The Economic and Monetary Union

THE ECONOMIC AND MONETARY UNION

A brief history In June 1988 the European Council reaffirmed the objective of the 1957 Treaty of Rome, establishing the European Economic Community, of progressive realization of an economic and monetary union. It assigned a committee chaired by Jacques Delors, then President of the European Commission, to draft a concrete programme to this end. On the basis of the Delors Report’s recommendations, in June 1989 the Council decided that the first stage in the creation of Economic and Monetary Union (EMU) would begin on 1 July 1990 with the free movement of capital. The start dates for the second and third stages were set by the Maastricht Treaty on European Union (1992): the second stage began on 1 January 1994 with the creation of the European Monetary Institute, with a mandate to strengthen cooperation between central banks and the coordination of monetary policies to prepare for the institution of a single currency and a single monetary policy. On 3 May 1998 the European Council decided that eleven Member States (Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) had fulfilled the convergence criteria set by the EC Treaty for membership of EMU and, on 31 December 1998, fixed the irrevocable conversion rates between the euro and their currencies. These States adopted the euro as their single currency with the launch of stage three of EMU on 1 January 1999; on the same date, the conduct of monetary policy was entrusted to the Eurosystem and the European Central Bank. In the first three years of EMU the euro was a book-entry currency. Cash – euro banknotes and coins – was introduced on 1 January 2002. Following a check of the Treaty convergence criteria, Greece entered the euro area on 1 January 2001, Slovenia on 1 January 2007, Cyprus and Malta on 1 January 2008, Slovakia on 1 January 2009.

Convergence criteria The convergence criteria which are used to establish whether a country is eligible to join EMU were laid down in Article 121(1) of the EC Treaty and subsequently elaborated in Protocol 21 annexed to the EC Treaty. The ECB later defined the way in which it applies the criteria. The definitions include: a) price stability: in the twelve months preceding the assessment, the average inflation rate must not exceed by more than 1.5% the average rate of the three Member States with the lowest inflation rates; b) sustainability of public finances: the government deficit must not exceed 3% of GDP and the government debt must not exceed 60% of GDP, unless they are declining substantially and continuously; c) exchange rate stability: the exchange rate of the respective currency must respect, for at least two years, the normal fluctuation margins provided for by ERM II without devaluing against the currency of any other Member State; d) convergence of long-term interest rates: the average nominal long-term interest rate (on government bonds or comparable securities) observed over the year preceding the examination must not exceed by more than 2 percentage points the average rate of the three Member States with the lowest inflation rates. THE EUROSYSTEM

The Eurosystem is the system of central banks of the euro area responsible for the conduct of the single monetary policy. It comprises the European Central Bank and the national central banks (NCBs) of those EU Member States that have adopted the euro. As from 1 January 2009 the euro area comprises sixteen countries: Austria, Belgium, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain, Cyprus, Malta and Slovakia. The ESCB is made up of the ECB and the NCBs of 27 EU Member States (Austria, Belgium, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain, the United Kingdom, Denmark, Sweden, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, and Romania). The ECB, which has legal personality under Community law, is the centre of the ESCB and the Eurosystem. It makes sure that the tasks assigned to these institutions are performed, either through its own activities or through the NCBs, under the Statute of the ESCB/ECB. Each NCB has legal personality under its national legislation. As an integral part of the Eurosystem, the euro-area NCBs perform the duties assigned to the Eurosystem under the rules set by the decision-making bodies of the ECB. Under their own responsibility they may perform tasks foreign to the Eurosystem providing that, in the judgment of the Governing Council, these do not conflict with the objectives and tasks of the Eurosystem

Decision-making bodies of the ECB The Eurosystem and the ESCB are governed by the decision-making bodies of the ECB: the Governing Council and the Executive Board. The General Council is constituted as a third decision-making body of the ECB for as long as there are Member States which have not yet adopted the euro. The functioning of these bodies is governed by the EC Treaty, the Statute of the ESCB/ECB and the relevant Rules of Procedure. Decision-making within the Eurosystem and the ESCB is centralized. However, the ECB and the euro area NCBs jointly contribute, strategically and operationally, to attaining the common goals of the Eurosystem, with due respect to the principle of decentralization, in accordance with the Statute of the ESCB/ECB.

