Bankers face ‘big gamble’ as single currency torchbearers

Date: 28/03/1996

By Fiona McHugh

THE plot seems straightforward enough at a first glance. The 12 to 15 players, having grown closer and closer over the course of the previous seven years, gradually harmonising inflation, debts and deficits, will join in blissful financial matrimony by the end of the century.

Dates have been set, criteria drawn up and belts tightened.

But, in fact, the story of Europe's planned economic and monetary union (EMU) is an intricate and a messy one. This is, after all, a wedding made in Maastricht, not heaven.

Looking particularly anxious these days are the bloc's bankers. For it is they, and not the politicians responsible for the Euro-currency script, who will end up footing the production bill. Never mind the finance ministers cocking snooks, the currency highs and lows and the ever-changing dates. What worries them most is the blind-date nature of EMU.

For the moment, the scheduled deadline is 1 January 1999, but it is still far from certain whether this target will be met and, if so, who will end up participating in the single currency project.

If it were to take place this year, only three of the Union's 15 members would meet the economic criteria listed in the treaty. Even Germany, one of the bloc's most pro-European nations but suffering a growth slowdown, would not make the grade.

It is this uncertainty about who is likely to participate, and who is not, which is causing headaches in the banking sector.

According to a timetable worked out at last December's Madrid summit, EU heads of state will decide at the beginning of 1998 which countries will be among the first wave of entrants to the one-currency club.

Exchange rates will be fixed irrevocably in 1999 and banks and governments can begin to trade in Euros. Finally, three years later, the general public will begin to use the new currency.

Between now and 1999, however, financial institutions will have to overhaul thousands of software programmes, print stacks of brochures and retrain their employees.

By 2002, several million vending machines and bank-note dispensers will have to be adapted to the new currency.

Altogether, the Banking Federation of the European Union has estimated that the cost to banks of monetary union is likely to run to more than 10 billion ecu.

The federation also estimates that it will require between two and three years of preparation.

The problem is that no one yet knows which countries will participate.

That leaves bankers facing a huge dilemma. Either they spend money on a project with no assurance that their investment will pay off, or they hold back - and risk finding themselves unprepared if their country goes ahead.

“There is an inherent problem with the EMU project which cannot be talked away,” says Nikolaus Bömcke, the federation's secretary-general.

“As the torchbearers of the new currency, banks will have to take a big gamble, especially those in the UK and Denmark, whose governments have opt outs from monetary union. If they guess incorrectly, then they could lose a lot of money.”

Bömcke welcomes the decision to phase in monetary union by first converting financial markets and governments to it, and then bringing the EU's 370 million citizens on board.

“In theory, a big bang would have been the easiest path to take, but, you see, the single currency is about coins and notes as well as book money, and notes and coins take time to mint,” he points out.

“I believe that, in fact, a big bang could have been lethal to the success of the single currency, because success depends on a currency's credibility. It is crucial that the Euro be tested by key operators first, who can demonstrate its trustworthiness to the public at large.”

As for the likely impact of the single currency, the secretary-general - while stressing that he is in the banking and not the clairvoyance business - predicts it will radically alter the banking landscape, triggering a surge in cross-border business and a wave of EU-wide mergers.

So far, financial institutions, unlike traders in goods, have failed to capitalise on the single market, prompting concern in Brussels about invisible trade barriers.

While acknowledging the disappointing track record of financial institutions, Bömcke insists things will change once the final piece of the jigsaw - the single currency - is in place.

It will strip away the remaining layers of protection and expose formerly-protected banks to the chill winds of competition. Institutions that were big fry in their national markets will suddenly find themselves small fish in a European pond.

“Domestic currencies give de facto protection to national banks because if, for example, you get paid in Belgian francs, automatically you will be inclined to take out a loan in Belgian francs,” says Bömcke, predicting: “Once the single currency is introduced, this will change.”

Explaining the failure of the single market in financial services to get off the ground, he chastises national governments for not implementing EU banking laws.

“What is missing? As far as legislation is concerned, nothing. It is a question of implementing not just the letter, but also the spirit of the law, and this really has not yet been done. A number of countries continue to hide behind trade barriers,” he maintains.

Citing the proposed directive on cross-border payments as an example of unwanted and unnecessary legislation, Bömcke warns against the temptation to enact new laws endlessly.

“Some people think that by passing legislation they can solve every problem. But that is a big mistake,” he insists.

The draft cross-border directive, which has yet to be finalised, aims to wipe out double-charging, and cut the cost and the length of time it takes to transfer small sums of money from one EU country to another.

But Bömcke claims it is “totally unnecessary”, insisting: “The Commission itself has found that there are no longer many delays. Double-charging is already illegal, so why make it doubly so? And, as for transparency, I do not think it makes sense to pass laws simply to force banks to print brochures.

“We believe that market forces would have convinced banks to comply with a code of conduct, the effect of which would probably have been better than that of a law.”

But while Bömcke's reasoning is seductive, critics argue that it does not stand up to close scrutiny. For if he really believes that the market will force banks to adopt higher standards than those required by the directive, why is he getting so hot and bothered about it?

“It is the money-back guarantee (which would oblige banks to refund lost money regardless of whether they are at fault) which really bothers us,” explains Bömcke.

“If you make a transfer from Sheffield to London, there is no money-back guarantee. Why create such an instrument on an EU level when it does not exist on a national one? It stipulates responsibility without fault, which is unacceptable,” says the secretary-general, looking, for the first time in an hour, just a little ruffled.