Table I

Convergence Criteria for 1997

Consumer Price Inflation (1)

General Government Surplus (+) or Deficit (-)

General Government Gross Debt

Long-Term Interest Rate

Exchange Rates Within the EMS

All Criteria Fulfilled

Normal Fluctuation Margins

ERM Participation

„Strict" Interpretation (2)

Art. 104c(2) Interpretation (2)

% change

% of GDP

% of GDP

%

1995/96

1996

Belgium

1.9

-2.7

126.7

5.8

yes

yes

no

yes

Denmark

2.4

+0.3

67.2

6.2

yes

yes

no (4)

yes (5)

Germany

1.8

-3.0

61.8

5.6

yes

yes

no

yes

Greece

6.0

-4.9

108.3

10.8

no

no

no

no

Spain

2.3

-3.0

68.1

6.6

yes

yes

no

yes

France

1.6

-3.0

57.9

5.8

yes

yes

yes

yes

Ireland

2.0

-1.0

68.3

6.4

yes

yes

no (4)

yes

Italy

2.3

-3.2

122.4

7.0

no

yes (3)

no

no/yes ?

Luxem-
bourg

1.7

+1.1

6.5

6.0

yes

yes

yes

yes

Nether-
lands

2.4

-2.3

76.2

5.6

yes

yes

no(4)

yes

Austria

2.0

-3.0

68.8

5.6

yes

yes

no

yes

Portugal

2.5

-3.0

64.1

6.5

yes

yes

no

yes

Finland

0.9

-1.9

59.2

5.9

no

yes (3)

yes (4)

yes

Sweden

0.7

-2.6

76.5

6.7

no

no

no

no

United Kindom

2.2

-2.9

54.7

7.5

no

no

no

no (5)

EU-15 average

2.1

-2.9

72.9

6.2

countries

countries

Reference value

2.6 (*)

-3.0

60.0

8.2 (+)

3

10-11 (12)

(1) Price inflation is evaluated according to the „harmonized" conumer price indices (CPI).

(2) Refers to the fiscal criteria (general government balance and general government gross debt) according to the EC Treaty, Art. 104c(2).

(3) Since October 12, 1996 Finland takes part in the exchange-rate mechanism of the EMS; Italy joined again on November 2, 1996.

(4) The Council (ECOFIN) decided on July 1996 that Denmark and Ireland met the fiscal criteria based on data of 1995 (no excessive deficit); Luxembourg always complied with this condition; on May 12, 1997 the Council decided that also the Netherlands and Finland (based on data of 1996) have no longer an excessive deficit.

(5) Denmark and the United Kingdom have an „opting out" rule (Protocol 11 and 12 of the EC Treaty).

(*) Defined as the average inflation rate of those three countries with the lowest inflation rates plus 1.5%.

(+) Defined as the average nominal long-term interest rate of those three countries with the lowest inflation rates plus 2 percentage points.

Convergence criteria according to the EC Treaty, Art. 109j and the Protocols 5 and 6.

EMS = European Monetary System; ERM = Exchange-rate mechanism of the EMS.

Source: European Commission, Spring 1997 forecasts.

Table II

Model Inputs and Economic Impact of a Large EMU

Economic Effects

(model inputs)

Positive Impact

Negative Impact

Reduction of transaction costs

(0.2% to 0.9% of GDP;

adjustment of disposable income -

less in hard-currency countries, more in soft-currency countries)
  • Abolition of costs of foreign currency exchange (positive for tourists, export and import agents)
  • Banks lose part of their currency exchange business (possibly a reduction in employment in this sector)

More competition in the financial sector

(-1% short-term interest rates;

evenly imputed for all countries)
  • Stimulating cross-border competition in the financial sector (banks and insurances) improves the conditions for financing business investment
  • Profit sqeeze in the banking sector (possibly a reduction in employment in this sector)

Exchange rate stability

(imposition of the exchange-rate fluctuations of the period 1992-96 to the period 1999-2003)
  • Hard-currency countries gain because these countries are no longer confronted with the devaluation threat of the soft-currency countries
  • Interest rates and the price level will converge (i.e., an increase in the hard-currency countries)
  • Soft-currency countries will lose because these countries can no longer use devaluations in order to improve their competitiveness
  • Interest rates and the price level will converge (i.e., a decrease in the soft-currency countries).
  • The internal (inflation) and the external stability (the external value of the Euro) are at risk in a large EMU

Dynamic or growth effects

(increase of total factor productivity - TFP - by 0.3% to 0.7% according to the Baldwin multiplier)
  • A stronger TFP increase and therefore larger growth effects may be expected in the hitherto less efficient soft-currency countries.
  • Less additional TFP increases and therefore weaker growth effects can be expected in the already highly efficient hard-currency countries.
  • The increase of TFP leads partly also to job losses.