The Governing Council comprises the members of the Executive Board of the ECB and the governors of the NCBs of the Member States which have adopted the euro. As laid down in the Treaty, its main responsibilities are: • to take the decisions and adopt the guidelines necessary to ensure the performance of the tasks entrusted to the Eurosystem; • to formulate the monetary policy of the euro area, including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the Eurosystem, as well as to establish the guidelines for their implementation. The meetings of the Governing Council take place, as a rule, twice a month at the ECB’s premises in Frankfurt am Main. Two meetings a year are held outside Frankfurt, hosted by one of the NCBs. At its first meeting of the month, the Governing Council, among other things, conducts an in-depth assessment of monetary and economic developments and takes related decisions, while the second meeting usually focuses on issues related to the other tasks and responsibilities of the ECB and the Eurosystem. When taking decisions, the members of the Governing Council act in a fully independent personal capacity. This is reflected by the “one member, one vote” principle.

The Executive Board The Executive Board comprises the President and the Vice-President of the ECB and four other members, appointed by common accord of the Heads of State or Government of the Member States which have adopted the euro. The main responsibilities of the Executive Board, which as a rule meets once a week, are: • to prepare the meetings of the Governing Council; • to implement the monetary policy of the euro area in accordance with the guidelines and decisions adopted by the Governing Council, giving the necessary instructions to the euro area NCBs; • to manage the day-to-day business of the ECB; • to exercise certain powers delegated to it by the Governing Council, including those of a regulatory nature. The Executive Board members each have one vote.

The General Council The General Council is composed of the President and the Vice-President of the ECB and the governors of the NCBs of all EU Member States. It carries out those tasks taken over from the European Monetary Institute which still have to be performed by the ECB on account of the fact that not all of the Member States have adopted the euro. In particular, it performs functions of an advisory nature and coordinates policies aimed at supporting the convergence of the non-euro area EU countries. MONETARY POLICY

Objectives and strategy The Eurosystem is responsible for the single monetary policy of the euro area. The primary objective of the Eurosystem’s monetary policy is to maintain price stability in the euro area. Without prejudice to this objective, the Eurosystem supports the economic policies in the European Community with a view to contributing, among other things, to the achievement of a high level of employment and sustainable and non-inflationary growth. Among its other tasks, it also contributes to the maintenance of financial stability in the euro area. Monetary policy decisions are taken by the Governing Council of the European Central Bank (ECB) and mainly consist of setting the key interest rates. The ECB has quantified the definition of price stability as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below but close to 2% in the medium term. The reference to the medium term above all takes account of the lag in the monetary policy transmission mechanism: shorter-term measures to combat, for example, a short- term shock to international raw materials prices, would run the risk of creating additional volatility in the economy. A forward-looking orientation is also necessary in view of the impact of inflation expectations on actual inflation; the single monetary policy aims to solidly anchor inflation expectations at levels consistent with price stability. Quantifying the definition of price stability also contributes to a further aspect of the ECB’s monetary policy strategy: by increasing the transparency of monetary policy and providing a reference framework which is easy to understand, it provides a clear and measurable yardstick against which the public can hold the ECB accountable. This renders the ECB’s policies credible, which is a precondition for forming market expectations. The ECB bases its monetary policy decisions on two complementary analytical perspectives (referred to as the “two pillars”): economic analysis and monetary analysis. The economic analysis assesses the short to medium-term determinants of inflation, focusing on real activity and taking account of the fact that price developments over these horizons are influenced by the interplay between the supply and demand of goods, services and production factors. Account is also taken of the macroeconomic projections produced every three months alternately by Eurosystem and ECB experts. In view of the long-term connection between money and prices, the monetary analysis mainly serves as a means of cross-checking, from a medium to long-term perspective, the short to medium- term indicators stemming from the economic analysis. The ECB pays considerable attention to communicating its assessments by means of official statements or regular publications, such as the Monthly Bulletin and the Annual Report.

