The History Of The Euro Essay, Research Paper

Michael Younan

The History of the Euro

Recently members of the European Community have proposed the “Euro” as the name of a united currency. The idea for a common currency is not a new one. For years European banks have been using ECUs as the basis for the European Monetary System and it will now be exchangeable equally for new Euros. ECU stands for European Currency Unit, and is defined in terms of pieces of European currencies, making it a composite currency of all European countries. Since its creation, it has commonly used as a currency of denomination for eurobonds and bank certificates of deposit.

In March 1979 the European Monetary System was launched, and the goal toward a united currency was started. The system was based on the average behavior of the participating countries of the European Community. All European economies were examined, and observed to measure their effect of the monetary system. Average inflation was good but too much departure from that average would produce problems in the system. If the community average were 5 percent inflation, but the country’s inflation with either 0 percent or 10 percent inflation, it would cause strains in the system. All this economic coordination took place through a country’s exchange rate. A country was on track just as long as its exchange rate with respect to the ECU did not depart too much from a fixed value the ECU central rate. The Maastricht Treaty proposed additional criteria other than exchange rates, which was finally approved in May 1993 despite a holdout from some countries in the European Community. The Treaty set out three stages of further transition to monetary union in Europe The first stage was to have been completed by January 1994, and involved the elimination of all restrictions on the movement of capital between Member States, and between Member States and third countries. However, that goal was not met completely (Santer, Jacques).

After January 1994, the second stage began with the creation of the European Monetary Institute or EMI in Frankfurt, Germany. The EMI was the beginning of the proposed European Central Bank. The EMI was created to hold the gold and foreign exchange reserves, and oversee the operation of the European Monetary System, and to promote the use of the ECU and the transition from ECUs to Euros. Its future responsibilities are to implement a common European monetary policy, conduct foreign exchange operations, and hold reserves of member countries. While it’s working to achieve those goals, the EMI is also supposed to monitor some other economic convergence criteria among member countries, which included exchange rates, inflation, government debt, and interest rates. To be allowed to joined the new monetary union, as stated by the EMI in 1999 countries needed to have the following criteria by end 1997:

? “price stability” or A rate of inflation of the consumer price index not more than 1.5- percent points about the three member countries with the lowest inflation rates.

? Have kept its currency within the normal margins around its fixed value in terms of the ECU and to have not devalued against any other member country for two years.

? Long-term interest rates not more than 2 percent above the three member countries with the lowest rates of inflation.

? A government deficit that is not “excessive”, or a government deficit that doesn’t exceed 3 percent of yearly gross domestic product, and the value of outstanding government debt doesn’t exceed 60 percent of yearly gross domestic product.

However, meeting the criteria has led to considerable activity in the area of government statistics fudging. How much fudging is allowed is up to the EMI and the European Commission to decide, and investigate.

A good example of this statistical changing is the case of France. They counted a current pension fund surplus as government income, thus reducing the calculated government deficit. Of course, just as in the United States, the current year’s surplus did not take account of future obligations, when the flow of pension funds was really in deficit. Nevertheless, this event didn’t matter, since both France and Germany are obligatory in the union, for financial backing. Even so, Germany believes that the new European Central Bank will conduct policy much like the Bundesbank.

The third stage began during January 1999, at which time countries will change their currencies to the new Euro after which national currencies will be phased out during a transition period. During transition, the Euro and the national currency will both remain in circulation. Government bonds will be denominated in Euros, and some countries, like France, will convert existing debt to Euros. The EMI in Frankfurt will be transformed into the European Central Bank, which will determine the common monetary policy. The current head of the central bank of the Netherlands, Wim Duisenberg, is expected to become the first president of the ECB. (Santer, Jacques)

Currently the Euro currency is in a three-year transition period until 2002. Right now European companies are converting their accounts to Euros, and in 2002, Euro notes and coins will be circulated in the different countries. However, there is still discussion of what the coins will look like and whether coin sizes will fit into each countries individual telephones and vending machines which are measured to old currencies. Also, it is still controversial whether the conversion of ECUs to Euros will take place at the market ECU value, or at the ECU value fixed on paper which is calculated from ECU central rates. So far market rates are being used for the conversion.

Europe is now going headlong into the change to a united currency under the new European monetary system within the union. They have already received the backing of national banks, and are already prepared for the significant change to take place. Luxembourg, for example, fits the bill for monetary union with no problem. But there is strong political opposition to the move in countries like the United Kingdom and Denmark. Countries like Italy and Greece are on the border of meeting the convergence criteria set by the central bank. However it is expected that Europe will succeed in the changeover, and the value of the Euro will be strong, and stable.