CIAO DATE: 7/99

An Economic System for Post-War South-East Europe _*

Daniel Gros

May 19, 1999

Centre for European Policy Studies

 

This is a companion paper to the CEPS WD no. 131: “A System for Post-War South-East Europe.”

Abstract

Economic recovery in the region requires stable currencies and open markets. The best way to establish these two basic conditions quickly is for the countries concerned to immediately link their currencies to the euro via a currency board and join the customs union of the EU. The EU should support this radical approach financially in two ways: a) through compensation for lost tariff revenues (conditional on clean and efficient border controls), and, b) emergency loans to acquire the necessary backing for the currency board. The currency boards should graduate to full euroisation in 2002. The total cost for the EU would be modest: around 2 billion euro p.a. if all countries participate. A market-led approach that pays local hosts to house refugees would ensure that the expenditure on refugees benefits the local economies.

 

 

1: General considerations

The starting point of any economic order for Post-War South-Eastern Europe must be that regional integration is not viable. This region is simply too poor to provide a significant market on its own. Integration with the EU is thus the only viable option.

A second basic point that must be kept in mind is that a large part of the region had already practically no viable industrial activity before the hostilities erupted. The few industries that existed in most of the poorer parts of the former Yugoslavia (and Albania) had been implanted under the old regime and cannot survive in an open market. In economic terms one starts thus essentially with a tabula rasa.

The basic elements of the economic order proposed here (multilateral free trade and euroisation) should not be established gradually over a number of years using normal procedures and negotiation practice. In this emergency situation the basic elements of the new order need to be established immediately, before special interest groups and political rivalries can come into play. There is anyway no need for long lists with exemptions for specific products or transition periods.

The financial consequences of the hostilities are now increasingly being discussed in the international community, especially by the international financial institutions (IFIs, i.e. IMF, WB, EBRD, etc.). The crucial difference between the EU and the IFIs in this respect is that the latter can provide only credits. The EU is the only game in town for substantial transfers. The natural division of tasks is thus the following: the EU provides income support whereas the IFIs provide credits for reconstruction and to help neighbouring countries weather the (hopefully) temporary disruption to important transport routes.

The cost of re-constructing bridges and other infrastructure damaged by the war will probably attract most attention but this task is relatively straightforward compared to the one of creating an overall economic order that fosters a lasting economic revival of the region. Even in pure cost terms the bill for re-construction of infrastructure is likely to remain modest. A bridge over the Danube will cost about 50 million euro. Even ten of them would thus cost only about 500 million euro. Reconstructing the factories destroyed by allied bombs might cost more, but would not make economic sense. Experience has shown over the last decade that a fundamental condition for success in the transition to a market economy is the acceptance that most of the large industrial dinosaurs inherited from the socialist period cannot be saved. That Bosnia-Herzegovina, Albania and Kosovo have no heavy industry left should be viewed as an advantage.

Economic activity in the part of the region directly affected by war is virtually at a standstill. To give the population something else to think about (and to do) than to seek revenge it is important that recovery start quickly. This should be the easiest part of the problem. With a minimum of advance planning substantial sums could very quickly start to flow into the region in the form of emergency loans, preferably not all to governments, but also directly to households affected by the war. The real challenge will come in the medium to long run, when the reconstruction of infrastructure and housing nears completion so that the boom in construction tapers of. When emergency loans will have to be serviced these economies will face a serious adjustment problem. If a substantial part of the region falls back into the trap of declining economies presided over by corrupt and unstable governments the danger of renewed conflicts will remain and a substantial part of the population will have to seek employment in the EU.

Growth in the region will have to come from the grassroots or it will not be sustainable. It is unlikely that FDI will play a large role as the region is not an attractive site for large industrial plants. Fostering the growth of small and medium sized enterprises cannot be done from the outside. The EBRD and other organisations try to achieve this, but this cannot be done with personnel that has to be paid the rates prevalent in global financial markets. Consultants at a thousand dollar a day are of no use in advising a small shop in the region. Capital is anyway unlikely to be the main factor constraining growth as most countries of the region also benefits from the transfers of that part of their workforce that is already in the EU.

The remainder of this paper is organised as follows: Section 2 and 3 discuss the proposed trade and currency regimes. Section 4 makes a concrete proposal for a market based concept to sustain refugees in the region. The annex provides details for the cost calculations.

