Introduction 

In May 1998, the Heads of State or Government of the European Union (EU) Member States confirmed that eleven Member States qualify to form Economic and Monetary Union (EMU) and adopt a single currency, the euro, from 1 January 1999. The eleven are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. In making this decision, the EU leaders completed a process of preparation which had been going on since the signing in 1992 of the Treaty on European Union (the Maastricht Treaty). 

This leaflet begins by briefly setting out the background to EMU, what EMU involves and the stages in it, the criteria for entry to EMU and the process leading up to the EU leaders' decision of May 1998, including the role of the Houses of the Oireachtas. The three main elements of EMU are then described. The leaflet then outlines the benefits of EMU, the challenges that it will present for Ireland and Ireland's policy on it; a short summary of the July 1996 report by the Economic and Social Research Institute (ESRI) on the Economic Implications for Ireland of EMU is then provided. The UK position on EMU and the sterling issue are mentioned and policy responses to a possible economic shock in EMU are considered. Finally, the leaflet sets out the timetable for the changeover to the euro and describes Ireland's legislative and practical preparations for it. 

Background 

The idea of a single currency among Member States is not new. It goes back at least to 1970. While its fortunes have varied since, the European Community has never lost sight of it as a goal. The European Monetary System and its Exchange Rate Mechanism, which were set up in 1979, were intended to be a move towards monetary union. The Single Market programme of the late 1980s gave fresh impetus to it. 

The Delors Committee report of 1989, together with the European Commission report One Market, One Money of 1990, laid the foundations for the provisions on EMU that are set out in Articles 102a to 109m of the Maastricht Treaty. The Treaty received widespread support here in Ireland and the leaders of the four main political parties issued a joint statement urging a "yes" vote in the referendum on it held in June 1992. The Treaty was endorsed by a substantial majority: just under 70 per cent of those who voted were in favour of it. 

EMU involves three inter-related elements: 

	the establishment of a single currency among participating Member States;
	the creation of a single monetary policy implemented by an independent European Central Bank (ECB); and
	intensified co-ordination of the economic and budgetary policies of participating Member States.

Three Stages of EMU 

The Treaty envisages EMU being approached in three stages. 

Stage One began on 1 July 1990 and involved liberalisation of capital movements, progressing the completion of the single market and closer coordination of the economic policies of Member States. 

Stage Two began on 1 January 1994 and involved intensifying the co-ordination of Member States' economic policies, based on multilateral surveillance in the context of broad economic guidelines laid down under Article 103 of the Treaty by the Council of Economic and Finance Ministers, ECOFIN. 

In addition, Stage Two brought into operation the excessive deficit procedure set out in Article 104c of the Treaty. This requires an annual examination of each Member State's budgetary performance to see if it meets the deficit rules laid down in the Treaty, with the Council making a recommendation for ending the excessive deficit of any Member State which does not meet them. 

Stage Two also involved the setting up of the European Monetary Institute, or EMI. The EMI was the forerunner of the ECB and had, inter alia, the task of setting out the regulatory, organisational and logistical framework for the ECB to perform its tasks. 

Stage Three is the final stage of EMU and will begin on 1 January 1999. On that date the euro will come into being and become the currency of the participating Member States although it will only exist in cashless form; the exchange rates of the currencies of participating Member States will be irrevocably locked against it; and the ECB, which was set up on 1 June 1998, will begin operation of the single monetary policy in respect of it. 

The EMU Criteria and the EU Leaders' Decision on which Member States qualify for EMU 

As already stated, in May 1998 the EU Heads of State or Government decided that eleven Member States, including Ireland, fulfil the necessary conditions to enter EMU and adopt the euro from 1 January 1999. 

This decision was made with the benefit of detailed convergence reports from the European Monetary Institute and the European Commission, together with a recommendation from the Commission, all of which were published on 25 March 1998. The emphasis of the reports was on the achievement of a high degree of sustainable convergence among Member States and this was assessed primarily on the basis of the progress made by the Member States in fulfilling the four convergence criteria set out in Article 109j(1) of the Maastricht Treaty. 

Briefly, the criteria for EMU relate first to the avoidance of an excessive budget deficit, meaning that the general Government deficit must not exceed 3 per cent of gross domestic product (GDP) unless it has declined substantially and continuously and reached a level close to 3 per cent, or unless the excess over 3 per cent is small, exceptional and temporary; and 

the ratio of general Government debt to GDP must be below 60 per cent or, if above, must be sufficiently diminishing and approaching 60 per cent at a satisfactory pace. 

