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MONETARY UNION AND THE EURO

Europe is in an advanced stage of monetary integration. This process has culminated in adopting a single European currency on January 1, 2024 and is aimed at improving the European economy’s performance; it will also affect non-europeans, e.g. Americans who do business in Europe or go there as tourists.

The Netherlands, Germany, France, Italy, Belgium, Ireland, Luxembourg, Finland, Spain, Portugal and Austria launched European Monetary Union (EMU) on January 1, 1999. Since then, all business transactions in the participating countries are calculated in the euro, the currency established under EMU. Tourists will probably not have any dealings with the Euro until 2002, when tangible, legal tender euro bank notes and coins will be introduced.

What is EMU?

EMU stands for European Monetary Union, which is the culmination of a process of economic integration that began after World War II, partially triggered by the U.S.’s financial Marshall Plan aid to Europe. In monetary union, individual countries give up their sovereign right to set monetary policy.

What is the Euro?

Euro is the name of the single European currency. The word euro is not a prefix or abbreviation, but was instead chosen as the name of the new currency by leaders of the European Community after ample consideration. The name ECU (European Currency Unit, the unit of account that is used for the European Community’s budget) was found to be unsuitable because of its confusing pronunciation in various European languages. The Euro will be divided into 100 cents.

Brief Overview of European Integration

The devastation and tragedy which WWII wrought upon Europe fostered the realization that closer ties between European countries would prevent future armed conflicts. Cooperation in the economic field was strengthened by the Marshall Aid and the terms under which the countries were eligible for this aid. The objective of non-isolationist European countries was shared by many European leaders. This led to the establishment of the European Economic Community (EEC) in the 1950s.

The EEC had a very successful start: between 1958 and 1968 all tariffs for cross-border trade were abolished. After a period from 1970 through the early 1980s (sometimes referred to as the years of Euro sclerosis), the EEC re-energized itself and set a new target: to achieve a common market in 1992. This goal was met by harmonizing national legislative provisions which hampered European trade. One major impediment to trade still remains: the 15 EEC countries have 14 different currencies. Exchange rates between these countries, although relatively stable by virtue of the (European) Exchange Rate Mechanism, still make for riskier business transactions than those conducted in one large monetary area, such as in the United States or Japan. Elimination of exchange rate risk, the ensuing price transparency and more efficient accounting will promote economic growth through Europe. To bring about the single currency, a three stage EMU plan was added to the EEC treaty in 1992. The EEC was consequently renamed the European Union.

When will EMU occur?

EMU began on January 1, 1999, which was also the date of the euro’s debut. During a three year transition period, the euro will be available only as an accounting unit, for bank balances or for payments by check or transfer card. Tangible, legal tender bank notes and coins will not be circulated until 2002. Banks in the Netherlands have already committed themselves to provide "euro facilities" to companies that adopt the euro as their unit of account. These facilities will permit electronic payments in euro beginning in 1999.

Will all European countries participate in EMU?

No. The EC Treaty specifies a number of criteria (inflation, public debt and interest rates) aimed a measuring the economic convergence of the various European economies. It is important for the countries to have a roughly similar level of economic performance. The Netherlands, Germany, France, Italy, Belgium, Ireland, Luxembourg, Finland, Spain, Portugal and Austria will launch European Monetary Union (EMU) on January 1, 1999; other countries may join later.

Why Will the Netherlands Participate?

As a small country of 15 million inhabitants with an historical inclination to reap the benefits of free trade–Holland has been a seafaring nation of tradesman since the 16th century–most initiatives which promote free and fair trade are supported by the Netherlands. Dutch companies, whether large or small, and Dutch multinationals (Philips, Shell, Unilever, Akzo, etc) benefit from having a large "home" market and thus support the process of economic integration. The increase in inter-european and international trade has allowed the Netherlands to become the Gateway to Europe.

When Will This Affect Me?

Businesses, especially those dealing with large Dutch multinationals, may encounter the euro as early as 1999, as some of those multinationals have already indicated that they will use the euro as their unit of account right from the start. American tourists should expect to begin using the new currency in 2002. When new euro notes and coins are put into circulation at the beginning of 2002–the so-called "E-Day"–ATMs in the Netherlands will dispense only euronotes and Dutch retail outlets will hand out small change only in eurocoins. The guilder is expected to vanish from circulation very quickly, perhaps within a few weeks. Americans holding bank notes denominated in Dutch guilders may exchange these notes at the Netherlands Central Bank for up to a period of 30 years; coins will be exchanged for a period of only several months.

What’s In It for Me, as a Non-European?

If you stay in Canada and have no business in or with Europe, the change-over should not affect you. For Canadian travelers or businessmen, the euro provides many advantages: exchanging currencies will be less burdensome and the euro will be more readily available at U.S. banks.

What about Contracts Stipulating the Use of a Disappearing European Currency?

While contractual law is often difficult, in the case of the euro there are very few problems. Under normal contract law, newly introduced currency automatically take the place of the currency it replaces. For example, if a contract concluded under Dutch law stipulates a payment of 1 million guilders, the contract would read 500,000 euros under a conversion rate of 2:1 (2 guilders for 1 euro). For contracts concluded under European law, this "continuity principle" in reinforced by a European Council regulation. For contracts concluded under state law in the U.S., contractual continuity will most like apply. Some U.S. states have already adopted provisions explicitly stipulating contract continuity with respect to the euro.

For more information, go to www.euro.nl

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