 

2: Trade regime

All of the states and territories of South-Eastern Europe are so small in economic terms that they can develop only if they have access to a larger market, in practice this must mean unrestricted access to the EU market. At present trade within this group of countries is less than one tenth of their trade with the EU (see table 1) and the dominance of the EU in trade terms is not likely to diminish over time. Gravity equations that simulate the trade patterns the countries in the region would have in a free trade environment and after a reasonable recovery indicate that the EU market would take 70-80 % of their exports (see also Gros and Steinherr (1995)). The EU should thus eliminate all barriers to imports from the region. Given that the combined exports of the entire region amount probably to less than 1 % of overall EU imports this would not have any appreciable impact on the EU market.

The free trade should not be limited to industrial products because the only sector in the region that still works is agricultural. The Common Agricultural Policy consists unfortunately of such a jungle of distortions that it is not possible to extend it to the region. However, the EU should grant generous tariff free quotas for practically all products. This would have little impact on the EU market, but would be particularly important for the countries hardest hit because they have no industry left and agricultural production should be easier to re-start. They would anyway specialise in products (fruits and vegetables) which are least problematic for CAP.

But access to the EU market is not enough. It is also imperative that governments do not even have the power to protect inefficient domestic industries against external competition and that the potential for corruption at the border be reduced to a minimum. Import tariffs should also be abolished. The easy way to achieve this is via a free trade agreement with the EU. In order to keep borders within the region as open as possible this free trade agreement should be multilateral, i.e. it should also extend to trade within the region.

It would thus be desirable to go beyond a ‘mere’ free trade arrangement and invite the countries to join a customs union with the EU. Having differentiated tariffs against the rest of the world would anyway not be significant for them and it would leave the temptation to use tariff policy in particular sectors. Moreover, it would make customs controls more difficult and thus provide more occasion for corruption.

2.1: Compensation for lost tariff revenues

In states with weak fiscal structures taxes on trade constitute an important source of revenues. However, in the reality of the Balkans frontier controls are also a major source of corruption and harassment so that in reality trade barriers are much higher than the official tariff rates. Given that governments in the region will have great difficulties in raising revenues in the Post-War situation the EU should recognise the fiscal need for trade taxes and compensate the countries concerned for the loss of tariff revenues that arise through the customs union regime. (Tariff revenue on trade with the EU will disappear completely. The external tariffs of the EU are very low, hence very little tariff revenue can be obtained from duties on third country imports.)

For the states of the regions for which data are available trade taxes yield between 1.5 and 2.5 % of GDP. For the states and territories for which no data on trade is available one can use this figure to calculate an approximation. We would consider as an upper limit a value of 3 % of GDP, which would correspond to an average ad valorem tariff rate of 10 % and a openness ratio (imports to GDP) of 30 %. Based on this -generous- assumption the total transfers to all former Yugoslavia minus Slovenia, but plus Albania would amount to approximately 1.5 billion euro annually. Present Yugoslavia plus BH would cost less than 1 billion, two thirds of which would be accounted for by Serbia.

Payment of the compensation for tariff revenue would be subject to strict monitoring of the effective implementation of an honest and efficient border control (still necessary for rules of origin and third country trade).

 

3: Monetary regime

A second indispensable basis for economic recovery is a stable currency. In countries with a weak fiscal administration seigniorage can be an important source of revenue for the government, but high inflation rates also have economic costs (and erode the real value of tax revenues). Seigniorage considerations are thus not a sufficient argument for a high inflation regime. But a credible low inflation regime cannot be created overnight by conventional means. This is why in times of crisis one has to resort to unconventional measures. Examples are the currency board of Bulgaria, introduced in the wake of hyperinflation and the DM regime for Bosnia-Herzegovina.

Another key advantage of a currency board (followed by full euroisation) would be its systemic impact, in transforming the political economy inside the country, and thus the chances of healthy economic growth. The banking system is almost everywhere in the wider Europe a key conduit for large scale corruption and political intervention in the economy. A political class that cannot run large deficits and that cannot control the banking system will be forced to create more room for really productive private enterprise. Supporting loss making state enterprises or just favouring politically well connected ‘business men’ will become more difficult and apparent because it would have to go through the budget. Entrepreneurs will learn to concentrate on managing their enterprises more efficiently, because that will become the main avenue for success. Political connections will count for less. Petty corruption and favouring some enterprises through tax breaks etc. will of course remain, but the sums that can be allocated this way pale in comparison with the wealth that can be controlled through the banking system and large scale inflationary finance.

