Tag Archives: Monetary policy

Impact on capital markets

Impact on capital markets

Outline of the Community (European Union) legislation about Impact on capital markets

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for capital

Impact on capital markets

Document or Iniciative

Commission communication of 2 July 1997 on the impact of the introduction of the euro on capital markets [COM (97) 337 final – Not published in the Official Journal].

Summary

In order to derive maximum benefit from the introduction of the euro, it is desirable to attain a degree of harmonisation of future euro markets by defining common characteristics that will apply to the financial markets of all the countries in the euro area.

Bond markets

Under the reference scenario adopted in Madrid, all new tradable public debt will be issued in euros as from 1 January 1999. In addition to this requirement, most issuers are now considering redenominating into euros their outstanding debt: this operation will have the advantage of generating euro liquidity in government bond markets and of enhancing the credibility of the governments’ commitment to the economic and monetary union (EMU) process.

The best method of redenominating the debt would appear to be the “bottom-up” approach:

  • individual securities are converted to euros using the fixed conversion rates;
  • the result is rounded up to the nearest cent;
  • the sum of all individual securities is then calculated and matched against the total held at the central depository.

The operation is neutral at all stages and the only potential differences for operators lie in the rounding arrangements.

Greater harmonisation of market conventions towards best practice is worth pursuing because it will increase transparency and avoid disputes. Harmonisation would concern the following points:

  • conventions governing the number of days used to calculate the accrual of interest: modern calculation systems enable the most accurate convention (exact number of days/exact number of days) to be adopted;
  • coupon frequency: the possibility of choosing between various options should be kept open. Semi-annual coupons reduce credit risk and are the norm in the US and Japanese markets, whereas annual coupons are the norm in the EU (except in Italy and the United Kingdom) and are cheaper for issuers;
  • business days: a standard definition could be to consider a business day as any day when TARGET is open for business (only Christmas Day and New Year’s Day are holidays);
  • settlement basis:
    – the most common method (“spot standard with a two-day settlement period”) would be a suitable standard to harmonise on for euro-money market transactions;
    – on bond markets, the settlement standard is currently trade date plus three business days: this standard could be maintained in the short term and a move made to a shorter settlement period in the longer term.

Equity markets

As regards the changeover to the euro, the main European stock exchanges have announced their intention to pursue a Big Bang approach: as from 4 January 1999 exchanges will trade and quote all securities in euros. Intermediaries will have to make the necessary conversion in order to account to their clients in the currency chosen by the latter.

The decision to redenominate shares is a company decision independent from the decision of the stock exchanges to trade in euros. The denomination of share capital should not affect its economic value: accordingly, redenomination can take place at any time during the transitional period, in other words from 1 January 1999 to 31 December 2001.

The recommended solution is that of Non Par Value shares (NPV). Since each share is a fraction of the capital stock, there is no need for a physical exchange of share certificates. However, in many Member States the national legislation allowing NPV shares has not yet been put in place.

In general, there is not much of a case for harmonising market conventions in equity markets.

As regards historical series and stock market indices, the changeover should not give rise to any particular problems.

Derivatives markets

The transitional issues relevant to the derivatives markets mirror those of the underlying markets to which they relate. Accordingly, the same types of solution are recommended.

Other market features

Price sources. It is important to ensure the continuity of price sources. Prices calculated on a national basis (PIBOR, LIBOR, etc.) and on a European basis (EURIBOR) can coexist. It is desirable for rates to be published for the whole of the euro area or for harmonised criteria to be available for calculating national sources. The bodies responsible for producing and publishing price sources should provide clear information on the prices that will be available between 1 January 1999 and 1 January 2002.

Issuing procedures for sovereign debt. There is concern in some quarters that the coexistence of national debt offices and the European Central Bank (ECB) debt on markets could confuse monetary policy signals. Informal coordination between sovereign issuers could help to prevent this happening.

Ratings: sovereign debt. There is a debate between those who contend that membership of the euro area could result in an adjustment for some sovereign credit ratings and those who believe that membership of EMU will strengthen the credibility of budget policy and that ratings will not be adjusted.
In any event, the cost of raising debt for an individual country is unlikely to be changed significantly by a small adjustment in its credit rating, given the importance of other factors such as liquidity and the efficiency of the country’s primary dealer system.

Ratings: corporate debt. The European Union (EU) will probably be rated AAA and thus corporate borrowers will no longer be potentially capped by the credit rating of the country in which they are located. Broadly, EMU should have a positive effect on corporate ratings.

