The process of moving towards European monetary union bears some similarity to organising a garden party to be held in some years from now.
The planning aspects have to continue even though the guest list is yet an unknown quantity; the dress code has yet to be finalised, and most important of all, what will the weather be like?
Current thinking leans towards European monetary union starting on January 1, 1999, and including six countries: Austria, Belgium, France, Germany, Luxembourg and the Netherlands.
There is already a remarkable level of concurrence on the interest rate front, with ten-year government bond yields of the six countries all within 50 basis points of each other already. This differential is likely to persist after monetary union, with those countries with the strongest economies and soundest fiscal position being able to borrow at a fractionally preferential rate.
So far, so good. But what of those EC members who are not in the chosen six? Denmark will almost certainly qualify for full participation under the Maastricht rules but has already stated that it will not be joining. The UK may well come into line but any decision on participation will probably have to wait until after the general election due by May of this year. Spain and Portugal are desperately keen to achieve full membership and will miss the initial deadline but are expected to join at a later date without incurring too many problems.
After all, while the Euro common currency will be born on January 1, 1999, national banknotes and coins will remain in circulation until 2001, and the Euro will not become the sole medium of exchange within EMU countries until July 2002.
It is assumed that by this time, those countries wishing to participate will have managed to meet the initial monetary and fiscal requirements.
The big problem, however, comes with the UK as it currently handles 30% of the global currency, with New York at just 16% being its nearest rival. What investors will want to know is whether there will be a gradual shift from London to Frankfurt, assuming the latter as the home for the newly created European Central Bank (ECB). This is very much the case in the US, where the issuance of bonds is concentrated in New York where the Fed is based and where monetary decisions are made.
There will also be deep and searching questions as to how much of a risk premium will be required to attract investors into the London market, giving that decisions on interest rates, currency values and monetary policy will remain with the UK government as opposed to the ECB.
Banks in London, including the 500 foreign banks represented, have very little idea as to whether they will be required to execute all transactions in the Euro. Staying outside the system will require the creation of a new currency in payment and accounting systems, while opting in will require conversion to dual currency operation between 1999 and 2002 before switching exclusively to the Euro. This problem is one that core EU countries are already well advanced in addressing.
Will the UK miss the boat is a question as easily answered as assessing the length of a piece of string. But the introduction of the Euro and mass participation in monetary union suggest that interest rates in the UK and Denmark will be higher than Euro rates for as long as these two countries opt out. The trade position will become a potential nightmare as core members act to ensure that those outside the system do not gain a competitive edge by allowing a currency depreciation, while at the same time grappling with the inherent rights of free trade as a member state.
Whatever rules are introduced, investors and traders are likely to adopt a few time honoured maxims, quality and price in the case of trade; risk, liquidity and return in the case of money markets.
Jason Crosland is a freelance journalist
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