FREE ESSAY ON HISTORY OF THE EURO

HISTORY OF THE EURO

It has been a long time in the making, but scheduled plans have marked January 1, 2002 as
the date that the new Euro currency banknotes and coins will be introduced in Europe.
July 1, 2002 is the designated day that the changeover to a monetary union will be
complete. The discussion as to the risks and benefits of this monetary union has been all
the talk around the world. This union will have vast and far-reaching effects that will
touch not only the countries in the union, but the entire world. There will be a dramatic
and radical economic change in Europe. All national currencies will disappear and there
will be only one money, the European Currency Unit or ECU.
Europe's economy was in shambles after the end of World War II. They had invested a lot
of money and resources to financing the war. In 1948, The United States Secretary of
State George C. Marshall, suggested that the United States should assist Europe in their
rebuilding, restructuring, and reconstruction. Offering U.S. capital, resources, and
cooperation to the countries of Europe would accomplish this. This was known as the
Marshall Plan. This plan was very successful right out of the gates. In just two years
Europe was ahead in industrial production (up one hundred and thirty-eight percent) from
its last year of peace before the war (Ball pg.138). The United States continued to work
with and assist Europe and in 1957, the Treaty of Rome was signed. This created the
European Community (EC), or as it is otherwise known as The European Economic Community
(EEC). The premise behind this union was that if the countries of Europe were liked and
dependent on each other financially, there would be less of a chance of them going to war
again with each other. The European Community began with just six members. They were
Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. Following afterwards
were the countries of Denmark, Ireland, United Kingdom, Greece, Portugal, and Spain. In
1995, Austria, Finland, and Sweden became members. All together, to this day, there are
fifteen members in the EC. The purpose of the European Union was to improve cooperation
between countries and remove, or at least reduce, trade and labor market barriers. In a
sense, they want to create an entity very similiar to the U.S. in the fact that Americans
enjoy relatively free movement of people, money, and goods. The headquarters of EU were
established in Brussels. Here the EC Commission is responsible for many things such as
labor, transportation, trade...etc. This is very similar to the United States Cabinet
(Ball pg.139). A council of ministers was set up to be the policy-setting body for the
EU. The Prime ministers of each country meet to establish policy, which will be enforced
by the commissioners. The European Parliament was established as a governing body for the
European Union. Voters in each member country elect its members. It operates as a system
of checks and balances for the European Commission. It has the power to throw out all the
commissioners or veto the entire EU budget. It was limited however, because in the
previous powers it was all or nothing. They could not veto parts of the budget or
eliminate certain commissioners. In 1987 the Single European Act gave the European
Parliament some power to amend the legislation drafted by the European Commission. The EU
Court of Justices was established to regulate and decide any cases that arise under the
Treaty of Rome. Its power is growing because of the high volume of cases it handles and
the authority it has over the courts of the member countries. European Union has
definitely become a force in world international trade. It is the largest import and
export market in the world. It is second in the world to the U.S. in GDP. It also
accounts for twenty percent of world trade (Ball pg.139). The people of Europe feel that
monetary union is the true key to becoming a powerful, strong, economic union. Europeans
long for an environment similar to the United States where there are little or no
barriers to trade or movement of labor. Many people feel that monetary union is the only
way to achieve this.
Many government officials and academics have attempted proposals to move beyond monetary
cooperation to monetary unification. The countries of Europe had started monetary
cooperation in 1950 when the European payments union was established. It was designed to
multilateralize trade and payments within Western Europe and provide a framework for
achieving currency convertibility. (Kenen, pg.3).
Pierce Werner was appointed in 1969 to draw up a plan to make the monetary union
possible. Werner was the Prime Minister and finance minister of Luxembourg. The Werner
Report scheduled monetary union to be completed by 1980. Economic crisis, rising
inflation rates, and rising unemployment rates caused monetary union to be thrown off
this schedule. Government officials were more concerned with their current economic
situations, rather than long-term reform. In 1972 the currency snake was developed. This
reduced exchange rate fluctuations by limiting the swings in bilateral exchange rates to
a two and a quarter percent band (Kenen pg.5). The snake is comprised of several European
currencies, led by the German deutsche mark. The exchange rate was agreed upon, but the
value of the currencies could fluctuate up or down to a ceiling or floor exchange rate.