The main argument usually advanced against currency boards (or full dollarisation/euroisation schemes) is that they might make it more difficult to adjust the real exchange rate. This argument is based on the observation that in well established economies nominal wages and prices are usually rigid in the sense that they are very difficult to lower. However, this argument does not apply to the situation in the countries in this region. In many of them wages are not set in national agreements and can thus adjust much more easily to market conditions. Moreover, labour leaders in the more settled countries should recognise that under these exceptional circumstances it does not make sense to refuse any reduction in wages, even if this would be required by a shock to the local economy. (See Annex 1 for a brief discussion of the costs and benefits of pegging to the euro for different countries.) As the DM is already playing an important role in all the countries of the region. Any attempt to have differentiated monetary policies would thus face at any rate considerable problems (see IMF (1999) for a discussion of monetary policy in dollarise economies).

The quickest way for the countries of the region to acquire a stable currency soon would be to adopt the euro. This can take different forms, a currency board or a wholesale adoption of the euro. The latter would be difficult to implement before 2002 as it would be necessary to use for the interim period until 2002 one of the 11 national forms of the euro that will exist until then, for example the DM. This would not change the economic aspects, but might be confusing for the population, which would have to change the units of accounts it is measuring monetary value again after a couple of years. Bulgaria and Bosnia faced the same issue not so long ago and in these two cases it was deemed very important to have a ‘real’ currency as the anchor. The euro did not exists then, but it does now, so that it would be possible to establish currency boards that link a new domestic currency one to one to the euro (as in Argentina with the dollar). Full euroisation (with the introduction of notes and coins would then be possible in 200 without any change in monetary units.

For some countries in the region full Euroisation might be preferable to a mere currency board basically because of the full credibility it provides and because it allows considerable savings of foreign exchange reserves. However, for the practical reasons mentioned full euroisation would be difficult to implement quickly. Hence it might be best to start with a currency board to the euro at 1 (local currency): 1 (euro). as quickly as possible. This could then be transformed into full euroisation without much effort in 2002.

The backing for the currency board should be provided by a zero interest rate loan by the EU to the countries concerned. In this way the countries which link themselves to the euro do not lose their seigniorage (their central banks can place the funds it receives on the money market and keeps the assets it had). The loan would have to be repaid upon accession as full member or if the country de-links from the euro. The cost for the EU would consist of the debt service.

3.1: Implementation and cost

The mechanics of a currency board with the euro is straightforward.

The key is that the government of the country in question would just declare that at a certain date the national currency is substituted by the euro and the old national cash will be exchanged into new notes and coins (that are considered legally the local form of the euro as in euroland) at the current market rate. If the country or region did not have a functioning currency regime one could just announce a fixed per capita distribution to provide the population with a minimum initial endowment (50 - 100 euro).

A currency board requires reserves to back the monetary base. This backing should be provided by the EU. The funds necessary to back the currency board 100 % should be provided to the local authorities in the form of a zero interest loan. The EU would have to raise these funds from the capital market markets. and the budget of the of the EU institutions would have to carry the interest cost. How much would this be?

In countries with moderate inflation, and at least a rudimentary banking system, the ratio of currency in circulation to GDP is generally between 5 and 10 %. Given that the states of the region are all very poor the euro value of their currency in circulation is actually quite low (e.g. 500 million euro for Albania - which has very high cash ratio because it has no banking system - and 300 million euro for FYROM). With interest rates currently between 3 and 5 % the amounts to be charged to the EU budget on these amounts would be minuscule: less than 25 million annually for Albania and 15 million for FYROM. All of ex-Yugoslavia in war (Serbia+BH+Mont.+Kos) would need 3 billion in cash (for comparison the total for the euro area is 300 billion) which would mean interest costs of 100 - 150 million euro p.a. (two thirds of which would be accounted for by Serbia). These sums would thus definitely below 1 % of the overall EU budget of 80 billion euro.

In this way the EU would effectively lend the countries concerned its currency (and hence its monetary stability). The countries concerned would not lose their seigniorage because they could keep the assets their central banks accumulated through the issuance of their defunct national currency. Of course, this leaves them only with the small amount of seigniorage that is compatible with price stability. But this is entirely appropriate as argued.