Repos. Market participants are keen to avoid the overly aggressive use of initial margin (the amount that has to be deposited before entering into a margining transaction)/haircut (the value of a security as collateral) in the official repo market as this would be an unnecessary restriction on the development of the market.
In addition, the use of variation margins (the amount that has to be deposited by the borrower to ensure that the counterparties remain fully collateralised throughout the term of a transaction) is far more efficient because it is based on symmetric daily marking-to-market of the collateral.

Markets need certainty that no volatility can occur at the end of the process because they would not be able to hedge. Investor protection is considered as one of the key factors of an efficient financial market and is crucial in determining the international attractiveness of the markets.

Towards a single currency: a brief history of EMU

Towards a single currency: a brief history of EMU

Outline of the Community (European Union) legislation about Towards a single currency: a brief history of EMU

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Practical aspects of introducing the euro

Towards a single currency: a brief history of EMU

The first appeal for a European currency prior to the 1929 crash

On 9 September 1929 the German politician Gustav Stresemann asked the League of Nations the following question “Where are the European currency and the European stamp that we need?” Six weeks later, on 25 October, the New York Stock Exchange experienced its “Black Friday”: the international economic crisis began. It caused enormous economic upheaval internationally, business closures and an unprecedented level of unemployment.

The States responded to the crisis with a policy of “beggar-thy-neighbour”, taking deflationary measures to boost export competitiveness and introducing tariff barriers for products imported from abroad. This policy made the economic crisis worse. While in the short term it was beneficial to the State concerned, in the long term it had serious economic consequences: inflation, falling demand, rising unemployment and slower growth in world trade.

The end of the Second World War: a new start

In 1944, while the Second World War was still laying waste to Europe, a conference on the restructuring of international financial and monetary relations took place at Bretton Woods in the United States. Over forty countries participated: on 22 July 1944 they signed the Bretton Woods Agreements. These agreements lay down rules and procedures governing the world economy. They led to the establishment of the International Bank for Reconstruction and Development (“BIRD”, which has now become part of the World Bank) and the International Monetary Fund. Furthermore, the Bretton Woods Agreements put in place the gold standard monetary system. This system provides stable exchange rates based on gold which becomes the reference standard. Only the US dollar is convertible into gold and the other currencies are indexed to the dollar.

The world underwent profound changes after the Second World War. The experiences of war gave rise to an awareness that international cooperation was crucial to avert further suffering. The United Nations (UN) was thus set up in 1945. In Europe, the first foundations for what would later become the European Union were laid by three Treaties bringing together six signatory States (Germany, Belgium, France, Italy, Luxembourg and the Netherlands):

  • the Treaty establishing the European Coal and Steel Community (ECSC), signed on 18 April 1951;
  • the Rome Treaties, i.e. the Treaty establishing the European Economic Community (EEC) and the Treaty establishing the European Atomic Energy Community (EURATOM), signed in March 1957.

Creation of Economic and Monetary Union

At the summit in The Hague in December 1969, the Heads of State and Government defined a new objective of European integration: Economic and Monetary Union (EMU). A high-level group chaired by Pierre Werner, Prime Minister of Luxembourg, was thus given the task of drawing up a report on how this goal might be reached by 1980.

The Werner group submitted its final report in October 1970. It envisaged the achievement of full economic and monetary union within ten years according to a plan in several stages. The ultimate goal was to achieve full liberalisation of capital movements, the total convertibility of Member States’ currencies and the irrevocable fixing of exchange rates. The report therefore envisaged the adoption of a single European currency as a possible objective of the process, but did not yet regard it as a goal in itself. Furthermore, the report recommended that the coordination of economic policies be strengthened and guidelines for national budgetary policies drawn up.

In March 1971, although being unable to agree on some of the key recommendations of the report, the Six gave their approval in principle to the introduction of EMU in several stages. The first stage, involving the narrowing of currency fluctuation margins, was launched on an experimental basis and did not entail any commitment regarding the continuation of the process.

The collapse of the Bretton Woods system and the decision of the US Government to float the dollar in August 1971 produced a wave of instability on foreign exchanges which called into serious question the parities between the European currencies. The EMU project was brought to an abrupt halt.

In March 1972 the Six attempted to impart fresh momentum to monetary integration by creating the “snake in the tunnel“: a mechanism for the managed floating of currencies (the “snake”) within narrow margins of fluctuation against the dollar (the “tunnel”). Thrown off course by the oil crises, the weakness of the dollar and the differences in economic policy, the “snake” lost most of its members in less than two years and was finally reduced to a “mark” area comprising Germany, the Benelux countries and Denmark.