Several currencies departed from the snake including the pound sterling, the Italian
lira, and the Swedish krona. The system's inflexibility led to the demise of the snake,
along with the departure of the above listed currencies. Each member country was
responsible for keeping its currency's value within the agreed upon relationship to the
other members' currencies. The agreed upon band was four and a half percent. Problems
occurred because the member countries had different inflation rates, fiscal and monetary
policies, and BOP balances. Thus market pressures pushed currency exchange rates out of
the agreed ranges, and the countries lacked the political will or resources to restore
the agreed exchange rate. Then the currency fell out of the system (Ball pg.165 ). The
snake was abolished in 1973 when the world shifted to floating exchange rates. It made it
more costly for some members to participate. The snake was a kind of precursor to a
stronger union that would come into being in 1979. European countries prefer fixed
currency exchange rated to floating ones. The European Monetary Union was a step back to
fixed rates and was a larger more improved version of the snake. This union required
countries to keep their currency values within a specified range in relation to one
another. The European Monetary Cooperation Fund was created to support the efforts of
member countries to keep their currency values within the agreed relationship to other
countries. It is comprised of dollars and gold, which have an equivalent to about
thirty-two billion (Ball pg.171). One major difference between the EMS and the snake is
that the exchange rates of the EMS are flexible. If one currency proves weaker than
another does, and the governments cannot or will not take steps to correct the situation,
the EMS exchange rates can be changed. There have been several rearrangements since 1979.
If a snake member couldn't stay within the terms, it dropped out and ceased to be a
member (Ball pg. 171). Eight EC countries joined EMU at its onset. Italy was allowed to
adopt a six- percent band, all others remained at two and a quarter percent. Spain, UK,
and Portugal joined in following years at the six- percent band. In 1992 however, Italy
and the UK dropped out due to the exchange rates crisis. Over the years, economic
conditions had changed quite a bit from when the Werner Report was introduced. In 1989,
Jacques Delors, then the president of the EC Commission, was asked to prepare a concrete
outline that would lead to European Monetary Union. This report listed three necessary
conditions for monetary union. They are: the total convertibility of currencies, the
complete liberalization of capital flows and full integration of financial markets, and
an irrevocable locking of exchange rates (Kenen, pg.14). He went on to say that there
would be a need for a common monetary policy. This would have to be regulated by an
institution that would be centralized and make collective decisions. It would influence
the instruments of monetary policy such as money, credit, and interest rates. This
recommendation would serve to form the ESCB or European System of Central Banks. 
"It would consist of a central institution and the national central banks. It would be
responsible for formulating and implementing monetary policy as well as managing the
community exchange rate policy vis a vis third currencies. The national central banks
would be entrusted with the implementation of policies in accordance with the guidelines
established by the council of the ESBC and in accordance with the instructions from the
central institutions. The ESBC would have a fourfold mandate. The system would be
committed to the objective of price stability. Subject to the foregoing, the system
should support the general economic policy set at the community level by the competent
bodies. The system would be responsible for the formulation and implementation of
monetary policy, exchange rate and reserve management, and the maintenance of a properly
functioning payment system. Lastly, the system would participate in the coordination of
banking supervision policies of the supervisory authorities (Kenan, pg. 14-15)."
Dehors also stated that three steps must be taken in three domains to avoid economic
imbalances. Competition policy and other measures must strengthen market mechanisms,
common policies should be devised to enhance the process of resource allocation where
market forces are not adequate, and macroeconomic courses should be coordinated. 
The report was reviewed in 1989 at the Madrid Summit. EMU was gathering a lot of support
due to the fall of the Soviet Union and the unification of Germany. Finally in 1991, EMU
was put into law with the signing of the Maastricht Treaty. It provided an economic,
political, and legal framework for the single currency, including three stages in the
journey towards EMU. In the first stage it will be known who will be participating in
EMU. The European Central Bank will be set in place and conditions for conducting
monetary policies will be decided. Also the production of the Euro banknotes and coins
will begin. 
The second phase would bring about the start of monetary union. The rates of conversion
between the Euro and the national currencies would become irrevocably fixed in early
1999, and the Euro would become a currency in its own right. The European System of
Central Banks (ESCB), which groups together the European Central Bank and the
participating national central banks, will then come into the picture. It will be
responsible for framing and implementing the single monetary and exchange rate policy -
in particular setting short-term interest rates - and any intervention vis-a-vis the
dollar or the yen. The participating national currencies will no longer be listed
independently on the foreign exchange markets vis-a-vis other currencies; their external
value will be set exclusively via the Euro thanks to the irrevocable conversion rates.
New issues of tradable public debt will be denominated in Euros from the beginning of
this phase. 
As far as the banking sector is concerned, the transition to the single currency will
begin chiefly via monetary policy, the capital market and the associated settlement
systems. More generally, the banks will take advantage of the time available in this
phase (not more than three years) in order to inform their customers of the consequences
of the switch to the single currency for their financial transactions. They will step up
their staff training efforts and could also offer certain products in Euros, legal and
technical constraints permitting. For example, customers' account statements could be
drawn up in both national currency and Euros. Firms could also begin operating in Euros.