There are also criteria in relation to inflation, interest rates and currency stability. These are briefly as follows: 

• average inflation must not exceed by over 1.5 per cent that of the three best-performing Member States; 
• the average nominal long-term interest rate must not exceed by more than 2 per cent that of the three best-performing Member States in terms of price stability; 
• a Member State's currency must without severe tensions have respected the normal fluctuation margins of the Exchange Rate Mechanism of the European Monetary System for two years before the assessment and its central rate must not have been devalued on the Member State's initiative against any other Member State's currency in that period. 

On the basis of the two convergence reports, the European Commission recommended to ECOFIN that the following eleven Member States be judged to qualify to enter the third stage of EMU on 1 January 1999: Austria, Belgium, Finland, France, Germany, Italy, Luxembourg, Netherlands, Portugal, Spain, and, of course, Ireland. Denmark and the United Kingdom exercised their Treaty opt-outs from EMU and Sweden and Greece were judged by the Commission not to have fulfilled all the criteria for entry. As the next step in the process, the European Parliament met on 29-30 April 1998 and adopted a Resolution on the convergence reports and the Commission recommendation which it forwarded to ECOFIN. 

On the basis of these reports and of the recommendation from the Commission, ECOFIN met on 1 May, assessed for each Member State the fulfilment of the conditions for adoption of the euro and formulated its recommendation to the Heads of State or Government. The European Parliament met on the morning of 2 May and delivered its formal opinion to the Heads of State or Government, who met that afternoon and confirmed that the eleven Member States listed above qualify to join EMU and adopt the euro from 1 January 1999. 

Report from the Central Bank of Ireland 

In addition to having the European Commission and EMI convergence reports, the Minister for Finance, Mr Charlie McCreevy TD, considered that it would be important to have a report on Ireland's convergence from the Central Bank of Ireland. This report was published on 31 March 1998. It too concluded that Ireland met the four convergence criteria concerning government budgetary position, price stability and interest and exchange rates. It also stated that membership of EMU offers Ireland the prospect of stable economic conditions, based on price stability. 

The Houses of the Oireachtas and the Move to EMU 

In the lead-up to the EU leaders' decision, the Houses of the Oireachtas considered Ireland's prospective participation in EMU on a number of occasions. In particular 

• the Minister for Finance appeared before a joint meeting of the Joint Oireachtas Committees on Finance and the Public Service, and on Enterprise and Small Business, on 4 February 1998; 
• in February/March 1998, the Central Bank Act, 1998 was debated and passed by both Houses of the Oireachtas. This Act was designed to bring the legislation governing the Central Bank of Ireland into conformity with the relevant provisions of the Maastricht Treaty and of the Statute of the European System of Central Banks and the European Central Bank set out in Protocol No 3 to that Treaty; 
• following publication in March 1998 of the convergence reports from the EMI, the European Commission and the Central Bank of Ireland, and the European Commission's recommendation, the Government introduced motions on Ireland's prospective participation in EMU in Dáil Éireann on 1 April and in Seanad Éireann on 7 April 1998. Both Houses noted the recommendation from the Commission that Ireland fulfils the necessary conditions for the adoption of the single currency. 

As already stated, EMU essentially involves three elements: (i) the establishment of the single currency, the euro; (ii) the single monetary policy implemented by the European Central Bank (the ECB); and (iii) closer co-ordination of Member States' economic and budgetary policies. 

(i) The Single Currency 

The euro will come into being on 1 January 1999. Article 109 L(4) of the Treaty provides that on that date the Council will adopt the conversion rates at which the currencies of the Member States participating in EMU will be irrevocably fixed against the euro, and the euro will become a currency in its own right. 

Over the weekend of 1-3 May 1998, ECOFIN Ministers announced that the current ERM bilateral central rates of the currencies of the Member States which will adopt the euro as their single currency on 1 January 1999 will be used in determining their irrevocable conversion rates against the euro. The aim of this announcement was to assist financial market stability in the run-up to the start of EMU. 

On 14 March 1998, the ERM central rate of the Irish pound was revalued by 3%. This was done in the light of our expected participation in EMU from 1 January 1999 and with a view to helping to ensure that Ireland's economic success continues in a balanced and sustainable way. 

In line with the Treaty, the setting of the conversion rates of the participating currencies against the euro can take place only on 1 January 1999. This is because the present ecu, which will convert one-for-one with the euro when the latter comes into being on 1 January 1999, contains elements of currencies, such as Sterling, which will not participate in the euro: thus the exact worth of the euro will only be known on 1 January 1999. However, as an illustration the euro can be thought of as being worth around 80 Irish pence: this would mean that one Irish pound would be worth 1 euro and 25 cent. 