IMF monitoring (reduced to fiscal policy and to some extent the banking system) should continue. Normal IMF credit lines should still be available subject to conditionally, which would, however, have to be adapted. Full Euroisation would only make apparent what has de facto already been happening in many instances: IMF credits are not motivated by and used for a balance of payment deficit, but are used to finance a fiscal deficit.

 

4: A market based approach to refugee finance

It is not likely that the refugees will be able to go back any time soon. In the meantime the hospitality of the local population in the receiving countries has been stretched.. For the refugees themselves the choice is between living in tents or in cramped quarters at the expense of their hosts. This could be changed by providing any local who accepts to host refugees in his home with a compensation in the form of 5 euro per day and per person.

For many Albanian families this would be a considerable income and it would probably be much cheaper than to build winter-proof housing for all refugees. It would have the advantage to inject a market mechanism in the process of providing refugees with emergency food and lodging.

This direct transfer would not imply any additional cost as it has to be set against the cost humanitarian organisations (official and NGOs) would have to sustain anyway. The rate of 5 euro person and day is actually at the lower end of what is being spent anyway on the refugees. In Bosnia the average cost to sustain a refugee was estimated at about 20-25 DM, or about 10-13 euro per day, more than twice the amount proposed here. This approach could thus actually save some money. The IMF/World Bank estimate of the economic consequences of the Kosovo Crisis was based on assumption that are closer to the per diem proposed here.

With this scheme competition among local families to host refugees would develop immediately. This competition would consist of attempts to attract refugees by offering them more space, better sanitary facilities, better food, etc. The sums spend on the refugees would thus increase the purchasing power of the local markets.

For the countries of the region these sums would be important for the local economy. For example, if all the about 500.000 refugees in Albania were to take this offer the flow of purchasing power would be 750 million euro, 20-30 % of the entire Albanian GDP. At present similar sums are already being spent in the country, but the aid to the refugees has little impact on the local economy (apart from transport) because the aid is distributed in a non-market way. There would be much less need for heavily escorted trucks owned and operated by foreign companies (reports from Albania indicate that almost half of all loads of food and other material is lost between the ports and the camps). Local transport and local markets would presumably spring up quickly to take advantage of this opportunity.

A necessary condition for this market-led approach to work is that the host countries immediately abolish all import duties and time consuming customs formalities for food and the other items (building materials, essential furniture etc.) that will be in great demand. If they join the free trade regime that is part of the associated membership this would anyway be the case.

An immediate objection to this approach is that under this approach the hosts would receive more from housing refugees than most other legal economic activity available to them (viewed from a different angle the refugees would be financially better of than their hosts). A host for a family of ten would have a monthly ‘income’ of 1.500 euros. However, competition among hosts would force them to spend a large part of this sum to keep their guests happy. The improvements to sanitation and housing that local hosts would invest in would remain.

 

5: Concluding remarks

This contribution has deliberately concentrated on the post-war economic constitution of the region affected by the Kosovo war. The key consideration has been that it does not make sense to try to foster regional integration. Instead one has to start from economic and political realities: in both economic and political terms the links with the EU are much stronger than the links within the region. Experience in Central Europe has shown that the perspective of eventual participation in Europe constitutes the most powerful stimulus for economic reform (and acceptable political behaviour). For this region an additional concern is speed. The populations of the region which are suffering from the war must be able to see tangible signs of their European future quickly.

The two elements proposed here, currency boards and free trade/customs union with EU, should thus be implemented as quickly as practically possible. If planning starts immediately this should be possible before the end of 1999. The start of the scheme should not be made contingent on the end of the war. Even if the war goes on for longer some countries might already start anyway; they might need this kind of structure even more in this case because a longer war can only increase the danger of instability throughout the region.

 

Annex 1

In thinking about the exchange rate arrangements between the euro and the rest of the (non-EU) Europe three groups of countries should be distinguished, according to their relative strength:

• fiscally and institutionally very strong countries with Maastricht-conforming policies;
• countries that are not yet at the Maastricht level, but are heading in that direction;
• countries in states of acute financial crisis, with very weak institutions.

1. The very strong countries, i.e. that could become members of the EU at any time and that fulfil the Maastricht criteria most of the time (e.g. Switzerland and Norway) would gain from pegging to the euro because the EU is anyway their major trading partner. They would thus experience considerable savings in transactions costs. Moreover, pegging to the euro gives financial markets an anchor for longer term expectations, thus reducing the impact of financial shocks. For these countries the classic criteria of the Optimum Currency Areas approach are close to being fulfilled as their economic structures are close to that of the EU. However, even if they have a strictly economic interest in joining the euro area, these countries can afford the luxury to wait and see. Given their strengths they can comfortably survive outside.

