Opinion of the Committee of the Regions on 'Economic and Monetary Union` (97/C 34/01)

THE COMMITTEE OF THE REGIONS,

Having regard to the decision of the Committee of the Regions of 15 November 1995, taken in accordance with the fourth paragraph of Article 198c of the Treaty on European Union, to assign the preparation of this Opinion to Commission 1 (Regional Development, Economic Development, Local and Regional Finances);

Having regard to the Draft Opinion adopted by Commission 1 on 21 June 1996 (Rapporteurs: Mr Geisel and Mr Bore) (CdR 65/96 rev. 3);

Having regard to

- Article B and Articles 109 e-m of the Treaty on European Union;

- the Green Paper on the practical arrangements for the introduction of the single currency (COM(95) 333 final);

- the European Monetary Institute's document on introduction of the single currency;

- the Conclusions of the Heads of State and Government, Madrid, 15 and 16 December 1995,

at its 14th Plenary Session held on 18 and 19 September 1996 (meeting of 18 September) adopted the following Opinion by a majority.

1. Introduction

1.1. The transition to the third stage of economic and monetary union will have many direct and indirect effects on Europe's regions and local authorities. This applies in particular to economic-structural policy, fiscal, financial, labour and social policies. EMU will also change the terms of competition in the internal market and will pose new challenges for cooperation between the regions/local authorities and firms established on the areas they administer. EMU will also entail many adjustments for regional and local authorities.

1.2. The Committee of the Regions has adopted the following Opinion on monetary union and its introduction:

2. Europe and monetary union

2.1. The COR affirms its support for the creation of an economic and monetary union constituting a community of stability and development, and advocates the further political integration of Europe.

2.2. A common currency is a logical adjunct to the single market and will strengthen the European economy's position in the world. Currency-linked transaction costs, costs of insuring against exchange-rate fluctuations, and exchange risk will disappear within the Community. This will mean cost savings and make for greater certainty in long-term investment planning.

2.3. Exchange rate fluctuations have in the past deprived the EU economy of the stability needed for it to realize its growth potential, leading to lower growth generally. With a European currency this kind of problem will no longer occur.

2.4. A single European currency can be expected to play a greater role in international trade and investment, and as a reserve currency, than the individual European currencies hitherto, thereby helping to prevent local economic difficulties leading to currency upheavals and making it possible to combat international exchange-rate speculation more effectively. This too will further economic development in Europe.

2.5. An enlarged capital market should mean lower interest rates on average in the participating Member States, although individual countries might experience slight rises.

2.6. The disappearance of exchange costs will make foreign travel within Europe cheaper, and thus promote European youth and cultural exchanges.

2.7. The COR considers that the expected positive impact of monetary union on general economic development in the Member States - in terms of employment and growth - will materialize only if the common European currency proves stable. Otherwise there is a danger of the European economy being weakened, with detrimental consequences for consumes and savers.

2.8. The Committee of the Regions welcomes the intention of the Heads of State and Government, expressed in the Conclusions of the Madrid Summit, that the third stage of monetary union should begin on 1 January 1999. It also feels that the decision to insist on fulfilment of the convergence criteria laid down in the EU Treaty was necessary (i.e. the criteria with respect to price stability, budget deficits, government debt, long-term interest rates, participation in the EMS and the establishment of independent national central banks in the participating Member States). In reality, however, the final decision on the participating countries and the timetable for introduction of the third stage of monetary union will be taken by the Heads of State or Government in the spring of 1998.

2.9. The COR also welcomes the decision of the Heads of State or Government to call the future European currency the euro.

2.10. The decision of the Madrid Summit to select the participant Member States on the basis of actual 1997 data rather than planned figures is welcomed.

2.11. As well as monetary convergence, real economic convergence and comparable productivity trends are preconditions for successful monetary union. Otherwise, either monetary policy will be less stability-orientated, or else there will be a need for a strengthened balancing mechanism for weaker regions, which would be unthinkable without further political integration in Europe and popular, solidarity-based support in the Member States.