From 1 January 1999 the euro will be available for use in cashless form (eg direct debits, credit transfers, cheques) but euro notes and coins will not yet be available, so Irish pound notes and coins will continue in circulation. On 1 January 2002, euro notes and coins will be introduced into circulation and the withdrawal of Irish pound notes and coins will begin: within six months at most (probably a good deal less), Irish pound notes and coins will have been withdrawn and the changeover to the euro will be complete. 

EU Legal Framework for the use of the euro 

Two EU Council Regulations together make up the legal framework for the use of the euro. Council Regulation (EC) No 1103/97, on certain provisions relating to the introduction of the euro, was adopted on 17 June 1997 and was published in the Official Journal of the European Communities on 19 June 1997¹. It provides for the replacement of the ecu by the euro at the rate of one to one from 1 January 1999 and for continuity of contracts, and lays down rules for conversion between national currencies and the euro including rounding rules. Council Regulation (EC) No 974/98, on the introduction of the euro, was adopted on 3 May 1998 and was published in the Official Journal on 11 May 1998². This Regulation contains the remaining provisions for the legal framework for the use of the euro, including the provisions to apply during the period 1 January 1999 to 31 December 2001. 

The relationship between the euro and the currencies of Member States outside the euro area 

With the start of the third stage of EMU on 1 January 1999, the European Monetary System will be replaced by an exchange-rate mechanism to be known as ERM2, linking currencies of Member States outside the euro area to the euro. ERM 2 will be based on central rates defined vis-à-vis the euro, reflecting both the anchor role of the euro and the goal of convergence to the euro area. There will be one standard fluctuation band of plus or minus 15% around the central rates. The operating procedures of ERM 2 will be laid down in an agreement between the ECB and the national central banks of the Member States outside the euro area. Participation in ERM2 will be on a voluntary basis, in accordance with the Treaty. 

Exchange rate relations with non-EU Currencies 
As regards relations between the euro and non-EU currencies, Article 109 of the Treaty provides that the Council of Ministers may, acting unanimously on a recommendation from the ECB or from the Commission, conclude formal agreements on an exchange rate system for the euro in relation to non-Community currencies, having first consulted the ECB (where appropriate) in an endeavour to reach a consensus consistent with the objective of price stability, and having also consulted the European Parliament. 

In the absence of such an exchange rate system in relation to one or more non-Community currencies, the Council, acting by a qualified majority, either on a recommendation from the Commission and after consulting the ECB or on a recommendation from the ECB, may formulate general orientations for exchange rate policy in relation to these currencies. These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stability. 

The European Council meeting in Luxembourg on 12 and 13 December 1997 agreed that general orientations for exchange rate policy in relation to one or more non-Community currencies will be formulated only in exceptional circumstances. 

ii) The European Central Bank (ECB) 

Article 4(a) of the Maastricht Treaty provides for the establishment of a European System of Central Banks (ESCB) and a European Central Bank (ECB) to operate the single monetary policy of the euro. The Treaty also provides that the primary objective of the ESCB, which comprises the ECB and the central banks of the Member States, will be to maintain price stability; and that without prejudice to this objective, the ESCB will support the general economic policies of the Community with a view to contributing to the achievement of the Community's objectives. Briefly, these are to promote sustainable and non-inflationary growth, a high level of employment and social protection, economic and social cohesion and solidarity among the Member States. The basic tasks of the ESCB include inter alia defining and implementing the single monetary policy of the euro: the central banks of Member States not participating in EMU do not take part in this task. 

Independence of the ECB 

The Treaty provides that, when carrying out its tasks, neither the ECB nor a national central bank, nor any member of their decision-making bodies, shall seek or take instructions from Community or national institutions or from any other body. 

Decision-making bodies 

The ESCB is governed by the decision-making bodies of the ECB. These are the Governing Council, the Executive Board and the General Council. 

The Governing Council is made up of the Governors of the central banks of the Member States participating in EMU (including, obviously, the Governor of the Central Bank of Ireland) and the members of the Executive Board. The Governing Council's responsibility is to take the decisions necessary to ensure the performance of the ESCBs tasks, in particular the formulation of monetary policy. In general, voting is on a one-person/one vote basis, including for monetary policy decisions, though voting is weighted (according to national central banks' shares in the ECB's subscribed capital) in the case of financial matters like capital and external reserves and the distribution of pooled income. 

The Executive Board is composed of the President and the Vice-President of the ECB and four other members. The Executive Board is responsible for the management of the ECB and for implementing monetary policy in accordance with the decisions of the Governing Council. 

The General Council is made up of the President and Vice-President of the ECB and the Governors of the Central Banks of all Member States (ie whether participating in EMU or not). The four other members of the Executive Board may take part in meetings of the General Council, but without having the right to vote. The General Council is responsible for performing the tasks which the ECB took over from the EMI which, because not all Member States are participating in EMU, must still be performed in the third stage of EMU. 

