EUROPEAN PARLIAMENT

GGG G G G G 1999 G G 2004 GGG Session document

FINAL A5-0169/2003

21 May 2003

REPORT

on the international role of the zone and the first assessment of the introduction of banknotes and coins (COM(2002) 332 - 2002/2259(INI))

Committee on Economic and Monetary Affairs

Rapporteur: Carles-Alfred Gasòliba i Böhm

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Page

PROCEDURAL PAGE...... 4

MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION ...... 5

EXPLANATORY STATEMENT...... 9

MOTION FOR A RESOLUTION B5-0640/2002...... 13

MOTION FOR A RESOLUTION B5-0016/2003...... 14

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EN PROCEDURAL PAGE

By letter of 20 June 2002 the Commission forwarded to Parliament a communication on the euro area in the world economy - developments in the first three years (COM(2002) 332), which had been sent for information to the Committee on Economic and Monetary Affairs.

At the sitting of 19 December 2002 the President of Parliament announced that the Committee on Economic and Monetary Affairs had been authorised to draw up an own-initiative report, pursuant to Rules 47(2) and 163 of the Rules of Procedure, on the international role of the euro zone and the first assessment of the introduction of banknotes and coins (C5 - 0572/2002).

The Committee on Economic and Monetary Affairs had appointed Carles-Alfred Gasòliba i Böhm rapporteur at its meeting of 1 October 2002.

At its meeting of 17 February 2003 the committee decided to include the following motion for resolution in its report:

- B5-0640/2002 by Ilda Figueiredo, on the effects of the introduction of the euro, referred on 13 January 2003 to the Committee on Economic and Monetary Affairs as the committee responsible.

At its meeting of 17 March 2003 the committee decided to include the following motion for resolution in its report:

- B5-0016/2003 by Franz Turchi on the EUR 1 and 2 banknotes, referred on 10 February 2003 to the Committee on Economic and Monetary Affairs as the committee responsible.

The committee considered the draft report at its meetings of 20 January 2003, 17 March 2003, 24 March 2003, 23 April 2003 and 20 May 2003.

At the latter meeting it adopted the motion for a resolution by 31 votes to 3, with 1 abstention.

The following were present for the vote: Christa Randzio-Plath, chair; Philippe A.R. Herzog and John Purvis, vice-chairmen; Carles-Alfred Gasòliba i Böhm, rapporteur; Generoso Andria, Juan José Bayona de Perogordo (for José Manuel García-Margallo y Marfil, pursuant to article 153(2)), Pervenche Berès, Roberto Felice Bigliardo, Hans Blokland, Renato Brunetta, Hans Udo Bullmann, Ieke van den Burg (for Helena Torres Marques), Harald Ettl (for Giorgos Katiforis), Jonathan Evans, Robert Goebbels, Lisbeth Grönfeldt Bergman, Mary Honeyball, Christopher Huhne, Othmar Karas, Piia-Noora Kauppi, Christoph Werner Konrad, Werner Langen (for Ingo Friedrich), Astrid Lulling, David W. Martin, Hans-Peter Mayer, Peter Michael Mombaur (for Ioannis Marinos), Ioannis Patakis, Fernando Pérez Royo, Mikko Pesälä, Alexander Radwan, Bernhard Rapkay, Peter William Skinner, Charles Tannock (for Mónica Ridruejo), Bruno Trentin and Theresa Villiers.

The report was tabled on 21 May 2003.

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EN MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION

on the international role of the euro zone and the first assessment of the introduction of banknotes and coins (COM(2002) 332 - 2002/2259(INI))

The European Parliament,

– having regard to the Communication from the Commission on The euro area in the world economy - developments in the first three years (COM(2002) 332)1,

– having regard to the Communication from the Commission on The euro: the introduction of banknotes and coins one year after (COM(2002) 747)2,

– having regard to the motion for resolution by Ilda Figueiredo on the effects of the introduction of the euro (B5-0640/2002),

– having regard to the motion for resolution by Franz Turchi on the EUR 1 and 2 banknotes (B5-0016/2003),

– having regard to the European Central report on Review of the international role of the euro, December 20023,

