substantial investments to the single currency project. Today it is too late to adopt such an attitude. EURO exist and it would be prudent for companies to establish working groups and develop changeover plans with no delay.

Emu is an opportunity but also a great challenge.

The adoption of a single currency poses a range of technical problems for businesses.

Aside from the technical problems which could be complex and costly, the main challenges of the EMU are structural.

The Euro’s stability will be measured by its capacity to adjust to an asymetric shock being either an economic or a financial crisis in one of the 11 Europeans nations.

The treaty sets down rules to prevent one member state from running up in irresponsible levels of public expenses and borrowing which could undermine the market credibility of the Euro. Moreover, the best safeguard for the stability of the Euro is the economic convergence. The commitment of the member states towards endorsing the disciplines consistent with sound economic policy has been fully demonstrated by the impressive degree of convergence we have reached in the EU. France and Germany, for example, have had a very similar growth rate during the last 20 years, close to 2.4 %. In 1993 the eleven member states had an average inflation rate of 4 %. Today their inflation rates converge to an average of 1.6 %.

In 1993 the eleven member states had an average budget deficit of 5.5 % in terms of GDP. By 1997, this has been reduced to 2.5 %.

Lastly, European countries are engaged in a deregulation and privatization process. The last examples are the deregulation of the telecommunication market in 1998, the recent « open sky »agreements and the soon deregulation of the electricity market which will take place in 1999.

With a single currency, the member states participating in EMU can no longer rely on the exchange rate as an instrument of adjustment. It has been suggested that the loss of exchange rate flexibility will exaggerate regional divergence in output growth and employment creation within the European Union economy. I know that structural rigidities exist in the european economy, but it is wrong to suggest that these will be aggravated by EMU.

The exchange rate movements on growth and employment are ineffective in highly open economies as those of the Union. This is why most European Union member states have never adopted free-floating exchange rates and have moved for fifteen years toward closer monetary integration.

Economic rigidities are best treated by appropriate structural reform. A flexible exchange rate can be an obstacle to structural reform by seeming to offer a lees-painful- but ultimately short term - alternative. The depreciation-inflation cycle experienced by many European countries in the seventies illustrates the dangers of the exchange-rate approach to adjustment..

Will the EURO topple the Dollar ?

Since 1st, 1999 the single market of government stocks in Euro represent roughly 2000 billion $. This market will be rapidly so deep and so liquid than the American market.

Goldman Sachs forecasts that the commercial bonds market in Euro will be increased by 5, from 160 to 800 billion $, modifying deeply the financing of the companies.

The European stock-markets should evolve deeply to reach the ratio of the American market.

Today the market valuation in the US is around 10.000 billion $ for a GDP of 8.000 billion $, while the market valuation of France and Germany is only of 1.500 billions $ for a GDP of 4.000 billion $.

These evolutions of financial markets will have great consequences for all the companies : more competition, less costs, challenges for the banks.

The central banks of the countries involving in Euro have reserves in amount of 300 billion $ in foreign currency, while the United States have only 50 billions $.

All that allow us to forecast a fall in the interest rate which will be good for the growth.

The European Union represent 31 % in world GDP but only 26 % in foreign currencies reserves while the US with 27 % in the world GDP have 56 % in foreign currencies reserves. All these data are going to change.

We can draw from these facts that EURO has a strong potential as an international currency. We do not expect it to displace the DOLLAR, nor do we wish it. But we consider there is room in today’s world economy for more than one international currency. At the time when the world is affected by financial and currency crises, it is in everybody’s interest that the world economy benefit from two areas of monetary stability.

Thank you very much for your attention.