Participation of President of Council of Ministers and Member of European Commission 

The President of the Council of Ministers and a member of the European Commission may participate at meetings of the Governing Council of the ECB, though without the right to vote, and the President of the Council may submit a motion for deliberation to the Governing Council. There is also a role for the President of the ECB in relation to meetings of the Council of Ministers, in that he or she will be invited to participate in such meetings when the Council is discussing matters relating to the ECB's tasks and objectives. 

Accountability of the ECB 

Accountability of the ECB is also provided for. The ECB must present an annual report on the activities of the ESCB to the European Parliament, the Council of Ministers and the European Commission as well as to the Heads of State or Government of the EU Member States. The report must cover the monetary policy of both the previous and the current year. It is the ECB President who must present this report to the Council and to the European Parliament, which may hold a general debate on it. The ECB President and the other members of the Executive Board may be heard by the competent Committees of the European Parliament, either on their own initiative or at the Parliament's request. 

The President of the ECB has indicated that he will hold a press conference once a month, normally after the first fortnightly meetings of the Governing Council of the ECB. It is also expected that the public will be kept informed about the ECB's activities through speeches and regular publications. 

(iii) Closer Coordination of Member States' Economic and Budgetary Policies 

The third element of EMU is closer co-ordination of the economic and budgetary policies of the Member States. The Stability and Growth Pact, which is based on Articles 103 and 104(c) of the Maastricht Treaty, is important in this regard. The Pact consists of the Resolution of the European Council on the Stability and Growth Pact of 17 June 1997³ and Regulations (EC) Nos 1466/97 ⁴ and 1467/97⁵, both of 7 July 1997. The rationale underlying the Pact is that in favourable economic times Member States should aim for general Government deficits considerably below 3 per cent of GDP, in order to ensure that they can, over the course of a normal economic cycle, reliably keep under the 3 per cent ceiling on such deficits prescribed in the Treaty. The Pact requires Member States in EMU to commit themselves to aim for a medium-term budgetary position of close to balance or in surplus. Such Member States will be required to present stability programmes, which will specify their medium-term budgetary objectives, together with an adjustment path for the deficit ratio and the expected path for the debt ratio. Member States not in EMU will have to present convergence programmes, the contents of which will be similar to those of stability programmes. Both stability and convergence programmes will be made public and will be updated annually. 

The Pact also provides for the speeding up and clarification of the excessive deficit procedure set out in Article 104(c) of the Treaty. Briefly, ECOFIN and the European Commission will monitor the performance of Member States in the context of their stability and convergence programmes with a view to giving early warning of any significant deterioration which might lead to an excessive deficit. In such cases, ECOFIN will address recommendations to the Member State concerned. 

If, not withstanding the early warning precautions, an excessive deficit does arise in a Member State in EMU, then ECOFIN may decide to give notice to the Member State concerned to take deficit reduction measures judged necessary by ECOFIN to remedy the situation. If the excessive deficit persists, and the Member State has failed to comply with the notice, then ECOFIN will, in accordance with Treaty Article 104c (11), take a decision on the imposition of sanctions on a prescribed scale. 

Whenever sanctions are first imposed, a non-interest-bearing deposit will be included. This will be converted into a fine after two years if the deficit continues to be excessive. Where the deficit results from non-compliance with the deficit reference value, the amount of the deposit or fine will be made up of a fixed component equal to 0.2 per cent of GDP and a variable component equal to one-tenth of the excess of the deficit over the reference value of 3 per cent of GDP. There is an upper limit of 0.5 per cent of GDP in respect of any single deposit. 

ECOFIN Declaration 

In accordance with the Stability and Growth Pact, in May 1998 ECOFIN adopted a joint declaration which reflects the existing framework of the Treaty and the Pact, agreeing to start to implement Regulation (EC) No 1466/97 (on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies) on 1 July 1998. ECOFIN also agreed to ensure that national budget objectives set for 1998 are fully met, if necessary by the taking of timely corrective action. In addition, ECOFIN is to have an early consideration of Member States' budgetary intentions for 1999 in the light of the framework and objectives of the Stability and Growth Pact. It was also agreed that if economic conditions prove better than expected, Member States will use the opportunity to reinforce budgetary consolidation so as to reach the medium-term objective of government financial positions close to balance or in surplus, as embodied in the commitments of the Pact. 