2.12. Over the last few years the fiscal consolidation efforts of many Member States have not yielded the forecast results. These efforts have been further impeded over the last few months by cyclical economic weakness in many Member States. Against the current background, hasty further consolidation of public-sector budgets could actually impose a further burden on an already weak European economy, particularly as in some Member States government spending cuts have come dangerously close to exceeding the level judged acceptable by public opinion, given the state of the economy. The objective of fulfilment of the convergence criteria by all Member States must not however be lost sight of, as only in this way can lasting growth and employment be promoted.

2.13. If the radical fiscal consolidation measures were to be perceived as arising from the need to comply with the convergence criteria, there is a danger of the future European currency becoming identified, in the eyes of many European citizens, with unemployment and the dismantling of public social services. This could result in a damaging renationalization of policy in the Member States and reduced support for European integration.

2.14. The broad-based popular support for monetary union, which the COR considers essential, would thus be undermined.

Political union and democratization

2.15. The transfer of control over monetary policy from the national to the European level will necessitate a deepening of political union. A stronger commitment of citizens to the European Union is in this sense an essential basis for solidarity within the Union. A monetary union involving only a minority would not be conducive to such solidarity and commitment to Europe. Moreover, the disparate forces unleashed by an economic and monetary union can in the long run be contained only by the common interest of a broader political union.

2.16. The COR calls on the Member States to use the forthcoming Intergovernmental Conference to make the European institutions more democratic.

Towards a stable monetary union

The founder Member States

2.17. In terms of competition policy and the viability of the internal market, the value of a monetary union rises with the number and size of the participating economies. The COR therefore urges that the single currency begin - subject to strict observance of the stability criteria - with the largest possible number of participating Member States and include the European Union's main economies. If only a small number of Member States were to join, it is to be feared that this would work against integration rather than for it.

2.18. Because of the importance of the euro in creating an identity for the EU and its citizens, the COR also feels that efforts should be made to ensure that the common monetary area includes a majority of European citizens from the outset.

The role of fiscal policy

2.19. The COR stresses the need for stability-orientated cooperation between monetary and fiscal policy, particularly in the participating Member States, as a way of guaranteeing long-term monetary stability and employment growth. The EU Treaty's criteria are, however, primarily concerned with entry to monetary union. The Treaty contains no clear indication of the conduct to be required of Member States after entry to monetary union or of sanction mechanisms to enforce stability-orientated fiscal policy.

2.20. The COR therefore supports the idea put forward at the Madrid Summit of a binding stability pact which should guarantee fiscal policy stability after monetary union without unleashing deflationary forces. Fiscal policy must be designed to deliver more employment, growth and prosperity in a sustainable way. Consolidation of public-sector budgets will contribute to this, independently of compliance with the convergence criteria.

2.21. The COR calls for partnership and cooperation between the Member States, regions and local authorities in order to achieve budget consolidation. Consolidation of government budgets should not however place a disproportionate burden on the regions and localities.

2.22. A common stability policy must be underpinned by a common culture and philosophy of stability. The COR points out that the enforcement of sanctions risks stirring up resentment between Member States and interfering with the budgetary sovereignty of Member States, regions and local communities. Incentives for pursuing stability-orientated fiscal policy would be more appropriate than sanctions.

2.23. The growing integration of European economies will mean that in future some Member States will have less scope than hitherto to counter economic disequilibria with expansionary fiscal policies. In order to ensure that there is still scope for policy action in the EU to prevent future economic imbalances, there has to be increased coordination of the fiscal policies of the EMU participants, and the other Member States of the European Union to combat the risk of any additional financial transfers from becoming necessary.

2.24. The COR also calls on the Heads of State and Government to create, before the beginning of the third stage of monetary union, the necessary economic and monetary policy instruments to guarantee sustained convergence between the Member States and the stability of the single currency. If a strengthening of existing transfer mechanisms becomes necessary, it will also be necessary to clarify the ways in which this is to be financed.