Creation of the European Monetary System (EMS)

Efforts to establish an area of monetary stability were renewed in March 1979, at the instigation of France and Germany, with the creation of the European Monetary System (EMS), based on the concept of fixed, but adjustable exchange rates. The currencies of all the Member States, except the United Kingdom, participated in the exchange-rate mechanism.

The principle was as follows: exchange rates were based on central rates against the ecu (“European Currency Unit”), the European unit of account, which was a weighted average of the participating currencies. A grid of bilateral rates was calculated on the basis of these central rates expressed in ecus, and currency fluctuations had to be contained within a margin of 2.25 % either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6 %).

Over a ten-year period, the EMS did much to reduce exchange-rate variability: the flexibility of the system combined with the political resolve to bring about economic convergence, achieved sustainable currency stability.

With the adoption of the Single Market Programme in 1985, it became increasingly clear that the potential of the internal market could not be fully exploited as long as relatively high transaction costs linked to currency conversion and the uncertainties linked to exchange-rate fluctuations, however small, persisted. Moreover, many economists denounced what they called the “impossible triangle”: free movement of capital, exchange-rate stability and independent monetary policies were incompatible in the long term.

Introduction of the EMU

In June 1988 the Hanover European Council set up a committee to study economic and monetary union under the chairmanship of Jacques Delors, the then President of the European Commission. The other members of the committee were the governors of the national central banks, who were therefore closely involved in drawing up the proposals.

The committee’s report, submitted in April 1989, proposed to strengthen the introduction of the EMU in three stages. In particular, it stressed the need for better coordination of economic policies, rules covering national budget deficits, and a new, completely independent institution which would be responsible for the Union’s monetary policy: the European Central Bank (ECB).

On the basis of the Delors report, the Madrid European Council decided in June 1989 to launch the first stage of EMU: full liberalisation of capital movements by 1 July 1990.

In December 1989 the Strasbourg European Council called for an intergovernmental conference that would identify what amendments needed to be made to the Treaty in order to achieve the EMU. The work of this intergovernmental conference led to the Treaty on European Union, which was formally adopted by the Heads of State and Government at the Maastricht European Council in December 1991 and signed on 7 February 1992.

The Treaty provides for the EMU to be introduced in three stages:

  • stage No 1: (from 1 July 1990 to 31 December 1993): the free movement of capital between Member States;
  • stage No 2: (from 1 January 1994 to 31 December 1998): convergence of Member States’ economic policies and strengthening of cooperation between Member States’ national central banks. The coordination of monetary policies was institutionalised by the establishment of the European Monetary Institute (EMI), whose task was to strengthen cooperation between the national central banks and to carry out the necessary preparations for the introduction of the single currency. The national central banks were to become independent during this stage;
  • stage No 3: (underway since 1 January 1999): the gradual introduction of the euro as the single currency of the Member States and the implementation of a common monetary policy under the aegis of the ECB. Transition to the third stage was subject to the achievement of a high degree of durable convergence measured against a number of criteria laid down by the Treaties. The budgetary rules were to become binding and a Member State not complying with them was likely to face penalties. A single monetary policy was introduced and entrusted to the European System of Central Banks (ESCB), made up of the national central banks and the ECB.

The first two stages of EMU have been completed. The third stage is currently underway. In principle, all EU Member States must join this final stage and therefore adopt the euro (Article 119 of the Treaty on the Functioning of the EU). However, some Member States have not yet fulfilled the convergence criteria. These Member States therefore benefit from a provisional derogation until they are able to join the third stage of EMU.

Furthermore, the United Kingdom and Denmark gave notification of their intention not to participate in the 3rd stage of EMU and therefore not to adopt the euro. These two States therefore have an exemption with regard to their participation in EMU. The exemption arrangements are detailed in the protocols relating to these two countries annexed to the founding Treaties of the EU. However, the United Kingdom and Denmark reserve the option to end their exemption and submit applications to join the 3rd phase of EMU.

Currently, 17 of the 27 Member States have joined the third stage of EMU and therefore have the euro as a single currency.

Practical aspects of the introduction of the euro: review of the situation

Practical aspects of the introduction of the euro: review of the situation

Outline of the Community (European Union) legislation about Practical aspects of the introduction of the euro: review of the situation

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Practical aspects of introducing the euro

Practical aspects of the introduction of the euro: review of the situation

Document or Iniciative

Commission Communication of 11 February 1998: “Practical aspects of the introduction of the euro: progress to date” [COM (98) final – Not published in the Official Journal].

