• In the transition period from 2 May 1998 to 4 January 1999, a speculative attack would not change conversion rates or policies, and so would not ‘succeed’, would not be profitable, and will not occur.
• From 4 January 1999 to 2002, ‘national currencies’ will be just units of the euro, the single currency, so there cannot be a currency run against any one of them.
• There could be a run on the banks or the government debt of a country in the euro region. But that would be a bank run or a debt crisis, not a currency crisis, and need have no effect on the euro.
• The risks of inexorably rising unemployment, pressures for fiscal transfers or protectionism, indeed the breakup of EMU, are all greatly exaggerated. And the breakup of EMU would not be a currency crisis, but rather a political crisis so catastrophic for the European Union that its monetary consequences would be secondary.

Brian Crowe, Director of Treasury and Capital Markets at The Royal Bank of Scotland who will be chairing the meeting, says "Richard Portes sets out very clearly and powerfully the arguments in favour of a smooth transition to a sustainable single currency. We support his views and are delighted that he has chosen an event hosted by The Royal Bank of Scotland in which to put his case".

Richard Portes will support his remarks with the following analysis:

• In the transition period up to January 1999, the currency of a country that will enter the euro area could be forced up or down by the markets. But this is highly unlikely: the conversion rates will be announced on 2 May, they will almost certainly be the current ERM central parities, and these parities are widely accepted as ‘reasonable’ (close to ‘equilibrium’). The forward markets have already priced in these parities for 4 January 1999. And the markets will know that the central banks will be able to intervene without limit just before close of business on 31 December to ensure that the closing rates equal their chosen conversion rates. From 2 May to 31 December, exchange rates can vary. A speculative attack would not change parities or policies, so would not ‘succeed’, would not be profitable, and will not happen.
• From 4 January 1999 until January 2002, ‘national currencies’ will continue to exist, in the form of notes and coins. But there cannot be a run against any one of them, because in fact they are then no longer separate currencies: they are units of the euro, the single currency. This will not be a fixed exchange rate system, and hence not subject to speculative attack. If holders of Italian lire (say) want D-marks instead, the Bundesbank will be willing to purchase as much as the entire Italian money supply at the fixed accounting rate. It would accumulate claims denominated in euros, with an explicit ‘exchange-rate guarantee’ from governments. Not to honour the guarantee would be to abrogate the Maastricht Treaty, with huge political costs – not an option for a central bank. And the monetary operations necessary to neutralise the consequences of such ‘currency substitution’ will be straightforward.
• If depositors in (say) Italian banks did want to move all their funds into German banks, and they were not reassured (and hence deterred) by the willingness of the monetary authorities to execute these transactions without limit, then Italian banks would be in trouble. But the Italian government could fill the hole in their balance sheets if it wished to do so.
• There could of course be a run on the government debt of a country in the euro region – just as New York got into trouble some years ago (and Italy came close in 1996). But that would be a debt crisis, not a currency crisis. Most if not all government debt will be redenominated into euros.
• Suppose an ‘asymmetric shock’ has a powerful negative impact on an EMU country; or the whole euro area suffers rising unemployment; or deep disagreement appears over whether the euro is too strong or too weak; or some countries adopt lax fiscal policies, which strongly upset others. Might there not be pressures for fiscal transfers, protectionism, or the breakup of EMU, not to mention ‘war within Europe itself’ (Feldstein)? Indeed there might. But these risks are much exaggerated. And this would be a political crisis, not a currency crisis. The breakup of EMU and the Maastricht Treaty would be so catastrophic for the EU that its monetary consequences would be secondary.

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Treasury and Capital Markets (TCM) forms one of the core business areas within Corporate and Institutional Banking at The Royal Bank of Scotland. As well as its 220-position London dealing room the bank also has additional on-line dealing rooms in Manchester, New York, Hong Kong and Singapore, providing 24-hour trading capacity. The bank’s full service dealing room in Edinburgh is the largest of its kind outside London. The Royal Bank of Scotland is one of the top five rated banks in the UK among larger corporates for its treasury and capital markets services.

Richard Portes is President of the Centre for Economic Policy Research, Professor of Economics at London Business School, and Directeur d’Etudes at the Ecole des Hautes Etudes en Sciences Sociales (Paris). He writes and lectures extensively on European monetary integration (see ‘The emergence of the euro as an international currency’, in Economic Policy No. 26, April 1998) and on sovereign debt and financial crises (see Crisis? What Crisis? Orderly Workouts for Sovereign Debtors, CEPR, 1995, and the issue of CEPR’s European Economic Perspectives No 17).