Monetary union and its effect on non-participant Member States

2.25. A Community based on solidarity, an objective referred to in Articles 2 and 130 of the EU Treaty, should embrace not only the core group of monetary union participants, but also those Member States which fail to qualify. These Member States may be expected to face higher real interest rates than the participating countries, as the markets will demand a risk premium. This will result in a higher cost of investment for the private sector and a higher cost of borrowing for government. This will in turn be a further obstacle to the necessary process of convergence.

2.26. Without support, these Member States might be tempted to embark on competitive devaluation, which, for reasons of the viability of the internal market alone, would be undesirable. The COR considers that, before introduction of the single currency, the Commission should assess whether, and to what extent, support measures are needed to stabilize monetary relations.

2.27. The COR also calls for binding rules on a modified system of monetary relationships between the participating and non-participating Member States before the Member States to join monetary union are selected in order to promote integration into the monetary union. In order to prevent distortions of competition vis-à-vis non-participant countries, appropriate currency arrangements are needed to provide a sufficiently high degree of exchange rate stability but at the same time taking sufficient account of the economic strength of these countries. Ensuring exchange rate stability within the EU is above all a matter for the non-participating Member States.

2.28. The COR believes that European monetary policy must also aim at securing the euro's external value. External exchange-rate stability must not be achieved at the expense of domestic price stability.

3. Effects of a monetary union on local areas and regions

Economic effects on the regions and local authorities

3.1. The COR considers that the economic effects of monetary union on the regional and local authorities have so far not been sufficiently discussed or analyzed, either with regard to the comparative positions of regions within the monetary union, or those of regions inside and outside the monetary union respectively. Nor are the effects understood of monetary union on peripheral and economically weak regions or regions of Member States with an opt-out clause.

3.2. The COR is also concerned at the lack of analysis and discussion of the employment effects of monetary union and their regional distribution.

3.3. The COR therefore urges the Commission to carry out comprehensive studies on the socio-economic consequences of monetary union for Europe's regions and local authorities before monetary union begins and to inform the COR of the results. Clarification of the problems and opportunities listed below is needed:

a) The larger monetary area will lead to further intensification of competition between the regions. Regions which have so far benefitted from exchange rate fluctuations will no longer be able to rely on such effects and will experience rising competitive pressures and further loss of market share by local industry. Regions on the other hand with a high level of external trade conducted in foreign currency will benefit greatly from the disappearance of exchange costs and risk.

b) The stabilization of prices and the absence of currency risk is likely to mean direct investment going increasingly to those participating European regions with favourable factors of production.

c) To compensate for the lack of scope for monetary policy measures in a monetary union, fiscal policy instruments based on minimum requirements may take on a new dimension at European level. The continuing limited mobility of labour in Europe could perpetuate asymmetric shock effects on individual regions, which against a background of monetary union could do lasting damage to prosperous regions as well.

d) Regional economic divergences within the Member States could be exacerbated, particularly as the budgetary consolidation currently being carried out by the Member States initially greatly restricts the scope for redistribution within the individual Member States. Adjustments to the Structural Funds will no doubt be needed, in particular to counter damaging economic and social consequences in the affected regional and local authorities. The Structural Funds cannot, however, be harnessed to fulfilment of the convergence criteria.

e) Growing economic divergences between regions might compel affected regional or local authorities to pursue a policy of low wages and environmental and social standards in order to remain competitive in a monetary union. This applies in particular to the authorities of regions with structurally low productivity. A more active European policy on minimum standards is therefore needed, subject to strict compliance with the principle of subsidiarity.

f) The progressive integration of the European single market and European monetary union open up new opportunities and requirements for employment policy at European, national, regional and local level. Employment policy is the responsibility of the Member States, but must be coordinated at European level in order to channel the benefits of the single market and monetary union into actively combating unemployment. The same holds true for policy relating to the social partners.

