Opinion of the Economic and Social Committee on 'Market implications of the legislation and regulations required for the transition to the single currency'
Date: 1996-10-31
Institutions: European Economic and Social Committee
Subjects: Economic and Monetary Union, euro, exchange rate, legislation, money market













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51996IE1265

Opinion of the Economic and Social Committee on 'Market implications of the legislation and regulations required for the transition to the single currency'  


Official Journal C 056 , 24/02/1997 P. 0065 





Opinion of the Economic and Social Committee on 'Market implications of the legislation and regulations required for the transition to the single currency` (97/C 56/12) On 26 September 1996 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion on the 'Market implications of the legislation and regulations required for the transition to the single currency`.The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 16 October 1996. The rapporteur was Mr Umberto Burani.At its 339th Plenary Session (meeting of 31 October 1996), the Economic and Social Committee adopted the following Opinion by 89 votes with 2 votes against and 3 abstentions.1. Foreword1.1. As the dates laid down by the Treaty for the completion of EMU approach, preparatory work is forging ahead in a number of areas requiring action by the European authorities. In accordance with the programme marked out by the Green Paper on the practical arrangements for the introduction of the single currency (), the Commission - in agreement with the European Monetary Institute (EMI) - is preparing a draft Council Regulation establishing the legal infrastructure for the use of the Euro. The Commission's work should be completed by the end of 1996.1.2. The present Committee Opinion follows on from the Opinion adopted in October 1995 on the Green Paper on the practical arrangements for the introduction of the single currency () and the own-initiative Opinion adopted in September 1996 on the Impact of Economic and Monetary Union: economic and social aspects of convergence and measures to increase awareness of the single currency. Quite apart from formal considerations, the Economic and Social Committee considers it to be its function and duty to collaborate with the drawing up of draft legislation which should not only meet the need to create a sound legal framework for the single currency, but is also responsive to market requirements. Above all, the transition must be kept as straightforward as possible, free of bureaucratic and procedural obstacles and, as far as possible, compatible with the usages and customs of each market.1.3. No official documents have yet been published by either the Commission or the EMI. The views expressed by the Committee therefore refer to the working and discussion papers which are progressively emerging in various quarters. The latest Commission document on which these comments are based is dated 27 July; subsequent changes have been taken into consideration subject to the working time available and the constraints of ESC procedure.2. General comments2.1. The legal basis of the Regulation is not yet clear. It is in the Committee's view important that the rules should come into force within the time limits set and should apply to all the Member States, whether or not participating in EMU.2.2. The Committee is pleased to note that many of the proposals made in its Opinion of October 1995 have been taken up in the Commission's preliminary work; it notes, on the other hand, that certain aspects of considerable importance - which will be recalled in the present Opinion - do not appear to have been taken into consideration.2.3. One of the aspects highlighted by the Committee concerned contracts drawn up between residents of Single Currency countries and residents of derogation countries and between residents of Single Currency countries, and residents of derogation countries and between residents of Single Currency countries and residents of third countries which are governed by the legislation of derogation or third countries (). Such contracts include issues of securities and rates of return on fixed-interest securities, particularly when quoted on the stock exchanges of third countries. The Committee had asked the Commission and the IME 'to establish official contacts in order to obtain assurances that in connection with observance of contractual rules the introduction of the Single Currency will not lead to any disturbances on European and third-country markets`.2.4. The Committee is pleased to note that this suggestion has been accepted, at least as far as the securities and monetary markets are concerned. Commission contacts with the International Primary Market Association (IPMA) and the International Swaps and Derivatives Association (ISDA) are preparing the ground for the forthcoming decision to officially accept conversion from the ECU to the Euro at a one-for-one rate. Further steps, probably in relation to third country governments and/or the World Trade Organization (WTO), will also be necessary to ensure continuity of contracts concluded with residents of third countries.2.5. Clearly, no national or European legislation can have extra-territorial scope. It is nevertheless essential for economic operators dealing with third countries to have the certainty that both the ready acceptance of the Euro and the validity and continuity of contracts will be guaranteed. It should be noted in this respect that while international law recognizes the right of countries to change the value and denomination of their currency, the automatic recognition of the right - applicable erga omnes - to legislate on conversion rates between different currencies is less clear.3. Replacing the ECU and national currencies with the Euro3.1. The Regulation will confirm the decisions already taken by the Council: with effect from 1 January 1999, the Euro will become the currency of the