Implementation of monetary policy The implementation of monetary policy is entrusted to the Executive Board of the ECB in accordance with the decisions and guidelines adopted by the Governing Council. The Eurosystem has a number of monetary policy instruments at its disposal in order to achieve its objectives. It conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the Eurosystem. In accordance with the principles of operational decentralization and subsidiarity established at the European level, the monetary policy operations are carried out by the Eurosystem NCBs on the basis of the necessary instructions given by the Executive Board and under uniform terms and conditions. BANKNOTES AND COINS On 1 January 2002, the euro banknotes and coins entered into circulation in the twelve countries then participating in the euro area (Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland), replacing the national currencies of those countries. According to the legal framework governing the issuance of banknotes and coins by the Eurosystem, the ECB has the exclusive right to authorize the issuance of banknotes within the European Community, while both the ECB and the euro area NCBs have the right to issue euro banknotes. In practice, however, the banknotes are issued by the euro area NCBs, since the ECB does not have an office for cash operations. The banknotes are available in the following denominations: 5, 10, 20, 50, 100, 200 and 500 euro. The euro coins are issued by the euro area countries. The ECB acts as an independent assessor of the quality of the coins and contributes to the development and maintenance of a common system to ensure quality in all the euro area mints. The volume of coins to be issued is approved each year by the ECB, and the decision is published in the Official Journal of the European Union. The coins are produced in the following denominations: 1, 2, 5, 10, 20 and 50 cent, and 1 and 2 euro. The Principality of Monaco, the Republic of San Marino and the Vatican City State are also allowed to issue euro coins in line with the relevant agreements. The euro banknotes and coins are legal tender throughout the euro area. In order to ensure that the public has confidence in the single currency, the quality and integrity of the banknotes in circulation must be safeguarded. To this end, the ECB and the Eurosystem NCBs have defined a framework for the detection of counterfeits and the identification of banknotes no longer fit for circulation by banks and all categories of professional cash handler. The framework must be followed by credit institutions and other professional cash handlers. As part of the fight against the counterfeiting of euro banknotes, a communication system has been developed for the collection and monitoring of data on counterfeits.

Banknotes General features

The euro banknote series which is legal tender throughout the euro area comprises seven different denominations: €5, €10, €20, €50, €100, €200, and €500. The euro banknotes were designed by Robert Kalina of the Austrian central bank (Oesterreichische Nationalbank). He won the Europe-wide design competition held in 1996. Each euro banknote depicts a European architectural style. In ascending order of denomination the styles represented are: Classical, Romanesque, Gothic, Renaissance, Baroque and rococo, the Age of iron and glass, and Modern 20th century architecture. In addition, the windows and gateways symbolize the European spirit of openness and cooperation. The 12 stars of the European Union (EU) represent the dynamism and harmony of contemporary Europe. The bridges on the back of the notes symbolize communication between the people of Europe and between Europe and the rest of the world. The notes also carry the name of the currency - euro - in both the Latin (EURO) and the Greek (EYPΩ) alphabets, the EU flag, and the initials of the European Central Bank in five linguistic variants - BCE, ECB, EZB, EKT and EKP - covering the 11 EU official languages at the time of the introduction of the euro. The symbol © indicates copyright protection. Security features Euro banknotes incorporate various security features to help users recognize a genuine banknote at a glance. It only takes a few seconds to check a banknote by feeling it, looking at it and tilting it. Special printing processes make it possible to feel the raised print on the banknotes. On the front and back of genuine banknotes it is possible to see the watermark, the security thread and the see-through number. By tilting the banknote, on the front it is possible to see the shifting image on the hologram, on the back, it is possible to see the glossy stripe on the lower denomination banknotes (€5, €10, and €20) or the colour- changing number on the remaining notes. For more information about checks, click on the link below to the ECB website. Signature Under Article 1 of ECB Decision ECB/2003/4 on the denominations, specifications, reproduction, replacement and withdrawal of euro banknotes, the notes bear the signature of the President of the ECB. At present, banknotes signed by former ECB President Willem F. Duisenberg circulate alongside with those produced after 1 November 2003 and signed by President Jean- Claude Trichet. Reproductions and replacements The regulations for reproducing and replacing euro banknotes set out the criteria for producing reproduction so that they cannot be mistaken for genuine banknotes. There are also guidelines for replacing banknotes that have suffered minor intentional damage or those presented for replacement by a bona fide customer. These regulations were published in the Official Journal of the European Union on 25 March 2003.