– having regard to its resolution of 4 July 2001 on means to assist economic actors in switching to the euro4,

– having regard to its resolution of 12 March 2003 on the state of the European economy – preparatory report with a view to the Commission recommendation on broad economic policy guidelines5,

– having regard to the Final report of 21 October 2002 of Working Group VI on Economic Governance of the Convention on the future of Europe6,

– having regard to Rules 47(2) and 163 of the Rules of Procedure,

– having regard to the report of the Committee on Economic and Monetary Affairs (A5/0169/2003),

A. whereas the creation of the euro is a major success story of European integration leading to more prosperity and European identity; whereas the benefits of the single currency clearly outweigh any disadvantages,

B. whereas the euro zone's recovery from the economic downturn is slow, and growth prospects remain unclear in a climate of geopolitical uncertainty,

1 Not yet published. 2 OJ C36 E, 15.2.2003, p. 2. 3 ISSN 1725-2210. 4 OJ C65 E, 14.3.2003, p. 162. 5 P5_TA-PROV(2003)0089. 6 CONV 357/2002.

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EN C. whereas the credibility of the euro zone is based on a sound institutional framework comprising an independent monetary authority pursuing a policy of price stability and co- ordination of macroeconomic polices by participant Member States; whereas, however, the growing interdependence of the euro zone and the global challenges posed to its economy have highlighted the deficiencies of the current co-ordination mechanisms,

D. whereas the current international representation of the euro zone and its representation in international policy-making institutions is insufficient in view of the fact that the euro area is the second largest economic area in the world,

E. whereas the euro zone’s attractiveness to investors will be significantly boosted by the full implementation of the Financial Services Action Plan and the implementation of the BEPGs by Member States; whereas this effect will be enhanced in the medium term when new Member States join the EU and hopefully introduce the euro,

F. whereas public and business confidence in the new currency has been greatly helped on the one hand by the fact that the ECB has largely achieved its stability target and, secondly, by the fact that the physical introduction of euro cash was successfully completed in 2002,

G. whereas the euro changeover has been used to bring about a limited increase in the prices of goods and services for everyday use – but smaller than what was psychologically perceived by consumers –, which was compounded by other simultaneous circumstances; whereas there are other complaints by consumers: namely excessive price increases in some basic goods, the issue of euro cent coins and the need for smaller denomination bank notes,

The international role of the euro zone

1. Calls for an enhanced representation of the euro zone in international policy-making institutions, justified by the euro zone's importance in the world, its first place as development aid donor, and the involvement of the EU in international financial and economic initiatives;

2. Calls for the selection of a single representative of the euro area who ensures that the can work efficiently to better co-ordinate economic and employment policies; calls for a proposal on how to reach the best formulation for this institutional role, one possibility being to formalise it in the person of a vice-president of the Commission who would also need to be the Commissioner responsible for Economic and Monetary Affairs, entrusted with the power to act as euro area representative; considers that a provision to this effect should be incorporated in the future Constitutional Treaty;

3. Believes that this representative body should be largely empowered to speak and act on behalf of euro zone countries in all important multilateral financial and economic fora, particularly in the G7 group of finance ministers, the IMF and the World Bank; calls on these institutions to eventually give this representative appropriate decision-making power; considers that in this case, the interests of euro zone Member States already represented would be better served by a single voice;

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4. Stresses the importance of continuous dialogue on exchange rates amongst economic currency-area representatives in multilateral fora; believes that the 'single representative' could faithfully act as the necessary link between Council Positions and multilateral economic policy guidelines, while at the same time present a single voice on behalf of the economies which is consistent with euro area countries' common stance at the European Financial Committee;

5. Considers that the ECB, despite its policy of neutrality with regard to the euro’s international use, should closely monitor developments in this field and take the necessary measures if the financial and monetary stability of the euro zone is threatened; in particular, believes attention should be paid to the official use of the euro by the public and financial sectors of non-euro zone countries;

6. Calls for a feasibility study to evaluate whether invoicing commodities and energy supplies in -in order to avoid the double price/exchange rate volatility-, is beneficial to the euro zone, and if so, to take measures to promote this; therefore, also calls for active measures aimed at increasing international trade invoicing in euros to benefit euro zone exporters and importers, by giving more certainty to commercial transactions and simplifying administrative procedures;

