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The Euro

Because of the impact of the changes and the technical requirements which the European Economic and Monetary Union (EMU) brings with it, the Currency System family of software and services includes special support for EMU currencies.

The European Union

The European Union (EU) is a dynamic institution, which also reflects on the EMU process. Several waves of accessions followed the original community of six countries, bringing the total to 28 member states on January 1, 2013:

  • 1957: Belgium, Germany, France, Italy, Luxembourg and the Netherlands;
  • 1973: Denmark, Ireland and the United Kingdom;
  • 1981: Greece;
  • 1986: Spain and Portugal;
  • 1995: Austria, Finland and Sweden;
  • 2004: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia;
  • 2007: Bulgaria and Romania;
  • 2013: Croatia.

The EMU

 
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The process of achieving economic and monetary union was set out in the 1957 Treaty of Rome and in subsequent treaties (Maastricht Treaty of 1992, Amsterdam Treaty of 1997 and Lisbon Treaty of 2007) and decisions. The euro (currency code: EUR) is the official currency of the European Union, and the EMU is the process by which EU member states replace their national currency with the euro and transfer management of monetary policy to the European Central Bank.

When a state joins the EMU its national currency becomes a sub-unit of the euro, at a fixed conversion rate with respect to the euro. During the transition phase, in which the national currency and the euro co-exist, a process called "triangulation", which is supported by applications such as Currency Server, WorldCalc and Euro Calculator, is required to convert to and from the national currency and any non-EMU currencies. At the end of the transition phase the national currency is first replaced by euro banknotes and coins, and then ceases to be legal tender. A first group of twelve EU states completed this process between the end of 2001 and the first half of 2002, after a transition phase which lasted between two and three years. Member states that adopt the euro after this point can choose from a number of scenarios (e.g. a shorter transition period, including a "big bang" option) that provide for additional flexibility, also in consideration of the fact that euro banknotes and coins are already in circulation. Following the initial introduction, the euro replaced the former national currencies of Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015.

Denmark and the United Kingdom were granted special "euro opt-out" status in the Amsterdam Treaty, while Sweden decided not to meet the EMU exchange rate criteria. These three EU member states, like some of the countries which joined the EU after the introduction of the euro, still use their national currencies and to different degrees conduct their own monetary policies.

The Euro outside the EU

The euro plays a role in the exchange rate regime of more than 50 countries outside the EU. The solutions adopted by these countries range from very close or even full links to the euro, such as the formal entitlement to use the euro as legal tender, to looser types of anchoring, such as peg arrangements and crawling fluctuation bands.

Non-EU countries such as Andorra, the Principality of Monaco, the Republic of San Marino and Vatican City have not only adopted the euro as their official currency, but are also minting euro coins on the basis of formal arrangements with the European Union.

The Future

Additional countries are expected to join the European Union. Most or all of these countries are likely to join the EMU, following a procedure which is expected to be similar to the one which applied to the countries which already adopted the euro. The British pound (GBP), the Danish krone (DKK) and the Swedish krona (SEK) may also join the EMU at any time.

In a speech held on March 21, 2002, Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank, said:

"Many policy-makers in accession countries are already now advocating for joining the euro sooner rather than later and this is indeed a desirable perspective in principle, as it helps to keep the reform prospect focused. Some have expressed their wish to adopt the euro immediately after the two-year participation in ERM II; others advocate for setting even before EU accession a pre-determined timeframe to join the euro area. Setting such a timeframe is said to anchor policies towards the fulfillment of the Maastricht criteria, thus providing the necessary incentive for virtuous economic policies. It is also seen as an anchor in a potential turbulent phase in financial markets, avoiding adverse shocks and shifts in market sentiment in an environment of free capital movement. In accession countries, however, there are also policy makers that are arguing in the opposite direction, for a possibly longer stay in the EU before the adoption of the euro. Their arguments are based on the fact that, as new EU members, countries will become exposed to the full competition of the single market and to the global capital market. Therefore, it remains to be seen in their view at what point in time the economies can forego the exchange rate as an adjustment tool in this new and highly competitive environment."

Also in consideration of the fact that euro banknotes and coins are already in circulation, the changeover scenario applied to the first twelve participating member states may not be appropriate or desirable for future euro-area entrants. The regulations that applied to the first group of countries which joined the EMU are have been updated to allow for member states to adopt transitional periods that can be significantly shorter than the one which applied to the countries that established the EMU in 1999 (eleven EU states), or joined it in 2001 (Greece).

Possible scenarios include:

  • a "traditional" approach, whereby first the euro is adopted as the currency of the respective member state, followed by the introduction of euro banknotes and coins at the end of the transitional period;
  • a "big bang" approach, where the transition period, if at all required to comply with applicable regulations, lasts only one second;
  • a "phasing out" approach, in which the euro is introduced under a "big bang" transition, while use of the national currency remains allowed within certain contexts (e.g. accounts) and for a limited period of time.

Other institutions in the Middle East, in Africa, in Asia and in the Americas are studying the EMU experience and may launch independent currency unions. The Currency System family of software and services have been designed to support present and future currency unions and the possible dynamics involving existing and new currencies and such unions, including each step that new EMU members will go through and its implications (activation of triangulation, change in legal tender, etc.)

Currency Server and the EMU

The Currency Server software specifically supports the EMU by means of:

  • Definition of EMU as a regime a currency may belong to;
  • Triangulation and rounding applied to EMU currencies (as required by law);
  • Handling of official EMU conversion rates and precision values (as required by law);
  • Preservation of internal exchange rate values expressed in EUR (as required by law);
  • Differentiation between constant EMU conversion rates and fluctuating exchange rates (e.g. for inactivity warnings);
  • One-click reset of official EMU data (Active Currencies tab of Currency Server Manager);
  • Manual changes to regime and legal tender status (All Currencies tab of Currency Server Manager);
  • Automatic notification and one-click approval of changes to regime and legal tender status (e.g. beginning and end of EMU transition phase).

Euro Calculator, WorldCalc and the EMU

Euro Calculator, WorldCalc and the other custom client apps specifically support the EMU by means of:

  • Automatic collection of EMU updates together with exchange rate data, with notification and one-click approval of changes;
  • Triangulation and rounding applied to EMU currencies (as required by law);
  • Handling of official EMU conversion rates and precision values (as required by law);
  • Preservation of internal exchange rate values expressed in EUR (as required by law);
  • One-click reset of official EMU data.

Your Organization and the EMU

If your organization is based in a country which is scheduled to join the EMU or which is nearing completion of the EMU transition phase, you probably already have a corporate euro changeover plan. Similar transition plans are in place at larger organizations outside the EU that are indirectly affected by the EMU. Whether you have such a changeover department or if instead you are the sole person responsible for keeping your organization and system up-to-date with EMU and with more general currency-related, Cloanto's range of currency-related software was designed to support you.

If you are planning to deploy Currency Server, we recommend that you have a look at the "Quality Checklist" and "Operational Procedures" sections in the "Getting Started" chapter of the software documentation. Currency Server includes an automatic notification and update system designed to inform you about changes with clear and detailed messages guiding you through any actions which may be required (e.g. removal of a currency which ceased to be legal tender, etc.)

Reference Documents

The following documents (in PDF format) published by the European Commission, Directorate General II, Economic and Financial Affairs, Monetary matters, are available:

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