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. Last Updated: 07/27/2016

EU Ministers Move On Monetary Policy

BRUSSELS, Belgium -- European Union finance ministers pulled an unexpected rabbit out of a hat over the weekend, announcing in Luxembourg they would effectively start economic and monetary union up to eight months ahead of schedule.

They agreed that EU leaders should announce exchange rates at which national currencies will be fixed against each other at the same time as they decide which countries qualify to join monetary union. That decision is due in April or May.

They said the announced bilateral exchange rates would also be defended.

The sleight of hand was cunning. The decision next spring will say only a little about the exchange rates at which those currencies will be converted into the euro on Jan. 1, 1999.

Bundesbank President Hans Tietmeyer reiterated in a German radio interview Sunday that the Deutsche mark and other currencies' conversion rates to the euro will depend on where the ecu, a basket of 12 European currencies, is trading at the end of 1998.

The ecu's value can vary up until then because moneys not due to take part in monetary union, such as the British pound, will continue to fluctuate.

Analysts said some further magic, as well as luck, would therefore be needed before monetary union could fly.

"If you announce the central parities prior to the 1999 start date, there is an opportunity for market players to test the willingness [of those joining monetary union to defend those central rates]," Nomura International economist Sonja Gibbs said.

"A lot of it will depend on where fundamentals are at that point," Gibbs said Sunday.

Official short-term interest rates of likely monetary union members still vary greatly, analysts noted, begging the question of whether the Bundesbank is prepared to raise its interest rates to deliberately narrow this spread.

Tietmeyer said Saturday that once the rates announcement had been made "the room to maneuver on national policy will naturally be restricted."

On Sunday, he added that those who speculate next spring against the announced exchange rates would find themselves hindered.

Kirit Shah, chief strategist at Sanwa International in London, said he believed markets would not see "a radical easing in Spain or Italy but a tightening in Germany" to respond.

Speculation could, however, start before the monetary union participants are known as recommendations from the European Commission and European Monetary Institute on monetary union starting line up are sifted by elected assemblies.

At present it is unclear what procedures these assemblies, such as the European parliament, will use to issue their opinions: whether countries will be treated on a case-by-case basis or whether a packaged approach will be used.