Summary

Following the Commission communication of 1 October 1997 [COM(97) 491 final – Not published in the Official Journal] which set out the practical preparations to be undertaken for the introduction of the euro, this Communication summarises progress made since then.

National administrations. Preparatory work by national administrations is proceeding apace. To date, eleven Member States have published a national changeover plan (Belgium, Ireland, Italy, Luxembourg, Netherlands, Austria, Finland, France, Portugal, Spain) or a comprehensive draft transition law (Germany).
Moreover, all the Member States have announced their intention to redenominate tradable central government debt, either immediately at the beginning of stage three or at the moment of their entry into EMU if that is at a later date.

Communication. Regarding communication, the main priority is to do more to inform the general public, small and medium-sized enterprises, local authorities, civil servants (in Member States and in the European institutions) and non-EU countries. Particular attention will be paid to the elderly, handicapped and other vulnerable groups.
Several Member States have already designed and launched wide-ranging information campaigns in close partnership with the Commission and the European Parliament.

Transitional questions. Regarding the Community institutions, since most of their financial operations are denominated in ecus, the changeover to the euro will for the most part take place on 1 January 1999, without a transitional period. The amount of specific changeover legislation required is extremely limited and the operational changeover is not expected to cause any disruptions. Furthermore, the management of the Community budget will be considerably simplified.

The Luxembourg European Council (12-13 December 1997) confirmed 1 January 2002 as the date for the introduction of euro notes and coins in all Member States participating in the first wave of monetary union.
In addition, a broad consensus is emerging that the period of dual circulation should be shortened: most Member States have already indicated that they will opt for a period substantially shorter than six months. Logistical problems relating to the storage of banknotes and coins up to 2001, and wholesale delivery to the commercial banks are, amongst other things, currently being examined.

Euro banknotes and coins. Agreement has been reached on the denominations and technical specifications of the euro coins. The Council Resolution of 19 January 1998 confirms this agreement.
The final design of the common face of the coins was adopted by the Council on 17 November 1997. Six countries (France, Germany, Austria, Ireland, Italy and Belgium) have so far made public the design of the national face of their euro coins.

Conversion rates and rounding of decimals. The Commission departments will continue to study the questions which arise in relation to the legal framework for the euro. Clarification has been requested in two areas in particular, namely the application of the conversion rates and the rules on rounding:

  • Use of the conversion rates between the euro and a participating national currency unit is mandatory whenever substitution or conversion takes place;
  • During conversion and reconversion (e.g. from Belgian francs into euros and back again into Belgian francs), a situation may arise in which the initial and reconverted amounts differ. In most cases, this problem will be dealt with by the payment systems: it is therefore better to leave conversions to the banking sector. Wherever possible, it is in any case preferable to write payment orders in the unit in which the obligation is expressed;
  • For conversions between national currency units, it is strongly advised always to employ the triangulation method (from the national currency to the euro and then from the euro to another national currency) with the euro as pivot;
  • Where sums of amounts are converted, rounding differences may systematically accumulate: the best solution depends on the individual circumstances of each case and the Commission does not consider it appropriate to draw up a general recommendation.

Information technology systems. Regarding the adaptation of information technology systems, the meeting between representatives of the industry and the Commission produced two main conclusions:

  • It was recommended that a “knowledge resource” on the IT implications of the euro be established;
  • Sharing practical experience and professional best practice via the publication of case studies and scenarios was felt to be of central importance.

Symbol of the euro. International recognition of the euro symbol has been assured by its registration with the International Organisation for Standardisation (ISO). The Commission has put forward detailed proposals for the placement of the symbol on computer keyboards.

Bank charges. The euro Regulations do not address the question of bank charges for conversions into euros. However, together with some provisions of national law, they do limit the banks’ possibilities: for instance, banks may not charge for the conversion of incoming payments or the conversion of accounts at the end of the transitional period, nor may they charge a higher fee for a service denominated in euros than for the same service denominated in national currency.
In practice, competitive pressure will be the most important influence on the policy of the banks: in general, banks do not intend to charge for converting incoming or outgoing payments in national currency or euros, for converting accounts from national currency into euros, either during or at the end of the transitional period, or for exchanging notes and coins in “household” amounts during phase C.
The Commission will propose a recommendation setting out a standard of good practice, i.e. conversion without charge.

