Transition to the single currency in europe and its implications for financial institutions

Abstract

This paper discusses the changeover to single currency in the European Union and provides a preliminary analysis of the timing and nature of the steps to be taken by financial institutions. It uses data from the literature and a recent survey of financial institutions operating in Europe to provide an overall view on conversion issues that both these institutions and policy-makers are facing. This paper could therefore serve as a background for future studies that pertain to the strategies of individual financial institutions, their competitive positioning for the long term, and their attempts to minimize their cost of conversion in the short term. The European Currency Unit, by virtue of its design, is a viable candidate for use as the single currency. Its current status in member countries shows that it meets the basic “money” criteria but that legal obstacles have kept it from wider use. However, these legal obstacles are being lifted. Financial institutions should start planning for potential implementation problems. The analysis of conversion costs categorized by product/service and by function shows that the move to single currency requires financial institutions to modify selected functions within a very short period of time. A lengthy dual currency period on all functions would cause duplication of efforts and large losses to banks. There are other intangible costs and benefits that are social and political, which are associated with the changeover. These are touched upon and discussed briefly in the context of the motivation behind the European Monetary Union.