Iedp 2010 Action Learning Project Regional Integration of Financial Systems


Identifying and analysing lessons learnt from the financial integration of the European Union (EU)



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Identifying and analysing lessons learnt from the financial integration of the European Union (EU)




The European Union (formerly known as European Economic Community), was formed in the early 1990s. The requirements for participation, or more formally the accession criteria, were established at the June 1993 European Council in Copenhagen, Denmark. For reference purposes, the qualification criterion is:

  1. Political Stability - achieved through democracy with a respect for the rule of law, human rights and the protection of minorities

  2. Economic Stability achieved through a market economy which is mature enough to cope with competition from other EU members

  3. Acceptance of the law - as defined by the EU to date

Figure 10: the Euro Area Source: Netherlands Central bank

The learning process has been a long one for the EU, and the current economic crisis, with many European countries at the centre of it, puts new challenges and questions old thinking with regards to regional integration. This is an invaluable leaning opportunity for SADC, with various learnings especially around the qualification criteria, defaulting, payment systems and customer migration.



    1. Failure to apply agreed qualification criteria

Aside from the Copenhagen criteria, a set of macro-economic convergence criteria was agreed upon, being:

  1. Price stability, to show inflation is controlled

  2. Soundness and sustainability of public finances, through limits on government borrowing and national debt to avoid excessive deficit

  3. Exchange-rate stability, through participation in the Exchange Rate Mechanism (ERM II) for at least two years without strong deviations from the ERM II central rate

  4. Long-term interest rates, to assess the durability of the convergence achieved by fulfilling the other criteria

A decision was reached on 25 March 1998 by the European Commission and the European Monetary Institute (EMI), now the European Central Bank (ECB) to allow counties that didn’t meet the convergence criteria to join the EU. Most notable, an exception has been made for Greece. The aftermath of that decision is still unfolding.

The EMI had come to the following conclusions:



  • The 15 EU member states, with the exception of Greece, met the inflation and interest rate criteria; the reference value for inflation was 2.7% in 1997, and the maximum reference value for the interest rate criterion was 7.8% in 1997.

  • Twelve currencies had participated, without any severe tension, in the European Exchange Rate Mechanism over the previous two years (the pound sterling and the Swedish krona did not take part in the mechanism and the Greek drachma joined the ERM on 14 March 1998)

  • For the 15 EU Member states, with the exception of Greece, the government deficit was below or equal to the reference value of 3% of GDP. Progress had been made towards bringing the government debt ratio close to the reference value of 60%, although further efforts were required from countries with a debt ratio of over 100% of GDP.

  • Slovakia subsequently joined in 2002, to bring the number to 16 countries.

The lesson for SADC is that a qualification criterion is critical as the consequences of not having one will create a Greek scenario for the region.

    1. Failure to enforce the law against defaulting member states

According to professor of European Law, Dr. Matthias Ruffert each and every European Union treaty that established the European Currency Union and the European currency called the Euro prohibits any form of bailout of for struggling EU, its government or its bonds, be it via direct subsidies, by co-guaranteeing its debt or in any manner conceivable.

All the members of the Euro zone have sworn solemn oaths called the Maastricht Stability Pact. It is this pledge that not only Greece has broken, but, by the size of Gross Domestic Product, the vast majority of the Euro member states (currently 16) could not enforce the law on defaulting nations because of the political will the European Central Bank (ECB). The member states had to inform the ECB of how they were going to overcome the defaults. The member states central banks were trusted by the ECB to oversee the process and report back to the European Central Bank.

The learning for SADC is that a region’s Central bank has the right to enforce law on any defaulting member state.


    1. Single Euro Payment Area (SEPA)

SEPA aims to establish a single market for retail euro payments by overcoming the technical, legal and market barriers stemming from the period prior to the introduction of the single currency. This will allow customers to make euro payments throughout Europe as easily, securely and efficiently as they do today within their own countries. Once SEPA has been completed, there will no longer be any differentiation between national and cross-border euro payments; they will all be treated as domestic.

SEPA consists of members from 32 countries, composed of banks, banking associations and payment institutions. Until now, migration deadlines have been relatively loose, with no decision on a final date. Cooper, Barclays' senior product manager on SEPA, noted that many corporates are having trouble justifying the business case for SEPA in the absence of a firm migration deadline away from legacy infrastructure.

Banks have to upgrade their systems to satisfy the SEPA requirements which include the use of standardised information in payment messaging. This will comprise the International Bank Account Number (IBAN) and the Bank Identifier Code (BIC), both of which will enable payment routing across the SEPA area in a common format. IBAN was launched in January 2008 and it is envisaged that it should be broadly available on debit cards by 2013 by the bulk of EU countries.

To have an integrated payment system, major decisions still have to be made on the following:



  1. Further European standardisation

  2. An end date for national payment instruments

  3. Interchange fees and payment fees

  4. Well organised stakeholder involvement and consultation

  5. Innovation at a European level (e-SEPA, mobile payments)

The advent of SEPA will lead to cross-border consolidation of banks, which will help deal with the costs of compliance as well as providing greater economies of scale when it comes to payments. Banks can potentially offer services across a number of countries, not just those where they have physical offices located.

The lesson for SADC, and in particular Banks, the implementation of a single payment system will be costly which can lead to banks mergers.



    1. Migration of bank customers

Apart from the loss of customers and revenue, the economic events of 2009 have shown a costly consequence of a single market – the burden to bail-out citizen money invested in another country. The failure of Icelandic banks and the ripple effect on Britain and the Netherlands is a classic example. In fact, given the volcanic eruptions in Iceland, a popular phrase coined by the Dutch is: “We said send cash, not ash!”

Iceland applied to join the European Union on 16 July 2009 and the application was accepted on 27 July. The EU announced in February 2010 that it supports the opening of accession talks with Iceland. Iceland's government has a target date of 2012 for joining the block. As part of the European Economic Area, Iceland is already a member of the EU's single market. It is also a member of the Schengen Area which removes border controls between member states.

Icesave was the name of the online banks set up in Britain by Landsbanki, one of the big 3 banks of Iceland. When the Icelandic banks collapsed in October 2008, the government passed emergency legislation to rescue their deposits. But those outside Iceland were not included. The British and Dutch governments paid €3.8bn to bail-out the depositors in their countries. The two EU countries subsequently went into reimbursement talks with Iceland, leading to the passing of the “Icesave law”.

Not surprisingly, on 6 March 2010 Iceland’s voters resoundingly rejected the compensation plan to Britain and the Netherlands, since the “Icesave” debts come to more than $15,000 for each of the 320,000 people on the island.





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