Dual display of prices. Dual display will play a key role in the changeover to the euro, and most retailers and public utility companies plan to provide dual display of prices and financial information even in the absence of an obligation to do so. The Commission believes that imposing binding European rules on dual display would not be the best way of ensuring its introduction in accordance with the needs of consumers or of minimising the costs of the transition to the euro. Nevertheless, it intends to make a recommendation on a “standard of good practice” which would provide the necessary clarity and certainty to citizens and would cover:

  • use of the fixed conversion rates to calculate the counter-values in dual displays;
  • clear indication by retailers as to whether they are prepared to accept payments in euros during the transitional period;
  • a clear distinction between the unit in which the price is set and amounts to be paid are to be calculated;
  • the counter-value which is displayed for information purposes only;
  • and voluntary agreements on the adoption of common formats or designs for dual display.

Dual displays, however, represent just one of many communication instruments necessary for the acceptance of the new prices and scales of value expressed in euros.

Small enterprises. Small enterprises are a special case. Two types of risk they face have been identified:

  • the risk that they will be forced to use the euro in their relations with other enterprises while continuing to use the national currency with consumers: although it will be up to each enterprise to decide when it will switch to the euro depending on its environment, the Commission calls on all enterprises, through their representatives, to negotiate at the appropriate level in order to agree on principles which would help small businesses to make the changeover to the euro;
  • lack of information plagues small enterprises: targeted information activities which take account of the very practical questions facing the managements of small enterprises should be carried out.

Lastly, providing information through the education system will be one of the most fruitful activities in the campaign to inform the general public.

Settlement finality in payment and securities settlement systems

Settlement finality in payment and securities settlement systems

Outline of the Community (European Union) legislation about Settlement finality in payment and securities settlement systems

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for capital

Settlement finality in payment and securities settlement systems

This Directive aims to reduce the systemic risk inherent in payment and securities settlement systems and to minimise the disruption caused by the insolvency of a participant in such a system.

Directive 98/26/EC of the European Parliament and of the Council on settlement finality in payment and securities settlement systems [See amended acts].

Summary

The Directive aims to reduce the systemic risk associated with participation in payment and securities settlement systems (“systems”), and in particular the risk linked to the insolvency of a participant in such a system. To this end, it lays down common rules stipulating that:

  • transfer orders and netting must be legally enforceable;
  • transfer orders may not be revoked once they have been entered into the system;
  • the insolvency of a participant may not have retroactive effects;
  • the insolvency law applicable is the law of the Member State whose system is involved.

It further stipulates that collateral security provided to a system by a participant may not be affected by the opening of insolvency proceedings against that participant. In this way, the Directive contributes to the efficient and cost-effective operation of cross-border payment and securities settlement arrangements, thereby reinforcing the freedom of movement of capital and the freedom to provide services within the internal market.

Institutions involved

The institutions covered are:

  • credit institutions;
  • investment firms;
  • public authorities;
  • any undertaking whose head office is outside the Community and whose functions correspond to those of Community credit institutions or investment firms.

Transfer and payment orders

Transfer orders and netting are legally enforceable and binding on third parties, even in the event of insolvency proceedings against a participant, provided that transfer orders were entered into a system before the moment of opening of such insolvency proceedings.
Where, exceptionally, transfer orders are entered into a system after the moment of opening of insolvency proceedings and are carried out on the day of opening of such proceedings, they are binding on third parties only if the settlement agent, the central counterparty or the clearing house can prove that they were not aware, nor should have been aware, of the opening of such proceedings.

The moment of entry of a transfer order into a system is defined by the rules of that system.

A payment order may not be revoked by a direct participant or by a third party as from the moment defined by the rules of the system.

Insolvency proceedings

Where the judicial or administrative authority launches insolvency proceedings, they inform the competent authority in the Member State concerned who will then inform the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA).

Insolvency proceedings may not have retroactive effects.

A Member State whose competent judicial or administrative authority has taken a decision regarding the insolvency of a participant in a system must immediately notify the other Member States concerned.

In the event of insolvency proceedings being opened against a participant in a system, the rights and obligations in connection with that participation are determined by the law governing the system in question.

As regards the effects of insolvency on collateral security, the Directive lays down that the rights of a participant in a system, as well as the rights of the central banks of the Member States and of the future European Central Bank, to collateral security provided to them may not be affected by insolvency proceedings against the institution which provided the collateral security.

Where collateral security is provided in the form of securities (including rights in securities), the rights of the relevant participants and of the central banks of the Member States and of the future European Central Bank are determined by the legislation of the Member State where their rights are registered.