7. Stresses the need to monitor the use of euro cash as a parallel currency in some third countries and regions; believes this is necessary as out-of-area use of euro cash could affect the currency’s value and produce misleading statistical signals in terms of the growth of monetary aggregates;

8. Calls on new Member States to comply with their commitments related to the euro area and to follow on with their efforts to reform their economies and to fulfil the Copenhagen criteria;

The economy of the euro zone

9. Urges Member States to increasingly consider their economic policies as a matter of common concern as established in the current Treaty, and realise that in an enlarged euro area there will thus be the need to put more emphasis on co-ordination of economic policies and a consistent implementation of the BEPGs; welcomes the streamlining process introduced by the Commission with a view to consolidating and synchronising the time frames of economic and employment policy guidelines;

10. Calls on Member States to maintain budgetary positions of close to balance or in surplus throughout the economic cycle, and as long as this has not yet been achieved, to take all the necessary measures to ensure an annual improvement in the cyclically-adjusted budget position of at least 0.5% of GDP; asks for budgetary positions to be evaluated in a flexible way in accordance with the guidelines set by the Commission in its Communication of 27 November 2002 to the Council and the European Parliament on strengthening the coordination of budgetary policies (COM(2002) 668);

11. Calls for the compliance of previous commitments made in Spring Councils in order to

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EN stress the need to reach the Lisbon strategy's competitiveness goals; calls for a promotion of a culture of entrepreneurship that takes into account the importance of SMEs for the euro zone economy as employment creators; calls for higher private and public investment aimed at increasing productivity levels by early adoption of technological discoveries, in particular in areas such as human capital and R&D; believes this will lead towards a level playing field that will enable the ECB to react more quickly to shocks;

12. Calls for facilitating labour mobility, both geographical and occupational, especially by implementing the Skills and Mobility Action Plan, by promoting the recognition of qualifications and the transfer of social security and pension rights, by eliminating tax obstacles to the cross-border provision of occupational pensions, by reducing bureaucracy, by removing obstacles to mobility, and by promoting lifelong learning and on-the-job-training, in particular language skills;

13. Expects that the overall review of the ECB's policies in its 5th year of operations will successfully balance the concerns regarding its first-pillar strategy and thus make the management of monetary policy more effective; considers that liberalisation of markets and structural reforms will help to reduce the inflationary pressures if, and only if, they are acompained by other measures; calls for a debate on the reasons for the important inflation differentials between euro zone Member States;

14. Calls for the completion of both the Financial Services Action Plan (FSAP) and the Risk Capital Action Plan (RCAP); notes that there are still differences in the costs of cross- border banking transactions in the euro zone - despite the steps that have been taken- that provoke citizens' perception of the single market to be distorted;

First assessment of the introduction of banknotes and coins

15. Congratulates Member States for a successful physical introduction of euro notes and coins; expresses, however, its disappointment about the inflationary pressures produced by the changeover, and the trouble caused to euro zone consumers, particularly in the services sector; calls for an investigation into these malpractices and for the appropriate legal action through independent studies if misuse is proven; calls to find ways to prevent these problems for future euro zone members;

16. Considers that more small denomination notes (5 and 10 euro) are needed when withdrawing from ATMs (Automatic Teller Machines); expresses its doubts about the issue of the 500 euro note and the link to ; calls for a working party on the use of the euro, set up by the Commission and the ECB, to address the need for a 1 euro bank note; believes that Member States should maintain the freedom to distribute or not 1 euro cent coins, which consumers and retailers in some areas seem to agree are a nuisance; finally, calls for the progressive elimination of dual price display as soon as possible, in order to accelerate the mental changeover of citizens to the euro;

17. Instructs its President to forward this resolution to the Commission and Council and to the governments and parliaments of the Member States.