participating Member States, and the national currencies with their subdivisions will become fractions of the single currency, at conversion rates to be determined. The Euro currency unit will be subdivided into hundredths. This arrangement permits automatic equivalence between the Euro and the participating currencies. Other provisions, which have already been made known and require no particular comment, concern:- the choice of the Euro as the unit of account of the European Central Bank (ECB) and of the participating currencies;- replacement of reference (explicit or implicit) to the ECU by reference to the Euro in all legal instruments (), it remaining confirmed that the conversion rate will be Euro 1 for ECU 1.3.2. With respect to continuity of contracts, the Council Regulation endorses the principle that introducing the Euro cannot have the effect of modifying the terms of contracts, or of entitling one of the parties to change them or to withdraw from the contract.4. Provisions applicable during the transitional period4.1. The Regulation introduces the concept of a 'transitional period`, corresponding to the Green Paper's 'Phase B`, or 'the third stage` in the words of the Treaty (); this would in practice be the three year period between the date of effective commencement of EMU (1 January 1999) until the day before the date of the final switch to the single currency (31 December 2001).4.2. Under one approach which had begun to emerge, but now appears to have been abandoned, the third stage could be shorter if circumstances permit. The Committee considered this possibility - already discussed in the Green Paper - and expressed its firm opposition () to any variation in the established programmes. The length of the various stages should be decided by the Council by 30 June 1998 at the latest; the decision should also establish that it will not be subject to subsequent modification. The market needs certainty in order to programme the numerous, complex and costly changes which will become necessary.4.3. The reasons for considering the possibility of reducing the length of the third stage are clear. This period was dictated by the time required for the central banks to put new banknotes and coins into circulation. It would appear that deadlines could be shortened if the central banks are able to speed up their preparations. The market could possibly adjust to a short period (although this is pure conjecture), but only on the condition that once its duration has been decided, no further changes are possible.4.4. One of the more noteworthy transitional provisions is that the Euro will be subdivided, in accordance with the conversion rates, into national currency units, which will retain the present subdivisions. The monetary laws of the individual countries will remain in force, in tandem with the provisions of the Council Regulation. These rules require no particular comment.4.5. The 'no compulsion, no prohibition` rule4.5.1. The Green Paper indicated that the use of the Euro for current market purposes during the transitional period should be optional. The Committee stressed that this principle should be adopted without exception, highlighting that 'every contracting party should be given the option to accept payment in currency other than national currency`. It was accepted by the Madrid Council that the market should be free to decide, summed up in the expression 'no obligation, no prohibition`. No document or communication appears to question this.4.5.2. The Regulation would, at first sight, appear to be based on this view. The basic rule establishes that legal instruments stipulating the use of the national currency or the Euro must effectively be executed in the currency selected in advance, except where agreed otherwise by the contracting parties. In other words, it will be up to the parties to decide in which currency the contract will be executed. The Committee fully supports this measure, which it had itself called for.4.5.3. As it currently stands, the draft Regulation provides for a derogation: any debt payable by a credit for account of the creditor, and expressed in Euro or a national currency, may be discharged in either of the two currencies, at the debtor's choice. The creditor will receive payment in the currency of his own account, with conversion at the fixed rates.4.5.4. This 'derogation` is clearly of such a scope as to become the guiding rule. Although absurd, the derogation would concern, if anything, only cash transactions: in effect it is irrelevant, since as there are as yet no Euro banknotes, these transactions can only be settled in a national currency. The 'no compulsion, no prohibition` principle is in practice abandoned in favour of the opposite principle: 'choice for the debtor, compulsion for the creditor`.4.5.5. If the above principle is finally adopted, the dispute which will arise in the event that the creditor is unable to accept a payment in Euros will have to be settled by the courts. One example would be that of retailers and service providers, confronted with a request to settle credit card payments in Euros effected with a credit to the seller's account. If their terminals and payment facilities were not yet in a position to deal with the new currency, or to operate in two currencies, such transactions would become impossible.4.5.6. In general terms, the option extended to creditors means, from the outset, an obligation upon companies and in particular the banking and financial sector to carry out innumerable conversions or to practice double-entry accounting throughout the period, something the Green Paper itself considered technically and economically inadvisable.4.5.7. The underlying reasons for the rule in question are perfectly valid; it is only the wording which appears clumsy and should be redrafted. It has been realized, in examining the actual situation - ascertained by the Commission in the course of its numerous meetings with businesses - that the market can only adjust to