ECOFIN also recognised that the higher the debt-to-GDP ratios of participating Member States, the greater must be their efforts to reduce those ratios rapidly. To that end, in addition to maintaining appropriate levels of primary surpluses in compliance with the commitments and the objectives of the Stability and Growth Pact, other measures to reduce gross debt should be put in place. Furthermore, debt management strategies should reduce the vulnerability of budgets to adverse developments. ECOFIN Ministers also undertook to submit, at the latest by the end of 1998, national stability or convergence programmes which will reflect these important elements. 

This declaration reflects what was already being done in Ireland in relation to budgetary policy: the Government's economic and budgetary stance already was, and is, in line with these commitments on budgetary policy. This stance, cited in the communiqué issued in Brussels on 14 March when the Irish pound's central rate was revalued, includes the revaluation itself and Ireland's budgetary policy for 1998 and 1999. 

The Euro-11 Group 

The European Council meeting in Luxembourg in December 1997 adopted a Resolution on economic policy coordination in Stage 3 of EMU. This Resolution reiterated the central role of ECOFIN as the centre for the coordination of the Member States' economic policies and reaffirmed that ECOFIN is the only body empowered to formulate and adopt the broad economic policy guidelines which constitute the main instrument of economic coordination. 

The Resolution also provided that "The Ministers of the States participating in the euro area may meet informally among themselves to discuss issues connected with their shared specific responsibilities for the single currency. The Commission, and the European Central Bank when appropriate, will be invited to take part in the meetings. Whenever matters of common interest are concerned they will be discussed by Ministers of all Member States. Decisions will in all cases be taken by the ECOFIN Council in accordance with the procedures determined by the Treaty." 

The Euro-11 Group has met on a number of occasions since the Luxembourg Resolution. 

Benefits of EMU 

The main elements of EMU and the procedure for forming it having been described, it is time to recall the reasons why the European Union and Member States set themselves the objective of achieving EMU. The main ones are as follows: 

(i)	elimination of transaction costs and exchange rate risk for trade, tourism and investment among participating Member States;
(ii)	low and fairly uniform interest rates among participating Member States;
(iii)	consolidation and fuller development of the internal market;
(iv)	promotion of price stability, sound public finances and sustained low-inflation growth in participating Member States;
(v)	increased attractiveness of participating Member States to foreign investment; and
(vi)	a voice in decisions about the single monetary policy of the Union.

Challenges of EMU 

Like most things in life which confer benefits, however, EMU is not without potential disadvantages. The obvious one is that participating Member States cannot devalue their currencies for any reason. In addition, a single monetary policy will involve some pooling of sovereignty among participating Member States. This disadvantage will probably be felt more keenly in the larger Member States, as the discretion about monetary policy enjoyed by smaller Member States is considerably less. 

It might be argued that the restrictions on budgetary freedom under the Stability and Growth Pact, especially the exposure to possible sanctions under the Treaty, are a disadvantage of EMU participation. There are, however, a number of points to be made about this: 

• first of all, the obligation to avoid an excessive deficit as defined in the Treaty will apply from the start of Stage Three, irrespective of EMU participation. Only the sanctions will be new, and, in any case, failure to abide by a Council notice to correct an excessive deficit would already expose a country to a suspension of Cohesion Fund aid; 
• while non-participation in EMU would exclude the possibility of formal Treaty sanctions for an excessive deficit, there is no doubt but that financial markets would impose a penalty in the form of higher interest rates in the event of such a deficit; and 
• avoiding an excessive deficit is in our own interest: our experience over recent years shows that keeping the deficit within the Treaty parameters is fully consistent with sustained growth in output and employment. Indeed, keeping our deficit within the 3% ceiling has not precluded improvement in public services and significant progress on tax reform. 

In the case of financial institutions, there will also be an ongoing loss arising from the elimination of transaction costs and exchange rate differentials between participating currencies. However, this ongoing loss of revenue to the financial institutions will be an ongoing gain to traders and business (as well as to individuals), and should help them to improve their performance: healthier companies will in turn be of benefit to the financial institutions. 

Ireland's policy on EMU 

Ireland supports the process of European integration, and with EMU marking a substantial stage in that process, Ireland's policy has always been to be eligible to participate in EMU from the outset. A statement issued by the Taoiseach, Mr Bertie Ahern TD, on 6 May 1998 reiterated the Government's commitment to continuing stability achieved through economic and budgetary policies to ensure tight expenditure and low inflation which will help secure the medium-term sustainability of Ireland's economic growth. The Taoiseach said that the challenge of EMU would also require intensification of the flexibility and problem-solving approach taken by Government and the social partners. In conclusion, the Taoiseach said that membership of the euro area was in Ireland's long-term strategic interests. 