g) Borders will be less of an obstacle to the economic integration of regions. Economic cycles will operate to a greater extent across borders. This could also affect trade and financial flows within individual Member States and transnational regional joint ventures. A coordinated economic policy for the Member States should be given a regional policy dimension. In Member States where the regional and local authorities have significant autonomous budgetary powers they too must be genuinely involved in the drawing up and implementation of the rules governing the operation of EMU.

h) Monetary union, and the disappearance of transaction costs, will cause changes in consumer demand in border territorial authorities. Regions and localities with low consumer taxes will become attractive to consumers living over the border in neighbouring countries. And purchasing power can be expected to migrate from areas where consumer taxes are particularly high.

i) As a result of transfer of responsibilities, the consolidation of public finances will put pressure on regional and local authority budgets, even where these have not contributed to the public-sector deficit. Consolidating public-sector budgets at disproportionate cost to the regional and local authorities will lead to deteriorating competitiveness and social marginalization.

j) The planned enlargement of the European Union will put pressure on the existing Structural Funds. At the same time, monetary union may be expected to lead to redistribution of Structural Fund resources. If enlargement and monetary union were to take place simultaneously, there could be an additional need for Structural Fund intervention.

Public information

3.4. The public sector, and thus the regions and local authorities, will play a leading role in promoting public acceptance of the changeover to the euro.

3.5. Because of their proximity to citizens regional and local authorities will have to play a key role in the dialogue with citizens on the advantages and disadvantages of introduction of the European currency. To enable them to perform this role, prompt and comprehensive information is needed from the European institutions on the arrangements for, and the advantages and disadvantages of, monetary union. EU support for the provision of information to citizens on the common European currency must also be made available to the regions and local authorities.

3.6. In order to do justice to specific regional characteristics, the regions and local authorities should be involved promptly and fully in the information campaign.

3.7. The COR suggests that the regions and local authorities nominate staff with the specific task of answering the public's questions on the introduction of the euro.

4. The introduction of the single currency

4.1. The COR is pleased to note that the Heads of State and Government have moved away from the Green Paper's scenario for the practical arrangements for the introduction of the single currency and are now in accord with the EMI's transitional scenario. The requirement for parallel currencies has to a great extent been abandoned. Only ESCB currency market transactions will be in euros (ESCB = European System of Central Banks).

4.2. The COR is pleased to note that private economic operators will be free to continue to issue invoices in national currency during the transitional period leading to the circulation of single currency notes and coins.

4.3. The COR notes the Heads of State and Government's call to the Member States participating in monetary union as from 1 January 1999 to denominate all new issues of tradeable public debt in euros. The COR would point out that this also applies to the territorial authorities of Member States participating in EMU.

4.4. The COR also points out that non-tradeable public debt instruments, including those issued by local and regional authorities, may continue to be issued in national currency until euro notes and coins begin to circulate.

4.5. The COR has failed to find any discussion of the costs of the currency changeover in the Commission's Green Paper, the EMI's publications or the Conclusions of the Heads of State and Government of 15 and 16 December 1995. Small and medium-sized firms and banks and, where these exist, financial institutions with local authorities as guarantors (savings banks) will be particularly affected by these costs.

4.6. The costs incurred by the regional and local authorities and regions will also be considerable. This applies in particular to small local authorities with low staff numbers. It is not yet clear who within the Member States is to carry the costs of the changeover. It must basically be ensured, particularly in times when budgets are under pressure, that no further financial burden is imposed on regional or local authorities.

4.7. For this reason and provided consumers are adequately protected, the changeover to euro notes and coins should not mean that non-market public services will be subject to parallel pricing. It is necessary to provide cheaper solutions, such as the publication of conversion factors or tables, which are affordable for regional and local authorities and which nonetheless provide the necessary information to the public and cover consumer needs.