Member States must determine the systems and the systems’ operators respectively who come under the scope of this Directive. They then notify ESMA who will publish the information on their website.

Member States must inform the Commission which systems are included in the scope of the Directive. The systems, for their part, must indicate to the Member State whose law is applicable the participants in the system as well as any possible change in the composition of the system. Member States may also impose supervision or authorisation requirements. Furthermore, any person with a legitimate interest may require an institution to inform him of the systems in which it participates and the rules governing their functioning.

The competent authorities cooperate with ESMA and provide it with all the information required for it to be able to achieve its objectives.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Directive 98/26/EC

11.6.1998

11.12.1999

OJ L 166 of 11.6.1998

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal
Directive 2009/44/CE

30.6.2009

30.12.2010

OJ L 146 of 10.6.2009

Directive 2010/78/EU

4.1.2011

31.12.2011

OJ L 331 of 15.12.2010

Successive amendments and corrections to Directive 98/26/EC have been incorporated in the basic text. This consolidated versionis for reference purpose only.

Turkey – Economic and Monetary Policy

Turkey – Economic and Monetary Policy

Outline of the Community (European Union) legislation about Turkey – Economic and Monetary Policy

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Economic and monetary affairs: enlargement

Turkey – Economic and Monetary Policy

acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

Document or Iniciative

Commission Report [COM(2011) 666 final – SEC(2011) 1201 – Not published in the Official Journal].

Summary

The 2011 Report notes a robust economic recovery in Turkey. The market economy is functioning and is able to cope with competitive pressure. However, the Report regrets to report a rise in trade account deficits, and external imbalances. Some structural reform needs to be implemented.

EUROPEAN UNION ACQUIS – (according to the Commission’s words)

EU legislation on economic and monetary policy contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the Central Bank and prohibiting privileged access of the public sector to financial institutions. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact on budget monitoring matters. These States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until their adoption of the euro, they will participate in Economic and Monetary Union as a Member State with derogation and will treat their exchange rates as a matter of common concern.

EVALUATION (according to the Commission’s words)

The economy of Turkey is currently experiencing a robust economic recovery. Public finances are improving and confidence in a lasting transformation of the country’s economic prospects and stability is increasing. Nevertheless, the rapid expansion of economic activity, driven by strong domestic demand, has led to significant and rising external imbalances that pose a threat to macroeconomic stability.

As regards the economic criteria, Turkey is a functioning market economy. It should be able to cope with competitive pressure and market forces within the Union in the medium term, provided that it accelerates the implementation of its comprehensive structural reform programme.

The economy expanded rapidly in 2010 and in the first half of 2011. Along with the high GDP growth, strong employment growth allowed for a decrease in unemployment. As a result of primarily higher cyclical revenues and a lower interest burden, the consolidation of public finances remained on track. The financial sector has shown considerable strength thanks to earlier reforms while the legal system continues to function relatively well. Moreover, the new law on State aid monitoring and the operation of the regulatory authority may increase transparency and lead to a reduction of State aid. The free interplay of market forces has been confirmed. Privatisation has accelerated. The EU remains Turkey’s most important trade partner and investor.

However, trade and current account deficits have been rising and external imbalances are now significant. Monetary policy has been only mildly successful in curbing credit growth, which along with high commodity prices, continues to feed Turkey’s growing current account deficit. More support from the fiscal side, and some specific and targeted micro-prudential measures are being elaborated, including by the banking regulator, in order to help engineering a soft landing of the economy and ease the burden placed on monetary policy. Turkey’s price and cost export competitiveness has slightly worsened. Inflation has started to rise, in large part due to pressures stemming from energy and food inputs, buoyant economic activity and hikes in administrative prices. A more resolute implementation of structural reforms is awaited. Measures to increase fiscal transparency and better anchor fiscal policy were modest, while they could help Turkey to gain credibility in the markets. Market exit remains difficult and bankruptcy proceedings are still relatively cumbersome.

Turkey has made some progress on economic and monetary policy. The Central Bank adopted a new policy mix to ensure financial stability, reducing policy rates while increasing reserve requirements for the banking sector. Turkey’s alignment with the acquis on economic and monetary policy is not complete, particularly as regards the full independence of the Central Bank and the prohibition of privileged access of the public sector to financial institutions. The overall level of preparedness is advanced.

Related Acts

Commission Report [COM(2010) 660 final – SEC(2010) 1327 – Not published in the Official Journal].
The 2010 Report presented the economic and monetary strategies adopted by the country following the international financial crisis. The authorities have also been very active in improving their economic relations at international level and cooperation with neighbouring States. However, progress was still required in aligning Turkish legislation with the acquis, particularly in the financial institutions sector.