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EXPLANATORY STATEMENT

Introduction Since its more than four years of existence, the euro has become the world's second leading currency. The first reason is the size of the euro area economy, which accounts for around 16 % of world GDP: somewhat smaller than the US (21 %), but much larger than Japan (8 %). Figures for the share total world trade in goods and services are similar. The second reason is the stability and growth orientation that ultimate underpins EMU. Therefore, from a worldwide macroeconomic perspective, a sound euro area economy is needed.

Compared to the previous national currencies, the euro has created a situation of greater stability, and has mitigated the magnitude of the asymmetric shocks that the global economy and the euro area have had to face. The euro has also gained market share in internal and external trade in goods and services, but with regards to financial markets, the situation is broadly the same as before 1999 - although there has been one clear success, international euro-bond markets (though demand is mostly euro area-based). Euro area financial markets were the first to adopt the single currency by listing all prices in euro. The physical changeover to the euro only highlighted what had already been achieved since the euro’s launch. In this context, it is of utmost importance to complete the Financial Services Action Plan and the Risk Capital Action Plan, together with actions relating to securities markets.

With regards to the international role of the euro and of any currency, it seems that this is a matter of long-term choices by economic trading agents, and that the euro is still at an early stage in this process, regionally based in neighbouring states - mainly accession candidates, other close countries and former colonies.

The physical changeover An important success of the euro has been the acceptance in the use of the new physical currency, which has removed the previous obstacles and the psychological barriers to cross- border trade and travel within the euro zone. Euro area citizens identify the introduction of the euro with the accomplishment of the Internal Market in goods, services and labour. For this reason, it is widely felt that it is unacceptable to pay higher cross-border fees for bank transactions between Member States. Although it seems that price increases due to the euro introduction have been moderate, it is regrettable that some concerns have arisen after the fist year of the physical euro. Some businesses that have taken advantage of the lack of familiarity with the exact euro equivalencies. This situation has been worse in those Member States where it was more difficult to calculate the euro/legacy currency rate.

Another debate has been opened regarding the need to introduce lower denomination bank notes in order to remove the psychological reflex that links coins to lower purchasing power. Similarly, a debate on the need for a 500-euro bank note is already ongoing. There is also unhappiness with the 1 and 2 cent coins.

An International currency Following its launch in 1999, the euro fell by more than 20% against the US dollar, and has almost regained this loss and is now above the 1 to 1 parity. It can be argued that the

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EN exchange rate of the euro, particularly euro/dollar, should not be the focus of disproportionate attention. Again, current appreciation is still believed by the ECB to be below the correct value that euro area fundamentals indicate, meaning that further euro appreciation may occur. The symbolic attachment to a strong euro policy should be discouraged: a currency strengthens in any case with a stable economy with strong fundamentals.

The introduction of the euro has not yet led to any important reallocation of official foreign reserves by central . Candidate countries already conduct most of their trade in euro and are using the euro much like the DM in the past. Most of euro cash outside the euro zone is in the candidate countries, the Balkans and Russia. Upon accession, the new countries will participate in EMU with the status of Member States with a derogation. To adopt the euro, the Treaty requires that new Members reach a high degree of sustainable convergence. In the meantime, this will give them time to discipline their economies and adapt to the EU's economic level, while keeping the flexibility of a partially floating currency.

The ECB “neither encourages, nor discourages” the internationalisation of the euro. This role is mainly determined by the decisions of public and private world economic actors. However, the physical euro entails implications regarding its external use. Countries in Central and Eastern Europe, the Balkans, Turkey, Russia and the southern Mediterranean, will become increasingly dependent on ECB monetary policy and value of the euro. Thus, both the benefits and costs of having a truly international currency should be considered.

20% of global foreign exchange trading involves the euro (same as the DM in 1998). With regards to international trade invoicing, the dollar remains the dominant currency and the increase in euro invoicing has not been spectacular since 1999. In terms of euro area trade, half of the area’s external trade is conducted using the euro. However, a year after the introduction of notes and coins, the euro is likely to progressively expand its invoicing role. Although there are some commodity futures listed in Europe priced in euros, their number remains limited.

With regards to public sector euro usage, currently over fifty countries have exchange rate arrangements with references to the euro, either in isolation or together with other currencies. It is debatable whether the euro zone should promote the euro as a vehicle currency for official intervention. While on the one hand it is argued that the impact on the euro area will be limited, this may be true for smaller countries using the euro, but not if larger countries were to adopt a similar policy.