4.8. During the period between the decision as to which Member States will participate in EMU and the effective beginning of EMU with the irrevocable fixing of exchange rates, the COR asks the Council of Ministers and the EMI to look at the possibility of setting conversion rates on the basis of a retrospective medium-term average. At all events safeguards should be adopted against currency speculation which might arise from the exchange rates to be established.

4.9. Future negotiations on the detailed arrangements for the changeover to the European currency must be based on the following principles:

a) the costs of the introduction of the European currency must be kept as low as possible for all concerned;

b) the procedures and arrangements for the changeover must be competition-neutral and must not favour any group of firms or individual financial centres;

c) the arrangements for the changeover must not constrain government borrowing in terms of the timing, location or conditions of the debt issue;

d) the arrangements must make provision for the prevention of abuses and help prevent any prejudicial consequences for the European institutions or the participants in monetary union;

e) the individual stages of implementation must be transparent, straightforward, decentralized and effective for market participants and citizens. All the individual measures must be designed to enhance the credibility and permanence of EMU and its acceptance by the market and citizens, in particular in their capacity as consumers;

f) inflation must be prevented. In the course of the changeover rules will therefore be needed governing the application of the conversion rates, including binding rules on rounding. As the new European currency can become the legal means of payment only when notes and coins are in circulation, the national currencies will until then remain legal tender.

5. Conclusions

In the light of the above considerations:

The COR

5.1. affirms its support for the creation of an economic and monetary union as a community of stability, and advocates the further political integration of Europe;

5.2. stresses that, as well as monetary convergence, real economic convergence is a precondition for successful monetary union;

5.3. considers that monetary union must contribute to the growth of prosperity and employment;

5.4. calls on the Member States to use the forthcoming Intergovernmental Conference to make the European institutions more democratic, as the disparate forces unleashed by economic and monetary union can in the long run be contained only by a sense of common interests in a broader political union;

5.5. urges that the single currency begin - subject to strict observance of the stability criteria - with the largest possible number of participating Member States and include the European Union's main economies;

5.6. feels, because of the importance of the euro in creating an EU identity, that efforts should be made to ensure that the common monetary area embraces a majority of European citizens from the outset;

5.7. considers it necessary that the future European currency command broad popular support;

5.8. supports the idea put forward at the Madrid Summit of a binding stability pact paving the way for more sustainable employment, growth and prosperity in Europe, and recognizes the need for closer cooperation between the Member States on economic, financial, social, environmental and employment policy with a view to monetary union, whilst strictly complying with the principle of subsidiarity;

5.9. calls on the Heads of State and Government to create, before the beginning of the third stage of monetary union, the necessary economic and monetary policy instruments to guarantee sustained convergence between the Member States and the stability of the single currency;

5.10. calls for the relationship between EMU participants and non-participants to be clarified at the earliest opportunity; the relationship must take account of the principles of solidarity and stability between Member States and serve the objective of integration into monetary union;

5.11. considers it necessary, in the light of the problems outlined in point 30, that before a decision is taken on definitive entry to monetary union the effects of monetary union on Europe's various regions be analyzed and evaluated. This applies in particular to the effects of monetary union on EU cohesion policy and the situation of regional and local authority budgets. In the light of the information thus gained the COR calls for the development and application of suitable instruments to counter the negative effects of monetary union on the regions and to strengthen the positive effects;

5.12. calls for partnership and cooperation between the Member States, regions and local authorities and rejects any consolidation of public-sector budgets which would place a disproportionate burden on the regions and localities;

5.13. calls on the Commission and the Member States to clarify the question of responsibility for the costs of the changeover to the single currency for both the public and private sector, and, in the interests of consumers, to pay greater attention to the danger of price rises resulting from unfair rules on rounding;

5.14. emphasizes the importance of the regional and local authorities in raising public awareness and in the debate on introduction of the single currency and therefore calls for them to be involved promptly and comprehensively in the drawing up of information and to have access to the funds made available by the EU for the provision of such information.

Brussels, 18 September 1996.

The Chairman of the Committee of the Regions

Pasqual MARAGALL i MIRA