Commission Report [COM(2009) 533 final – SEC(2009) 1334 – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2699 – Not published in the Official Journal].

The November 2008 Report highlighted the continuing problems. The Central Bank was still not totally independent and monetary financing of the public sector and privileged access of public authorities to financial markets were maintained. However, measures taken to coordinate and reform economic and monetary policy have enabled the country to progress towards a more stable macroeconomic framework.

Commission Report [COM(2007) 663 final – SEC(2007) 1436 – Not published in the Official Journal].
The November 2007 Report found that progress had been made as regards economic and monetary policy. However, certain steps had still not been taken, in particular provisions for the independence of the Central Bank. The European Commission also noted that economic policy formulation remained fragmented and often insufficiently coordinated. In general, preparations in the field of economic and monetary affairs were at an advanced stage.

Commission Report [COM(2006) 649 final – SEC(2006) 1390 – Not published in the Official Journal].
The November 2006 Report found that Turkey had made little progress as regards monetary policy but rather more in terms of economic policy. Legislation to prevent monetary financing of the public sector and to prohibit privileged access of public authorities to financial institutions was not in line with the acquis. The absence of economic impact assessments and efficient coordination and cooperation reduced the effectiveness of economic policy.

Commission Report [COM(2005) 561 final – SEC(2005) 1426 – Not published in the Official Journal].
The November 2005 Report noted some progress in the field of economic policy. Alignment on the acquis in the monetary policy field remained limited. However, the capacity to implement an effective economic and monetary policy was still held back by the lack of an effective system for coordinating formulation, cooperation and implementation.

Commission Report [COM(2004) 656 final – SEC(2004) 1201 – Not published in the Official Journal].
Its October 2004 Report found that Turkey had made no progress in adopting the EMU acquis, covering direct public-sector financing by the Central Bank, prohibition of privileged access by the public sector to financial institutions, and the independence of the Central Bank.

Commission Report [COM(2003) 676 final – SEC(2003) 1212 – Not published in the Official Journal].

In its November 2003 Report the Commission noted that no progress had been made in this field.

Commission Report [COM(2002) 700 final – SEC(2002) 1412 final – Not published in the Official Journal].
Its October 2002 Report found that no further progress had been made as regards direct public-sector financing by the Central Bank. The same was true of the prohibition on privileged access by the public sector to financial institutions and the independence of the Central Bank.

Commission Report [COM(2001) 700 final – SEC(2001) 1756 final – Not published in the Official Journal].
In its November 2001 Report the Commission found that Turkey had made progress in the adoption of the economic and monetary union (EMU) acquis.

Commission Report [COM(2000) 713 final – Not published in the Official Journal].
The Commission’s November 2000 Report found that little progress had been made in the area of economic and monetary policy.

Commission Report [COM(1999) 513 final – Not published in the Official Journal].

Commission Report [COM(1998) 711 final – Not published in the Official Journal].

Croatia – Economic and monetary affairs

Croatia – Economic and monetary affairs

Outline of the Community (European Union) legislation about Croatia – Economic and monetary affairs

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Economic and monetary affairs: enlargement

Croatia – Economic and monetary affairs

acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

Document or Iniciative

Commission Report [COM(2010) 660 final – SEC(2010) 1326 – Not published in the Official Journal].

Summary

The 2010 Report presents the reforms that have advanced the general level of alignment with the acquis, despite the international financial and economic crisis. However, alignment is not complete and the policy of economic and monetary coordination should be improved.

EUROPEAN UNION ACQUIS (according to the Commission’s words)

EU legislation on Economic and Monetary Union (EMU) contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the central banks and privileged access of the public sector to financial institutions. Moreover, all Member States are bound to lay down specific measures necessary for the protection of the euro against counterfeiting. These rules must have been implemented by the date of accession. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact and the Statute of the European System of Central Banks. They are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until they adopt the euro, they will participate in Economic and Monetary Union as a Member State with a derogation and will treat the exchange rate of their currency as a matter of common concern.

EVALUATION (according to the Commission’s words)

There has been further progress in the area of economic and monetary policy where, overall, alignment with the acquis is effectively complete.

The economy of Croatia has been severely affected by the global economic and financial crisis. The country fell into recession in the first quarter of 2009 and there were no clear signs of a recovery by mid-2010. Unemployment, public deficit and debt have increased significantly. External indebtedness rose further and remains a key vulnerability of the economy. Monetary stability was preserved by the policies of the central bank and the financial sector weathered the crisis relatively well.