Implications for Ireland of EMU 

In dealing with the implications for Ireland of EMU, it is important to make two general points, because it is vital not to ascribe to EMU effects that will arise anyway. The two points are: 

First, the global economic environment is changing fast. This process will continue, and would continue even if EMU had never been thought of. It involves greater globalisation of activity, increasing intensification of competition among all the countries of the world, and increasing technological change. 

Secondly, the formation of EMU will mark a substantial change in the economic environment of the Union as a whole. This is true for all Member States: and it is true whether or not they join EMU. In other words, continuation of the status quo is not an option for any Member State. EMU will change things even for Member States which do not join it. 

ESRI Report: "The Economic Implications for Ireland of EMU" 

In order to obtain an independent view of EMU's implications for Ireland, the Economic and Social Research Institute was commissioned to carry out an in-depth study of the likely economic implications of EMU for Ireland, with particular reference to employment, including at sectoral level, in the context of various membership scenarios. The ESRI published its report, entitled "The Economic Implications for Ireland of EMU", in July 1996 and it has been widely circulated. 

Both the negative and positive effects which EMU is likely to have on the Irish economy were analysed in detail by the ESRI. Its report concluded that membership of EMU would, on balance, be economically advantageous even were the UK to remain outside. The net benefit to the Irish economy from taking part in EMU, without the UK, was estimated by the ESRI to be an additional 0.4% of GNP on an annual average basis over the medium term - allowing for possible shocks to Ireland arising from the UK's non-participation. The ESRI also looked at potential but unquantifiable effects of EMU participation. They concluded that some of these, such as increased attractiveness of Ireland as a destination for foreign direct investment, could be substantial. The ESRI conclusion was endorsed by the National Economic and Social Council in its report "European Union: Integration and Enlargement" (Report 101, March 1997). NESC found no reason to revise its long-standing position that Ireland's strategic interest lay in full economic and monetary union. 

One of the editors of the ESRI report, Terry Baker, in an article in the Irish Times on 4 March 1998, examined the question of whether the conclusions of the report could still be considered to hold true. In relation to external shocks, Mr Baker concluded that the risks were considerably lower than they were in 1996, for three reasons: 

• an increase in the number of prospective EMU participants (as compared with the number expected in the ESRI's report); 
• a massive appreciation of sterling; and 
• a fundamental policy shift by the UK government in favour of eventual membership of EMU. 

"the risks attached to EMU entry have diminished significantly since mid-1996, while some of the risks that would be faced had Ireland opted to delay entry to EMU have tended to increase. With hindsight, it appears that our 1996 assessment underestimated the advantages of initial entry. The balance of risks now seems to confer a clear-cut and substantial benefit to Ireland from the decision to join EMU at the outset." 

Position of the UK 

Most people think of sterling when they think of the exchange rate exposure involved in Ireland joining the single currency, and it is therefore appropriate to say something about the position of the United Kingdom in relation to EMU. 

In a speech made in July 1997 the UK Chancellor of the Exchequer first specified five economic tests of the UK's suitability for EMU membership. The five economic tests are: 

Are business cycles and economic structures compatible, so that the UK and others could live comfortably with euro interest rates on a permanent basis? 

If problems emerge, is there sufficient flexibility to deal with them? 

Would joining EMU create better conditions for firms making long-term decisions to invest in Britain? 

What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets? 

In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs? 

In his Statement on EMU to the House of Commons on 27 October 1997, the Chancellor assessed these five economic tests. His analysis was based on a UK Treasury paper published on that date. This concluded that a successful EMU would bring benefits for the UK economy by securing macroeconomic stability and underpinning a well-functioning single market. This in turn would be good for investment, growth and employment in the UK economy. However, reflecting the cyclical divergences between the UK and Continental European economies at this time, the Chancellor concluded that it would not be right for the UK to join EMU from the outset. 

Sterling 

Clearly the sterling issue is important, although its importance should not be overstated. When analysts talk about a "sterling shock", they are for the most part talking about a sharp fall in sterling from its equilibrium level. Sterling is currently above what most commentators consider to be its equilibrium level. Therefore, sterling would have to fall considerably before its level could be considered to represent an economic shock. A further point worth noting is that while sterling remains outside the euro zone, it is UK business which is more likely to suffer from an exchange rate premium on domestic interest rates, a factor that will no longer apply to Ireland in EMU. 

Forfás Document - Actions for Irish Enterprises to address UK Delayed Entry into EMU - A Competitive Response 

The Government is not, however, ignoring the need to prepare for the possibility of problems for Irish industry as a consequence of sterling falling significantly below its equilibrium level. In July 1998, Forfás launched a document which summarises the results of a consultancy study, commissioned by their EMU Business Awareness Campaign, to identify actions in the fields of finance, marketing and distribution that firms could consider as part of their planning for the possible contingency of sterling falling below its equilibrium level. The document is included in the Campaign's information pack for business. 