Companies most heavily involved in international trade are likely to opt for early
conversion, although there will be no obligation to do so. Administrations will also have
to prepare actively for their own changeover. They will also provide operators and
consumers with the necessary information on introduction of the single currency. For the
most part, however, their transactions with the public will remain in national currency
until Euro banknotes and coins are put into circulation. Consumers will continue to use
chiefly their own national currency because Euro banknotes and coins will not yet be
available. Public demand could, however, prompt some banks or firms to offer services in
EUROs. The gradual introduction of dual pricing of goods and services will enable
consumers to get used to the single currency. By developing a feel for prices in the
single currency and learning to convert national currencies into Euros at a fixed rate,
they will thus realize that they do not stand to lose from the introduction of the single
currency. 
The third and final phase would be a definitive changeover to the Euro. 
By not later than January 1, 2002 and over a short period (not more than six months), the
national currencies will be withdrawn and the new Euro banknotes and coins will be put
into circulation. This phase will deliberately be kept short in order to minimize the
complications that would inevitably arise if national currencies were to remain in
circulation for an extended period alongside the single currency. The exchanges will, of
course, have been thoroughly prepared. In some cases (reprogramming of tills and cash
dispensers, for example) preparations will have to be made long beforehand to ensure that
software and machinery are properly adapted. Most companies are already hard at work on
this in coincidence with Y2K preparations. From the beginning of this phase, retailers
will continue to accept national currencies but will also carry out transactions in
Euros. All money-based transactions in the economy (wages and salaries, pensions, bank
balances, etc.) will be denominated in Euros. Bibliography to national currencies in
contracts will be converted into Euros without any other changes in terms and conditions.
In other words, the principle of continuity of contracts will apply in full. 
Public administrations in the countries taking part in EMU will also implement a
coordinated switch to the Euro for their transactions with the public. The definitive
changeover to the single currency should be completed by July 1, 2002 at the latest with
final withdrawal of the national currencies. The success of the changeover to the single
currency will depend on one condition: the Euro must win full public acceptance. Although
the switch will indeed be a radical change and will upset people's habits, it will at the
same time bring many benefits: elimination of the additional costs associated with the
existence of different national currencies, enhanced price stability and transparency,
simplified travel across Europe, less costly funds transfers from one country to another,
but also stimulation of employment and a stronger role for Europe on the world stage. In
short, the single currency will bring Europe closer to the citizen, strengthen European
unity and make a genuine contribution to stability, peace and prosperity. In the long
run, all the Member States of the European Union that so wish will be able to adopt the
Euro once they satisfy the criteria laid down by the Treaty. Meanwhile, efforts to
achieve convergence and develop solidarity between the Member States will make for
greater exchange-rate stability in Europe and thus preserve the smooth functioning of the
single market. 
In reference to the criteria mentioned above, there were five major criteria laid down by
the Maastrict Treaty. The inflation rate must be within 1.5 percentage points of the
average rate of the three states with the lowest inflation. The long-term interest rate
must be within two percentage points of the average rate of the three states with the
lowest interest rates. The national budget deficit must be below three percent of GNP.
The national debt must also not exceed sixty percent of GNP. Lastly, the national
currency must not have devalued for two years, and must have remained within the two and
one quarter percent fluctuation margin provided by the EMS. A lot of people seem to think
that these criteria are unrealistic for a lot of the countries of EU. Many countries will
be forced to develop a cutback policy in order to fulfill the Euro requirements and
become or remain a member. 
The members of the European Commission believe that the scenario for changeover must have
certain characteristics. First, it must allow sufficient time to win popular acceptance.
Second, it must be flexible enough to allow different speeds of adjustment between
currency users and to allow market forces to operate. Third, it must be efficient and not
impose unnecessary costs. Fourth, it must respect the legal provisions of the Maastricht
Treaty. Lastly, it must be credible and incapable of being reversed by unforeseen events.

When examining EMU and the eventual joining of members to a single currency, it is
important to discuss the relevant costs and benefits to the impending union. The benefits
to the European Community and to the world obviously outweigh the risks and costs or else
they wouldn't be going ahead with it. There are however some issues that could be very
damaging. There is a great debate as to what the effects EMU will bring to the EC and to
the world. David Currie explains the debate between those who oppose and those who
support in this way:
"The debate is polarized to an extraordinary degree. For many who oppose the single
currency, it is not merely an ill-advised undertaking, but a disastrous one: a stride
further along the road to a European superstate that will submerge the individuality of
the European nations in an unwieldy federation, hobbled by bureaucracy, commanding little
popular support and imposing a crippling burden of regulatory and other costs on Europe's
economies. Opponents also see it as a distraction from the two most urgent tasks
currently facing the EU: completion of the single market and enlargement of the Union to
the east. Many argue that EMU will prove unworkable and divide Europe dangerously into
ins and outs. Many advocates of EMU reply in kind. They see not only a chance to achieve
worthwhile economic benefits, but also a fleeting opportunity to grasp an historic prize.