Broad political consensus on the fundamentals of a market economy was maintained. The Economic Recovery Programme has given economic policy a medium-term orientation. The programme’s benefit for growth and international competitiveness depends on its effective implementation. Given the existing constraints, macroeconomic policy has, by and large, been appropriate to address the consequences of the global economic and financial crisis. Monetary policy succeeded to preserve exchange rate and financial stability while alleviating liquidity pressures. The current account deficit narrowed as a consequence of the recession and inflationary pressures subsided further. The banking sector remained resilient to shocks.

However, structural reforms generally advanced at a very slow pace, not least with respect to privatisation and the restructuring of loss-making enterprises. The labour market remained highly rigid, with low employment and participation rates which declined further during the recession.

In the fiscal area, the authorities made limited efforts to contain the rising deficit and to increase the efficiency of public spending. Social transfer payments remained high and not well-targeted and a large number of state-owned enterprises continued to receive State support through direct and indirect subsidies and guarantees. For achieving medium-term fiscal sustainability, it remains a key challenge to improve the budgetary process and discipline and to enhance the efficiency of public spending. The investment climate continued to suffer from a heavy regulatory burden and numerous para-fiscal taxes.

Related Acts

Commission Report [COM(2009) 533 final – SEC(2009) 1333 final – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2694 final – Not published in the Official Journal].

The 2008 Report noted significant progress and that alignment with the acquis had reached a satisfactory level in the areas of budget and finance. New regulations and procedures were necessary to increase the efficiency of public expenditure and administrative capacity.

Commission Report [COM(2007) 663 final – SEC(2007) 1431 – Not published in the Official Journal].
The 2007 Report recorded major progress in alignment with the acquis in the area of “economic and monetary affairs”. However, the Commission observed that Croatia had not yet completed the necessary alignment.

Commission Report [COM(2006) 649 final – Not published in the Official Journal].
The 2006 Report did not observe any progress in the area of monetary policy. Croatia should continue to make headway with introducing indispensable changes to its institutional and legal system, especially as regards the total independence of its Central Bank. However, in the area of economic policy, the country had made some progress in its alignment with the acquis.

Commission Report [COM(2005) 561 final – SEC(2005) 1424 – Not published in the Official Journal].
The 2005 Report observed that the country should be capable of coping with competition and market forces within the Union. Inflation was kept relatively low, the exchange rate seemed to have stabilised; the substantial deficits which existed in the public accounts and current transactions had been reduced. However, Croatia needed to take steps to consolidate public finances, notably through structural measures in the area of subsidies and transfer payments. The privatisation process speeded up in 2005. On the other hand, little progress had been made with the reorganisation of the major public companies, especially those in the energy sector. Telecoms deregulation, on the other hand, was proving a great success.

Commission Opinion [COM(2004) 257 final – Not published in the Official Journal].
In its Opinion of 20 April 2004, the Commission concluded that Croatia was a stable democracy with a functioning market economy and that it must be able to meet the demands stemming from the Community acquis in the field of economic and monetary union (EMU). The same was true of provisions on monetary financing, privileged access by public authorities to financial institutions and the protection of the euro. As regards Croatia’s participation in the third stage of EMU, the Commission took the view that it had enough time to prepare for participation as a Member State subject to a derogation.

Economic and Monetary Affairs

Economic and Monetary Affairs

Outline of the Community (European Union) legislation about Economic and monetary affairs

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs

Economic and monetary affairs

Economic and Monetary Union (EMU), as provided for in Title VII of the Treaty establishing the European Community, involves close coordination of the economic policies of the Member States at European level and requires Member States to avoid excessive budget deficits (“Stability and Growth Pact”). EMU has led to the introduction of a single currency: the euro.

Economic and Monetary Affairs Contents

  • Practical aspects of introducing the euro:The citizen and the euro, Euro notes and coins, Information strategy, Summaries, Historical aspects: from stage one to stage three (1990-1999), Brief history of Economic and Monetary Union (EMU)
  • Institutional and economic framework of the euro: EMU key institutions, Euro member countries, Relations with non-member countries, Legal status of the euro, Economic convergence
  • Stability and growth pact and economic policy coordination: Foundation and implementation of the Stability and Growth Pact, Coordination of Member States’ economic policy.
  • Economic and monetary affairs: enlargement: The impact of enlargement on the euro zone, candidate countries, the Enlargement of May 2004