Policy responses to a possible economic shock in EMU 

The question of possible economic shocks in EMU must also be considered. There are two distinct types of such shocks. First there is a shock which would affect the whole EMU area. Such a shock would be dealt with jointly by the Member States and the relevant Community institutions, including the ECB. 

Secondly there is a shock which would affect Ireland in particular. A successful response to such a shock would depend to a large extent on how well the Irish economy had prepared itself in advance. The use of interest and exchange rates as economic instruments to deal with shocks which are particular to Ireland will no longer be available in EMU. This means that if there are shocks in the future which are particular to Ireland, the adjustment process will have to be assisted by a combination of fiscal policy, pay policy and structural reform. 

The terms of the Stability and Growth Pact, requiring a Member State to achieve a budgetary position of close to balance or surplus in normal economic conditions, can allow fiscal policy to help stabilise the economy following an economic shock. Indeed, one of the main objectives of the Pact is to help ensure that, by making provision in good economic times, sufficient flexibility will exist in bad times to allow fiscal policy to be used to help cope with the problems that might then exist. A medium-term budgetary objective of being "close to balance or in surplus" will, of course, require the adoption of prudent policies in relation to the rate of growth in public expenditure, and appropriate tax policy within the overall framework of Partnership 2000. 

Enhanced competitiveness has an important role to play in the economy's capacity to accommodate economic shocks successfully. Ireland's competitive position in recent years has been strong. It stems from a strategic framework built, inter alia, on a consensus approach which brings the social partners into the national goal-setting arena; sound fiscal and economic policies pursued by successive Governments; and a long-established investment in education. This is now translating into strong employment growth, a continuous decline in unemployment and increased national resources to tackle social priorities. 

Provided our competitiveness is maintained, disturbances can be absorbed more readily by appropriate adjustment to domestic costs and prices. The social partnership arrangements are important in this regard, in providing a framework for both long-term competitive labour cost development and for strategic and dynamic responses to shocks, such as the provision for review under Partnership 2000. Also important are the maintenance of competition in product markets and the development of suitable infrastructure - both "hard" (physical infrastructure) and "soft" (social infrastructure, e.g. public services and the regulatory framework; the skills and knowledge base; and information management). 

Ultimately, private sector preparation for possible shocks in EMU is, like all issues of competitiveness in the market place, primarily a matter for individual companies themselves. Considerable progress is being made in making companies aware of the issues which deserve attention in the context of their individual operations and important work is being done by the Forfás EMU Business Awareness Campaign and others, primarily in the financial sector, in spreading the message of the need to prepare for EMU. Special attention is being paid to SMEs which are perceived to have particular needs. 

Ireland's Legislative and Practical Preparations for the Changeover to the Euro 

The Timetable for the changeover to the Euro 

In addition to its economic aspects, the changeover to the single currency also requires legislative and practical preparation. Following is the timetable for the changeover to the euro: 

• On 1 January 1999 the euro will come into being as the currency of the Member States participating in EMU and the conversion rates of the currencies of those Member States against the euro will be irrevocably fixed. The euro will be useable for non-cash transactions, but as euro notes and coins will not yet be available, national notes and coins will continue to circulate; 
• On 1 January 2002 euro notes and coins will be put into circulation and the withdrawal of national notes and coins will begin; 
• Within six months at most (probably a good deal less), national notes and coins will have been withdrAWN and the changeover to the euro will be complete. The introduction of euro notes and coins and the withdrawal of Irish pound notes and coins will be a considerable operation and the logistics of it are being actively examined. 

The two Council Regulations which together make up the EU legal framework for the euro have already been mentioned. At national level, the following legislation has been enacted in preparation for the introduction of the euro on 1 January 1999. 

The Central Bank Act, 1998 provides for the compatibility of Irish Central Bank legislation with Articles 107 and 108 of the Maastricht Treaty: these deal, respectively, with the independence of national central banks and with the requirement that national legislation, including cental bank statutes, be compatible with the Treaty and the Statute of the ESCB and the ECB. 

The Finance Act, 1998 (Section 47 and Schedule 2) provides for the taxation changes required for the introduction of the euro on 1 January 1999. In general, the amendments seek to treat, for tax purposes, gains and losses arising from the introduction of the euro in the same way as foreign exchange gains and losses are treated at present. 

The Economic and Monetary Union Act, 1998 declares that by virtue of Council Regulation (EC) No 974/98, from 1 January 1999 the currency of the State will be the euro and the Irish pound will be a subdivision of it. The Act also removes incompatibilities between Irish monetary law and the EU legal framework for the use of the euro and gives effect to enabling provisions in that framework, for example in relation to the redenomination into euro of outstanding debt. The Act is also designed to facilitate companies which wish to redenominate and renominalise their capital structure into euro before the final changeover to the euro on 1 January 2002. 