The euro area could benefit from the official use of the euro by third countries in two ways. First, euro area exporters would benefit from lower transaction costs and higher growth and imports from third countries. Secondly, the euro area would gain from seniorage revenues. On disadvantages, one could argue that further pressure would be put on the ECB in order to take into account these areas when taking monetary policy decisions or, in case of banking crises in these areas, acting as a lender of last resort in order not to dangerously alter monetary supply. Additionally, the increase in in circulation outside the euro area might affect the stability of monetary demand and reduce the information content of the monetary aggregates used by the ECB. The use of the euro by non-EU countries could also result in an increase of the euro’s exchange rate volatility as financial markets might unfavourably judge a link to unstable economies.

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Finally, another interesting issue is the debate on the possibility of quoting energy prices in euro. It should be borne in mind that the countries of the Gulf Co-operating Council (GCC) are the 5th largest market for EU exports. Given the lack of investment in energy alternatives to fossil resources, the EU's energy dependence on the GCC is bound to increase in the medium term. The euro area's bilateral balance will have a high correlation to oil price, as demand is highly inelastic to price changes. Without enough empirical data a definitive assessment cannot be made. An increasing mismatch between Gulf export receipts (denominated in USD) and their import payments (in euro) could be a driving force for the Gulf countries to switch to euro-quoting. It should be then considered whether this euro quotation is beneficial to the euro area economy.

Proper representation1 of the euro area in international organisations could significantly improve multilateral co-operation in a globalised financial world. This challenge is a matter of urgency and is fully justified by the growing importance of the euro zone and its financial markets, plus the sheer size of the euro area in the global economy. There is the consensus that a representative of the euro area that co-ordinates fiscal and budgetary policies needs to be present in key international fora: IMF, G7, World Bank, and OECD. This report would like to emphasise that the external credibility and role of the euro zone will be best managed if euro area economies act no longer individually, but somehow put in place a mechanism that allows them to better harmonise their policy-mix decisions, thus having positive effects on other euro area economies.

Towards increased economic policy commitment in the euro area The success story of the physical introduction of the euro, and the short-term benefits and costs of it, should not deviate the analysis from the real long-term implications of EMU and the future of the euro area. The euro area is attractive to outside investors because of sound economic fundamentals, underpinned by a stability-oriented economic-policy framework, i.e., monetary and budgetary discipline geared at non-inflationary growth. The Stability and Growth Pact enhances euro zone credibility in the eyes of market participants, thereby strengthening the euro zone economy.

However, in view of the recent economic downturn there is the need for further commitment of euro area economies in the short term. The agreed mechanisms of peer review have proved powerless when reforms involve substantial political or financial costs for governments. This calls for a bigger role of the Commission in monitoring compliance. For example, a government facing a reprimand could be excluded from the voting.

The subsidiarity debate needs more clarity, and proper economic mechanisms are needed to cater for the economic problems of different regions: regional problems not only of regions of Member States, but also of regions including areas of more than one Member States with common characteristics.

1 The aspect of position taking and representation of the Community at international level in stage three of EMU is covered by Treaty Article 111 (4). Following the Amsterdam Treaty and with the Nice Treaty now in place, the main implications of this have to do with the IMF and the G-7 group.

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EN Variations of the fiscal burdens according to cyclical regional factors and their associated level of government expenditure must be combined with real labour mobility across regions in Europe, in order to match the already existent high degree of capital mobility. For this to happen it is obvious that an EU budget according to federal principles will be adopted sooner or later in order to achieve the US' degree of adaptability to regional crises. Nevertheless, it is important to underline the necessary pre-conditions for this to happen: a level of flexibility in EU goods, services and labour markets that makes regional monetary and fiscal policy more efficient to better deal with regional asymmetric shocks, an issue that will be reinforced by a more integrated Internal Market.