2. The middling countries, with moderate inflation rates (now usually below double digit) and fiscal deficits, for example the countries of central Europe. But with rather large current account deficits these countries can be vulnerable to speculative attacks. These countries are also in an intense process of structural change whose outcome is difficult to foresee. They might therefore need some flexibility in their real exchange rate for some time. But the cost of retaining some flexibility in the exchange rate is that this leaves open the threat of speculative attacks, as the example of the Czech Republic has recently shown. This experience also suggests that the cost of such an attack is limited, and does not result in outright catastrophe as in the case of Russia. The costs and benefits of different exchange rate regimes are thus often finely balanced and must be considered case by case.

3. The very weak cases, namely countries that are very far from fulfilling any of the requirements for EU membership in general (and the Maastricht criteria in particular). These countries usually have large fiscal deficits and high inflation, their currencies are often under pressure and real interest rates are very variable, often patently unsustainably high when the government tries to stabilise the economy. These countries would gain from being able to enter the euro-area, because that would be a way to import sensible macroeconomic policies and decisively gain the confidence of financial markets. Since the alternatives are hyperinflation and/or enormous risk premia on foreign debt, the benefits of this confidence effect and of a stable currency can far outweigh any potential costs of not being able to react to asymmetric shocks with exchange rate changes.

One way for non-EU countries to enter the euro area is to opt for a currency board, as already done by Bosnia, Bulgaria, Estonia and Lithuania. The first three chose the DM as the anchor and are now de facto members of the euro area. A currency board can deliver the benefits of credibility with financial markets and low inflation as these examples. However, as the experiences of Argentina and Hong Kong also show, even currency boards that are run very conservatively can come under attack. While the mechanism of the currency board itself is usually technically unassailable these attacks are costly because they lead to increases in domestic interest rates, which have a negative effect on demand. Defending a currency board is thus technically easy, but can have a high price in terms of unemployment. Financial markets know this and this is why a currency board is never 100 % credible. This weakness of currency boards has recently prompted the Argentine government to consider plans to switch totally to the US dollar.

The economic benefits of full dollarisation or euroisation are similar to those resulting from a currency board, but they are more certain. They can be reaped even by countries whose institutional and political weakness would leaves doubts in the market that it could follow the rules of the game of a currency board (e.g. Russia and the Ukraine). Under a currency board regime the country still has a domestic monetary authority, which might cede to government pressure and violate the rules of the currency board, e.g. by giving credit to the government.

Therefore the radical solution of unilateral, total adoption of the euro (or dollar) as the domestic currency offers even more benefits, compared to the currency board, for countries with very weak institutions. The case of Argentina suggests that the idea is one of practical, not just theoretical interest. But it is not to be thought of as something more for advanced emerging markets such as Argentina. On the contrary, in the case of Central and Eastern Europe euroisation meets the objection that the national authorities would still be quite free to abandon their commitment to the monetary rule of the currency board, which in present circumstances would mean costly interest rate risk premia. Abandonment of the euro would be much more costly in political terms. Total euroisation should thus be a more credible regime.

 

Annex 2: Details of cost calculations

Most of the data necessary to make a reasonable estimate of the potential costs are available for the established countries in the region, i.e. Albania, Bulgaria, Croatia and FYROM. For the remainder (B-H and rump-Yugoslavia) one has to rely on older data and statistics concerning the republics of Yugoslavia before the break-up. A key variable, GDP per capita, had thus to be estimated on the basis of 1979 data for Serbia, Kosovo and Montenegro. This problem cannot be avoided. For Bosnia-Herzegovina only some variables are available, from the EBRD.

The main purpose of all calculations was to provide an upper bound. The implicit dollar/euro exchange rate was set at 1:1 to avoid complications that would anyway minor compared to the other sources of uncertainty.

Compensation for lost tariff revenue

The EBRD gives tariff revenues as a percentage of imports for most countries in the region. This can be combined with the available information on GDP in dollars and the share of trade in GDP to obtain the corresponding dollar amounts. The assumption implicitly used here is that EU support would be at most equal to this amount. In reality it would be considerably lower because the EU should provide compensation only for the tariff revenue on trade with the EU. Trade with the EU is a large and growing proportion of the overall trade of countries in the region, but in some cases the proportion is closer to 50 than to 100 %. In reality the amounts required might thus be only about one half of the figures mentioned here.

