The European Monetary Institute, forerunner of a European Central Bank, will unveil tomorrow its plans for the introduction of a single currency. But the signs are that the report will not meet key concerns about the credibility of the transition process, mainly because of footdragging by the Bundesbank, sources close to the EMI said.
The failure of the report to come up with a convincing plan for the transition to a single currency is all the more important since the document will play a crucial role in the attempt to bring about European monetary union. Finance ministers will consider it when they meet in two weeks' time and it will then figure, along with the European Commission's Green Paper and any subsequent revisions, in the decisions of European leaders at the Madrid summit next month.
"If the report does not come up with a robust changeover scenario, this is bound to fuel fears in the markets that it will all fall apart," said Graham Bishop of Salomon Brothers.
One principal demand of financial markets has been for clarity about the legal standing of the new currency in the period between the locking of exchange rates on 1 January 1999 and the moment when national currencies are replaced. The worry is banks that mismatch their balance-sheets - with liabilities in, say, German marks and assets in the new Euro-currency - could face enormous losses should the new system unravel.
A solution would be to say the Euro-currency is legally identical to existing national currencies. However, the Germans insisted on an alternative option, under which the Euro-currency and national currencies will continue to be seen as entirely distinct. "This sends a message that Germany wants to retain the option to back out," said a source close to the EMI.
The Bundesbank has also apparently held out against the EMI deciding in principle how the European Central Bank should operate in the period between the decision by the European Council on those participating in EMU and the actual locking of exchange rates.Instead it is insisting that key decisions on the conduct of monetary policy be left until after the central bank is set up.Reuse content