Economic Report President

short-term public debt). Even after monetary union, differences amonglong-term interest rates may remain, as different EMU countries withdifferent stocks of public debt may be perceived as having differentdefault probabilities. However, long-term interest rates among the 11countries (collectively called the euro-11 area) had converged quitesharply by the fall of 1998 as well.In July 1998 the European Central Bank came into existence. OnJanuary 1, 1999, a single currency, the euro, was created as thecurrency of the 11 EMU countries. On the same date the EuropeanCentral Bank took control of monetary policy in these countries. Existingnational notes and coins will continue to circulate until euro cash isintroduced, but the mark, the franc, the lira, and the rest are no longerseparate currencies. Rather they are “nondecimal denominations” ofthe euro, locked in to it at permanent conversion rates. (By analogy,U.S. dollar bills are issued in the 12 Federal Reserve districts aroundthe country and carry a circular seal with a letter inside denoting thedistrict from which they come. However, Europeans will continue forsome time to be far more aware of the geographic origin of the currencythey carry than Americans are.) Only in 2002 will euro cash enter intocirculation and national currencies be phased out. This transition periodis necessary because authorities need time to print the banknotes andmint coins. Retailers and banks also want time to prepare, andgovernments have to consider how to change their services over to theuse of the euro.Although euro cash will be introduced only in 2002, many changeswill occur in the 3 years between now and then. Government bondsissued after 1999 will be denominated in euros. Almost all outstandingissues of marketable government debt by the participating countrieswere redenominated in euros at the end of 1998. Moreover, severallarge European companies plan to begin accounting in euros in 1999.Such a move may lead smaller firms to follow. Even businesses that donot switch their internal accounting to euros may quote prices in eurosfor trading before 2002. Consumers and the public sector are likely tobe using national currency units until 2002. In general, European governmentsagreed that there will be no compulsion and no prohibitionin the use of the euro between 1999 and 2002.THE BENEFITS AND POTENTIAL COSTS OF EMUEMU offers several potential benefits. Transactions costs in tradeamong the members will be lowered, as exchange rate risk and currencytransactions within Europe will both be eliminated; the ensuinggoods market integration and enhanced price competition will be beneficialto consumers. Integrated European financial markets will bebroadened and deepened. Price discipline will be preserved by theindependent European Central Bank, which is committed to pricestability. It is hoped that fiscal discipline will also result, since, as the293