Moreover, for a country that aspires to full EU membership (e.g. Bulgaria) tariff revenue would anyway disappear. The part based on trade with the EU is anyway scheduled to disappear soon under the Europe agreements and the part based on trade with the rest of the world will shrink considerably when the country adopts the common external tariff, whose rates in most cases are close to zero.

For countries for which tariff revenue data is not available the potential for compensation was set at 3 % of GDP, which is somewhat higher than the average for the other countries; but this appeared justified because this group is generally poorer. The dollar amounts were then calculated as 3 % of GDP in dollars.

Capital needs for 100% backing for currency board (=cash needs for euroisation)

For the countries for which financial data are available one can just use the latest figures on currency in circulation converted into euro at the latest available exchange rate. This was done for Albania and Bulgaria. For the other countries it was assumed that cash to GDP is 10 %. This high figure was used on purpose because the countries for which no financial data are available no longer have a functioning banking system.

The initial endowment in euro that is needed can then be calculated easily as 10 % of GDP measured in dollars (or euros). The burden for the EU budget was then set equal to 5 % of this sum. As interest rates are at present somewhat lower this is again meant to be a ceiling rather than an accurate estimate.

In the case of full euroisation the country concerned would use the same type of loan as for the currency board backing to buy the initial stock of cash from the Eurosystem (in reality from any of the national central banks in the euro area). The national central banks that provide the euro cash should immediately transfer the euros they obtain from the South Eastern European country/region to the ECB who would then invest these funds. ₁ The interest income of the ECB would thus increase by approximately the same amount the EU institutions would have to pay to service their own borrowing. As the profits of the ECB are distributed each year to national governments the net cost to the EU as whole (national governments and EU institutions consolidated) would thus be close to zero. (Not exactly zero if the interest the EU institutions pay on their borrowing is higher than the return the ECB obtains from its investments. Another complication is that all 15 governments contribute to the EU budget, but only the 11 euro area governments would receive a share of the revenues of the ECB. However, as the sums involved are minuscule this issue will be neglected here.)

Although the net cost of the operation would be essentially zero for the EU. The budget of the EU institutions would have to carry the interest cost, which would be the same as for the baking of the currency board.

While it is straightforward to account for the initial endowment of cash it is more difficult to deal with subsequent developments from an economic point of view. If a Euroised economy grows its demand for cash should also grow. Unless the EU makes further loans of its currency the country in question would have to run a balance of payments (either current account or capital account) surplus. However, the magnitudes would again be so small that this is not an important issue.

Table 1: Matrix of Trade relationships of South-East Europe
(EU Data: year 1997; otherwise year 1996; exports from countries in rows; imports to countries in columns)

Source: Eurostat, IMF. All figures in millions euro. 1996 data in USD converted using end of period exchange rate (1,2530 euro per 1 USD)

 

Table 2: Approximate budgetary costs for EU

 

References

Gros, Daniel and Alfred Steinherr (1995) ' Winds of Change: Economic Transition in Central and Eastern Europe ', Addison Wesley Longman, London.

International Monetary Fund and World Bank (1999) ‘The Economic Consequences of the Kosovo Crisis’.

International Monetary Fund (1999) ‘Monetary Policy in Dollarised Economies’, Occasional Paper No. 171.

Kopits, George (1999) Implications of EMU for Exchange Rate Policy in Central and Eastern Europe, WP/99/9, International Monetary Fund, Washington, D.C., January.

Pirtttila, Jukka (1999) ‘Tax evasion and Economies in Transition: Lessons from Tax Theory’, Bank of Finland Institute for Economies in Transition (BOFIT), Discussion Papers No. 2.

 

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Endnotes

*: Prepared for the CEPS conference: “A System for Post-War South-East Europe Brussels,” 19 May, 1999.  Back.

Note 1:  It is necessary to book the counterpart to the transfer of cash at the ECB and not at the NCBs that provides the cash because the treaty provisions concerning the distribution of seigniorage are not operative yet. If the transfer of cash were not booked at the ECB only those member countries that are asked to provide euro cash would benefit from the implicit seigniorage whereas all member countries would have to contribute to the debt service of the EU institutions. The accounting would of course be simpler if the ECB could provide the cash directly, but this would be incompatible with its statutes.  Back.