And short-term interest rates throughout the euro-area would be set, identically, by the ECB, that will have been established in the early summer of next year. From 1 January, 1999 the participating central banks would immediately begin to denominate their money and foreign exchange market interventions, on behalf of the ECB, in the new currency. Their national currencies would nevertheless continue to exist for a period of some three years, as broken-amount denominations of the euro, and it will still then be possible, through the payments mechanism, to convert those national currencies into euro and vice versa, effectively automatically, for anyone that wished to do so. The likelihood is that wholesale financial market transactions generally within the euro-area will rapidly switch to the euro-denomination, although that would be up to the operators in those markets. The principle that will apply is one of no compulsion but equally no prohibition. It means that, here in Hong Kong, you should expect to be able to have accounts denominated in euro across which to conduct wholesale, particularly, financial market activity, if you BIS Review 89 /1997  -3-  wished to do so, although you would equally be able to continue for the time being to operate across accounts denominated in the national currencies participating in the euro if you preferred. Euro bank notes and coin will not become available until some time probably towards the end of 2001 and it is unlikely that retail transactions denominated in euro will develop much before then.
The euro-member countries would have no possibility of adjusting either interest rates or their exchange rate independently, and they would have somewhat limited scope for independent fiscal adjustment because the Stability and Growth Pact would constrain the size of overall public sector deficits. And alternative adjustment mechanisms -- such as the labour migration or fiscal redistribution that helps to alleviate similar regional problems within individual countries -- are not well developed at the level of Europe as a whole -- nor are they likely to be, at least in the near future. So the risk is that the one size-fits-all interest rate could result in economic weakness and unemployment in some areas if the European Central Bank pursued a firm monetary policy or unwanted inflation in others if it were more accommodating. Such divergent national monetary policy needs within the euro-area could result from differences in the cyclical position as between one country and another; or from different fiscal positions, BIS Review 89/1997  -2although these, as I say, should be constrained by the Stability Pact; or they could result from external shocks which had disproportionate effects on some countries as against others. They may be the more likely because Europe starts from a position of generally very high levels of unemployment [ranging from around 7% in the UK, to around 10% in Germany, over 12% in France and Italy, and even more in Spain on a consistent basis].