the Single Currency gradually; accounting in two currencies is costly and often - especially at the beginning of the period - completely impracticable. The rule is intended to take account of this fact, but its consequences may outstrip its intentions.4.5.8. In the light of the above, the Committee suggests deleting the rule referred to in point 4.5.3 above and replacing it with another providing that monetary debts payable by a credit for account of the creditor may be discharged by the debtor in either Euros or national currency, subject to the agreement of the creditor and of the financial institution where the account is held. This is the only way for the 'no compulsion, no prohibition` principle - which should apply to all operators - to be upheld; it also accords with actual practice.4.6. The organized markets4.6.1. The gradual shift to the single currency entails planning internal technical and organizational measures on the part of the financial institutions. It should also be borne in mind that the financial sector works in a closely interdependent fashion: each institution conducts its relations with the others in accordance with clearly-established rules, which are essential to the sector's operation. The legislation under examination takes account of the concept of 'organized markets` and lays down the rules needed to avoid disruption during the switch-over from the national to the single currency.4.6.2. The Regulation understands 'organized markets` to be markets set up for swaps, clearance or settlement of the financial instruments listed in Section B of the Annex to Directive 93/22/EEC on investment services, and including swaps, clearance and settlement of payment instruments.4.6.3. It will be in the clear interests of all organized markets to move to the single currency as rapidly as possible, although at the same time, they will have to take account of the capacity of their individual members to adjust to the new rules in an ordered and, most importantly, coordinated way. With a view to this requirement, the Council Regulation would provide an arrangement whereby the Member States will be able to take appropriate measures to allow the organized markets to take the necessary decisions for the changeover from the national to the single currency.4.6.4. The Committee fully supports this measure which reflects the necessary pragmatism and an acknowledgement of the circumstances in which each national organized market operates. This fails to resolve, however, the question of international organized markets whose operating base is located in a Member State - not necessarily participating in EMU - but whose members also belong to other Member States, whether or not participating in EMU. The Committee calls for specific rules to be devised to cover this aspect.4.6.5. The Committee believes that:- the rules adopted by a market regulated by provisions made by the Member State in which it is based apply to all its members, whether or not resident in the European Union;- where an organized market is based in a country not participating in EMU, but whose members are based in participating countries, the Member State in question should avoid adopting measures which would hamper voluntary use of the Euro.4.7. Legal measures to be adopted by the Member States4.7.1. The Regulation under discussion apparently intends to leave Member States broad freedom of action in relation to their own markets. Allowance for national requirements should, however, be tempered by compliance with the common principles which are needed for a harmonized changeover in the various countries. The Committee endorses this approach, but at the same time would draw attention to the need - already alluded to in paragraph 4.5.2, also to take explicit account of cases where national rules might affect institutions or organized markets of other Member States.4.7.2. One general rule is that national regulations must comply with the timetable to be drawn up by the Council. In the Committee's view, this rule is necessary but probably not sufficient: a degree of coordination of actions will be essential if excessive discrepancies in implementing the measures adopted in each country are to be avoided.4.7.3. The need for coordination discussed above becomes all the more evident given that the Member States will have to take the necessary measures to redenominate government stock in circulation. Moreover, the Member States will have to allow the bodies directing the organized markets to take the decisions necessary for the adoption of the Euro as the unit of account. Here also, excessive discrepancies in implementation periods for these measures in different countries and markets could unsettle the markets.4.7.4. National legal provisions permitting or imposing netting or other procedures of similar effect must apply to money liabilities expressed in Euros or national currency. Conversion will be carried out on the basis of the parities set. The same applies to the presentation of company accounts. These rules conform to Treaty rules and require no special comment.4.7.5. It has also been confirmed that national banknotes and coins will retain their capacity as a legal means of payment only within current national boundaries, remaining subject to the national monetary legislation of the country in question. The Committee notes the decision, which is in compliance with the Treaty.5. Rounding-off when converting5.1. One basic rule to be laid down by the Regulation is the number of decimal figures to be used in converting. The Commission seems to be leaning towards the following conversion rules:a. the conversion rates will be calculated to six significant figures, and will not be subject to rounding-off;b. the monetary amounts to be paid or calculated when converting a national currency to Euros will be rounded off to the nearest hundredth; for conversion from Euros to national currency, rounding-off will be to the nearest decimal sub-division or unit, depending on national