Practical Preparations for the Changeover to the Euro 

As regards practical preparations, the Department of Finance is the Department with overall responsibility for coordinating Ireland's preparations for the changeover to the euro. It has responsibility for coordinating the preparations of the Irish public administration and has a key role in helping the rest of the economy to prepare itself for the changeover. 

The Department has put in place a number of initiatives in connection with the changeover: 

• The Single Currency Officers Team (SCOT) was set up in Autumn 1995. SCOT consists of a representative from every Government Department as well as from the Office of the Revenue Commissioners, the Office of the Comptroller and Auditor General, the Central Statistics Office and the National Treasury Management Agency. The Central Bank of Ireland also participates in SCOT. SCOT's remit is to coordinate preparations for the introduction of the euro in the public sector. Every Government Department has prepared a detailed changeover plan in respect of its operations, has designated a senior officer to oversee the implementation of its plan and has applied similar arrangements as appropriate to all bodies under its aegis. Progress reports are submitted to the Government on how the changeover is progressing across the public sector. 
• THE EURO CHANGEOVER BOARD OF IRELAND The Euro Changeover Board of Ireland was established by the Minister for Finance on 5 May 1998 and has two basic tasks: to oversee the detailed implementation of the changeover to the euro and to provide public and consumer information. The Board includes representatives from ICTU and IBEC, from the community and voluntary pillar of Partnership 2000 and the National Women's Council and from consumer, business, financial and professional bodies, as well as from the European Commission Representation and European Parliament Office in Dublin, the Central Bank of Ireland, Forfás and relevant Government Departments. The Department of Finance provides the Chairperson and secretariat to the Board. 
• The National Information Programme on EMU and the changeover to the euro was launched in December 1996. The Programme is designed in phases to provide information on EMU and the changeover to the euro as the single currency project proceeds and is part-funded by the European Union. The first phase of the Programme ran to end-1997 and consisted mainly of the Forfás Business Awareness Campaign. 
• The Forfás Business Awareness Campaign aims to provide businesses with the information they need to prepare themselves for EMU and the changeover to the euro. The Departments of Finance and of Enterprise, Trade and Employment, the Office of the Revenue Commissioners and the Central Bank of Ireland are represented on the Management Committee for the Campaign. A Consultative Committee advises on the direction of the Campaign: it includes representatives from businesses and trade associations, from professional bodies and from the State agencies that deal directly with businesses. 
• Following the EU leaders' confirmation in May 1998 that Ireland qualifies to join EMU and adopt the euro from 1 January 1999, a substantial Public Information Programme was launched in June 1998. This included a major advertising campaign using press, radio and television, as well as the distribution of an information leaflet to every household in the country - over 1.3 million leaflets in all. In addition, over 80,000 posters outlining the changeover timetable and showing what euro notes and coins will look like were distributed to schools, libraries and public offices. The Euro Changeover Board of Ireland is also administering, on behalf of the EU, a programme under which non-governmental organisations receive part funding for activities to promote awareness of the euro. Further public information initiatives will be taken in the run-up to the launch of the euro on 1 January 1999 and beyond. 

Finally, the third edition of EMU and the Euro: Ireland's National Changeover Plan was published in November 1998. It sets out the arrangements that will be made by the public sector (including Government Departments and Offices, local authorities, health boards and State-sponsored bodies; the Department of Finance; the Central Bank of Ireland; the National Treasury Management Agency; the Revenue Commissioners; the Department of Social, Community and Family Affairs; the Department of Agriculture and Food; the Department of Education and Science; the Department of Enterprise, Trade and Employment in relation to the national code of practice on dual display; and the Central Statistics Office) as well as by private sector bodies, (including banks and building societies, the Irish Stock Exchange, the Insurance Sector and IBEC) to facilitate the use of the euro. An Appendix to the Plan summarises the work that is being done, not just in the public sector but also across the private sector, with a view to ensuring that the changeover to the euro will be carried out in a smooth and orderly way; it also lists contact points from which more information can be obtained. Other Appendixes include a list of euro websites, the membership and secretariat of the Euro Changeover Board of Ireland, and the Standard of good practice on bank charges for conversion to euro and on dual display of amounts published by the Irish Bankers' Federation and the Irish Mortgage and Savings Association. The designs for euro notes, and the designs for the common face of euro coins as well as for the national faces where these are available, are shown at the end of the plan. 

OJ No L162
OJ No L139
OJ No L236
OJ No L209
OJ No L209