Broadly speaking, euro area interest rates have been balanced since the currency was introduced in 1999. The current ECB interest rate policy focuses on inflation control, but the implications on investment need to be considered. The linkage of wage increases to productivity has also benefited inflation levels in recent years. Nevertheless, the ECB euro- wide policy only takes care of the euro area as a whole. Competent national and subnational authorities are currently the ones addressing the problems arising from inflation differentials among economic regions until other mechanisms are put in place. Concerns should be focused on those regions where excessive inflation is due to the lack of productivity gains in capital and labour.

With the current structures in place, high unemployment rates will prevent the EU from reaching the employment goal agreed in Barcelona plus the Lisbon competitiveness goals. Budgetary discipline is a necessary but not sufficient condition for the success of EMU as well: long-term structural reforms are needed, as stated in former EP resolutions covering the Broad Economic Policy Guidelines (BEPG), the Stability and Growth Pact (SGP), the Employment Guidelines (EES), and other related documents. Transitional costs associated with serious structural reforms exist and therefore strong political will is needed to sell these reforms to reluctant social actors and public opinion, and at the same time to explain the changes to pension and health systems in view of ageing populations.

Conclusion After more than 4 years of the EMU and after its first year of physical visibility, the process can be considered as the major monetary event of the European Continent’s history; many questions remain open on how to solve the challenges that have been mentioned in this statement. When these issues will be satisfactorily sorted out, the euro might be capable of having a similar international weight as the USD in world markets. This, if it ever were to happen, will not be in the short-term. However, the first thing to know is whether it is in the interest of the EU to have, at present, an internationalised currency willing to take over the USD or cohabiting with it. It is very possible that other important concerns -on the solidity and strength of the economy of the euro area, and its internal and external coherence- should be a priority for policy makers.

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EN 19 December 2002

MOTION FOR A RESOLUTION B5-0640/2002 pursuant to Rule 48 of the Rules of Procedure

by Ilda Figueiredo

on the effects of the introduction of the euro

Motion for a European Parliament resolution on the effects of the introduction of the euro

The European Parliament,

A. having regard to the inflationary pressures which have followed the entry into circulation of the euro, thanks to abusive rounding-up practices and hidden price rises; whereas numerous consumer organisations have denounced undue price increases and, as a consequence, a 'shopping strike' was held in the EU on 12 September 2002,

B. whereas the Commissions estimates that the impact on inflation is likely to be 0.20% (higher than the initial estimate of 0.16%), admitting that certain sectors of activity have recorded price increases that are quite out of the ordinary,

C. whereas consumer organisations have denounced excessive increases in bank charges and commissions; whereas, despite the implementation of the regulation on crossborder payments, there have been complaints over illegal charging and higher charges for domestic payments,

D. whereas suitable monitoring and resources do not exist for dealing with these problems,

E. whereas this situation is calling in question the claimed advantage of the single currency as regards reduced transaction costs, and is affecting consumers, micro-businesses and small businesses,

1. Calls on the Commission to advance plans for a full assessment of the impact of the euro on inflation and of the evolution of bank commissions and other bank charges in the euro zone, with specific reference to both domestic and crossborder payments;

2. Calls on the Member States to introduce suitable monitoring and penalties.

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EN 4 February 2003

MOTION FOR A RESOLUTION B5-0016/2003 pursuant to Rule 48 of the Rules of Procedure

by Franz Turchi

on EUR 1 and 2 banknotes

Motion for a European Parliament resolution on EUR 1 and 2 banknotes

The European Parliament,

A. whereas virtually every day articles appear in the European press reporting the widely held impression that the introduction of and banknotes has resulted in increased inflation,

B. whereas this impression, although contradicted by Eurostat statistics, may jeopardise the success of the euro in the eyes of the general public,

C. whereas, in the past, all the old European currencies had single unit banknotes,

D. whereas the analogy with the one-dollar bank note would help to put across the message that, setting aside the issue of fluctuating exchange rates, the euro is just as important a currency as the dollar,

E. whereas in all the Member States except two prior to the introduction of the single currency the lowest denomination banknote had a value of less than EUR 5,

1. Calls on the European Commission and the to draw up a study into the feasibility of introducing EUR 1 and 2 banknotes and to prepare an information campaign designed to make the general public aware of the thinking behind such a step.

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