practice. If application of the rule results in an exactly half-way figure, the sum will be rounded up to the nearest hundredth or unit, as appropriate.5.1.1. These rules are simple and follow earlier practice and logic, particularly decimalization of the pound sterling. Various problems in terms of law and application arise, some of which are already being examined by the Commission and the EMI.5.2. It should be explicitly established - however obvious it may be - that in the case of companies, especially financial institutions, the applicable rule is that each individual amount shall be converted using calculations based on six significant figures and rounded off in accordance with the procedures set out in paragraph 4.7.1 b. above. In this case, the total of the numerous amounts in national currency, converted into Euros, may not correspond precisely to the total in Euros of the individual amounts converted. Several tens of sample calculations have confirmed the law of large numbers: for practical purposes, the differences are negligible, with rounding-up or -down balancing each other.5.3. It follows that use of six significant figures followed by rounding-off, in accordance with the rules provided, entails neither appreciable losses nor gains. In other words, the conversion rules are 'neutral` as far as markets and individual operators are concerned. The Committee supports the uniform adoption of these rules for all the Member States.5.4. It should however be borne in mind that many organized markets may rapidly adopt the Euro as their currency of account while enabling their members to keep the national currency in their dealings with their own business partners. In this case, the amounts calculated in national currency will be converted into Euros by the organized market and then reconverted into national currency for the purposes of recording payment or clearing transactions. Matters are further complicated when inward and outward sums are in two different currencies, both participating in EMU. If the system is to work, it is essential in the interests of accounting correspondence, that exactly the same sum is calculated inwards and outwards. This correspondence is practically impossible to secure, particularly if the sums in question are considerable (see point A of the Appendix).5.5. The Committee is of the view that uniform rules must be adopted to ensure accounting agreement of transactions. The organized markets should therefore be left free to establish rules in this field; these rules would be valid for all their members. Alternatively, they should be drawn up by the Council Regulation although this solution would not be simple to put into practice since it could not take account of the varying features and wide range of needs of the national and international organized markets.5.6. A point of considerable importance needs to be made at this juncture: operations using six significant figures and rounding-off operations are readily executed by suitably programmed computers and personal computers (PCs), but not by desk calculators with either printers or digital displays, by cash registers with built-in conversion programmes, or by pocket calculators: the limited number of digits (usually no more than twelve) they can display rules out any calculation. This means that those operators not equipped with electronic data processors or PCs will have to replace their existing equipment, which cannot be adjusted to the new requirements, with entirely new equipment. The same applies to consumers wishing to check whether prices correspond with ordinary pocket calculators.5.7. Replacement of desk calculators, cash registers and pocket calculators with models in line with the new requirements could represent a new, worthwhile market for manufacturers. There is no way of knowing how many such items are in use, but some tens of millions seems a reasonable estimate. On the other hand, replacement costs would constitute an additional cost of switching to the single currency for the market and for individuals, the total amount of which would be far from negligible.5.8. The above comments raise problems which the legislator cannot ignore or underestimate. Consumers, as well as retailers and service providers, need clear, readily implemented and monitored rules, based on criteria of equity for both parties. Adherence to the 'six significant figures` rule, with the consequent rounding-off, is clearly not available to all. There is a real risk of provoking public resistance to the Single Currency at a time when current and planned campaigns seek to obtain the reverse. The Committee urges careful consideration of these needs and the adoption of rules appropriate to market requirements (see point B of the Appendix).5.9. The Council Regulation should therefore include a specific reference to retail trade and services; acting on the basis of the principle of subsidiarity, the Member States should then devise appropriate simplified rules for converting their currencies into Euros.5.10. A further comment is required concerning conversion between participating currencies: under Treaty Article 1091(4), the Council will establish only the conversion rate into Euros for each individual participating currency, but not the rate for converting each of them into each other one. The Regulation provides that this conversion shall be carried out on the basis of an algorithm comprising the conversion of the original sum into Euros, with at least three decimal figures, and the reconversion of the latter sum into the other national currency. Given that the conversion rates of the national currencies are fixed, why should not the Council itself - or the ECB, by appropriate delegation - set and impose the conversion rates between the various currencies, calculated on the basis of the algorithm mentioned above?6. Banknotes and coins in Euros6.1. Legal tender in Euros and national currencies6.1.1. The Regulation provides that banknotes in Euros shall be issued - or rather, put into circulation - at the end of the transitional period by the ECB and the central banks of the participating countries. According to the Regulation, these notes should be the only legal tender in the countries in question. The same rules would apply to coins, subject to the reservation that no-one could be obliged to accept more than fifty coins for any single payment.6.1.2. The draft Regulation's Final Provisions establish that national banknotes and coins would cease to be legal tender six months after the end of the transitional period. This period could be made shorter in each Member State through national legislation.6.1.3. The fact that banknotes and coins in Euros will be legal tender with effect from the end of the transitional period - in fact, 1 January 2002 - and that national banknotes and coins will cease to be legal tender six months later - 30 June 2002 - means that for a maximum of six months (or possibly less in some countries) legal tender will be expressed in two different ways: the Euro for all participating countries, and the relevant national currency - a subdivision of the Euro, see paragraph 3.1 - valid only in the country of issue.6.1.4. Although the situation outlined in the previous paragraph is from the legal point of view quite unexceptionable, in practice the public would tend to regard the Euro and the national currency as two separate legal tender currencies. There are some precedents: the Scottish pound, the Belgian franc and the Luxembourg franc, but with the difference that these currencies continue to circulate without a cut-off date. In order to avoid disturbance, the market should be clearly informed that the two currencies are of equal legal value. There should thus be no rush to central banks and commercial banks during the first days of issue by members of the public wishing to change national currency into Euros immediately. All countries have successful experience of exchanging new models of national banknotes and coins for types which are being withdrawn from circulation.6.2. Forgery and counterfeiting6.2.1. In accordance with one developing line of thought, the Council Regulation would restrict itself to obliging the Member States to provide appropriate sanctions against forgery and counterfeiting of banknotes. The Committee would point out, in this regard, that point 136 of the Green Paper stated that 'it would fall to the Commission in conjunction with the ESCB (European System of Central Banks) to make legislative proposals on the legal protection of banknotes against counterfeiting`. Both the Green Paper and, apparently, the Council Regulation, have however omitted to consider that the placing in circulation of counterfeit money should also be covered by the law.6.2.2. It has therefore been seen that the necessary protection of a shared asset, the single currency, could not be left to the initiative of the individual Member States. Although criminal law is the exclusive preserve of the Member States, equally the common interest cannot be protected in different ways from country to country. The principle of subsidiarity cannot be invoked here, not even in terms of the criminal law argument.6.2.3. The Economic and Social Committee considers it essential that the Commission and Council devise a legally valid solution to extend adequate protection to the single currency through measures which all the participating Member States will be obliged to adopt. Purely 'national` solutions would not be enough and could even prove counterproductive: countries with 'softer` laws would become a haven for counterfeiters and their distributors.6.2.4. The Committee proposed a solution in its Opinion on the Green Paper (paragraphs 7.10 to 7.14), which it here reiterates: the adoption of an innovative and politically acceptable approach by all the Member States. Measures to counter forgery and counterfeiting of the single currency should be considered as an element in the fight against organized crime: in effect, the same approach as was adopted with the money laundering directive. The Committee highlighted a fact which is well-known to all the police forces of the world: these offences are never committed by isolated individuals. The forgery and counterfeiting (together with circulation) of bank notes - and coins - is a monopoly of criminal organizations, almost always international, with impressive resources at their disposal, which are frequently connected with other organizations involved in drug trafficking and money laundering.6.2.5. The Committee also proposed that the new legislation should be of comprehensive scope, and cover means of payment which substitute or constitute money (payment cards, pre-paid cards, travellers' cheques, etc.). These means now account for a considerable proportion of the currency in circulation, and their acceptance depends entirely on the confidence which the public places in them. They too are helping to give new strength to the international criminal gangs. Although the sanctions for offences against private assets cannot be the same as those for offences against public assets, both types of offence have the same impact on society - namely a growing threat to the common good and a strengthening of organized crime.Brussels, 31 October 1996.The President of the Economic and Social CommitteeTom JENKINS() COM(95) 333 of 31. 5. 1995.() OJ No C 18, 22. 1. 1996, p. 112.() Op. cit. (footnote 2), paragraphs 7.4, 7.5 and 7.6. Contracts between residents of Single Currency countries and derogation countries should not cause such problems, since the Council Regulation will clearly be valid for all EU countries without distinction.() Particularly worthy of note is the intention to define the concept of 'legal instrument`: laws, regulations, administrative decisions, court rulings, contracts, payment instruments other than banknotes and coins, and other instruments with legal effect.() Article 109 J (4).() Op.cit. (footnote 2, p. 65), paragraphs 5.1.2 and 5.3.2.