Table III

Macroeconomic Effects of a Large EMU

Partial effects of EMU

Total Effects of EMU

(5)=(1+2+3+4+5)

Reduction of Transaction Costs
(1)

More Competition in the Fincancial Sector
(2)

Exchange-rate Stability
(3)

Dynamic or Growth Effects
(4)

1st year

5th year

1st year

5th year

1st year

5th year

1st year

5th year

1st year

5th year

(Deviations from base line solution(1) in %)

GDP effects:

HC

0.25

0.12

0.31

0.18

0.28

0.16

0.13

1.46

0.97

1.92

AT

0.45

0.00

0.36

0.25

0.06

0.30

0.21

1.64

1.08

2.19

SC

0.72

0.24

0.38

0.60

-0.51

-1.97

0.18

2.54

0.77

1.41

EU

0.44

0.17

0.34

0.35

-0.04

-0.70

0.15

1.89

0.89

1.71

Employment effects:

HC

0.09

0.11

0.12

0.17

0.08

0.21

0.04

0.34

0.33

0.83

AT

0.13

0.09

0.10

0.21

0.02

0.22

0.04

0.11

0.29

0.63

SC

0.23

0.44

0.11

0.57

-0.13

-2.15

0.03

0.24

0.24

-0.90

EU

0.15

0.24

0.12

0.33

0.00

-0.74

0.03

0.30

0.30

0.13

Price effects:

HC

0.08

1.85

0.13

2.44

0.05

5.0

-0.13

-2.46

0.13

6.83

AT

0.19

1.90

0.14

2.80

0.00

3.10

-0.07

-1.35

0.26

6.45

SC

0.21

3.10

-0.13

2.82

-0.22

-15.17

-0.21

-2.56

-0.35

-11.81

EU

0.13

2.35

0.02

2.60

-0.06

-3.12

-0.16

-2.50

-0.07

-0.67

Interest rate effects:

HC

0.20

0.78

-0.84

-0.36

0.11

2.19

-0.33

-2.27

-0.86

0.34

AT

0.23

0.66

-0.93

-0.45

0.08

2.25

-0.38

-2.55

-1.00

-0.09

SC

0.22

0.65

-0.89

-0.39

-0.02

-0.51

-0.41

-2.50

-1.10

-2.75

EU

0.21

0.72

-0.86

-0.37

0.05

0.99

-0.36

-2.37

-0.96

-1.03

Budgetary effects:

HC

0.32

0.34

0.26

0.46

0.07

0.29

0.11

0.73

0.76

1.82

AT

0.55

0.23

0.43

0.81

0.02

-0.01

0.18

1.18

1.18

2.21

SC

0.26

0.36

0.22

0.63

-0.14

-1.81

0.10

0.92

0.44

0.10

EU

0.29

0.35

0.24

0.54

-0.02

-0.64

0.10

0.82

0.61

1.07

Exchange rate

(Euro/US-$)(2)

0.01

1.83

0.27

2.61

-0.01

4.86

-0.01

-2.52

0.26

6.78

(1) Base line solution is the EMU scenario with fixed exchange rates vis-à-vis the DM, starting in January 1999. The scenario "Exchange-rate stability" compares the EMU scenario with a situation of exchange-rate fluctuations during the period 1992 to 1996. "Large EMU" means in the model, that 9 EU Member States participate in the EMU.

(2) An increase (decrease) means devalutaion (revaluation) of the Euro against the US-Dollar.

HC = Hard-currency group (Belgium, Germany, France, Netherlands, Austria).

SC = Soft-currency group (Spain, Italy, Sweden, United Kingdom).

AT = Austria; EU = HC + SC.

Source: Own calculations with the OEF World model.

Graph 1

Graph 2a

Graph 2b

Graph 2c

Graph 2d

Graph 2e

©1997 by Breuss
arranged by MN, 16.5.1997