They regard EMU as essential to creating a stronger EU, with greater economic, political
and social cohesion. This offers the best hope for helping the former communist-bloc
countries: closer integration among the current EU members helps, not hinders the
prospects for enlargement. Without the single currency, they say, the reality of the
single market will not be achieved and Europe's economies will remain divided and weak,
unable to compete internationally either with the low-wage economies of Asia or with the
large, integrated, high-wage economy of the USA. Only a stronger and more integrated
Europe will be able to exercise leadership on the global issues facing the world economy
(Currie). 
Emerson points out in his book, The ECU Report, some of the benefits of EMU. One of the
most obvious benefits is the resulting ease of transactions across the EU. This will save
both money and time. The savings in transaction costs would be approximately fifteen
billion ECU per year , or .4 percent of GDP. Most of these gains are financial and
consist of the disappearance of bank commissions and of the exchange margin by which a
bank sells a currency more expensively than it purchases it. Many also believe that the
suppression of exchange rate variability in terms of increased trade and movement of
capital will do much to lessen foreign exchange risk. A potentially very important gain
arises because EMU reduces the overall uncertainty which investors feel about economic
prospects, particularly foreign investors faced not only with the inherent risk of a
particular project but also with the risk that an exchange rate change may wipe out the
value of future profits. A reduction in overall uncertainty could lower the risk premiums
firms have to pay to raise equity capital and would greatly increase investment. Even a
small reduction in the risk premium could raise the income of the community
significantly. By improving business expectations of future growth and profits, EMU could
lead the community not just to a rise in income, but to a higher annual growth path. This
would also cut unemployment substantially (pg. 33). 
Currie discusses in his article the advantages of low inflation that monetary union will
bring. 
"For many proponents of EMU, the most important economic advantage is the prospect that
the independent European Central Bank (ECB) will deliver durably low inflation for the
EMU area. For Germany, which has enjoyed low inflation for decades, the ECB can scarcely
offer more on this front than the status quo. These reservations probably apply also to
those countries, such as Austria, France and the Netherlands, that have attached their
currency to the D-mark and hence adopted the Bundesbank as their de facto central bank.
For them, however, the creation of the ECB offers a voice in the conduct of monetary
policy, which they currently lack. The disinflation benefits will plainly be greatest for
EMU countries that have not enjoyed stable low inflation hitherto. These include Ireland
and the UK (were it to join) together with Italy, Portugal and Spain. Low inflation
implies low interest rates, as the premiums for inflation and exchange-rate risk would be
eliminated from interest rates. Despite the independence of the Bank of England, the UK
still faces a premium of more than 1% on long-term borrowing rates compared to Germany
and France. Three factors could, however, make the ECB's performance somewhat more
erratic than the Bundesbank's. First, governors of central banks from all participating
countries will influence the ECB's decisions on interest rates. Although the Maastricht
Treaty safeguards the ECB's independence, it is legitimate to ask at what level of
pressure their political resolve might buckle, for example if unemployment remained very
high. Second, unlike the Bundesbank, the ECB has a reputation to establish, and to start
with a period of higher interest rates may be needed to demonstrate anti-inflation
resolve. This in turn could reinforce internal dissent in the ECB. Third, EMU will be a
profound economic change, which may well alter the workings of the joint monetary economy
in significant and unpredictable ways. All central banks have to cope with such changes
from time to time: examples include the shift in UK demand for money after financial
markets were liberalized in the 1980s. At such times, policymakers can lose their
bearings, and the conduct of monetary policy can become volatile. The ECB will enjoy the
monetary equivalent of a baptism of fire. On balance, it seems likely that the ECB will
be able to establish a record and reputation for conducting monetary policy in a sound
manner. But this may take time, and in the meantime Euro monetary policy, and the
markets' judgement of it, may prove erratic. These problems could be particularly acute
if EMU starts on weak foundations, with insufficient convergence. . German exporters will
no longer be at a disadvantage vis-a-vis their European competitors in the European
internal market and in the markets of non-EU states as a result of devaluation of their
competitors' currencies. Companies will have a reliable basis on which to plan; tourists
will not have to exchange currency, which means their holidays will be cheaper; the
European currency can become a more important world reserve currency than is presently t
he case; and competition intensified by greater transparency in prices will improve the
efficiency of the European economies. This will make it possible to safeguard present
jobs and create new ones (Currie)."
Despite all of these benefits, there are still concerns about EMU. For one there is a
huge cost involved in switching to a single currency. For one, new money has to be made.
Adjustments will have to be made to all the different types of money machine such as
ATMs, soda machines, and subways. It is estimated that these costs alone will total over
five billion. Other major roadblocks are the major cultural differences and the extreme
sense of nationalism that each country has There are huge differences in labor market
institutions within Europe. There is a language barrier between almost every country in
the union. There are differences in opinion in regard to policies, laws, government, and
regulations. It will be interesting to see if all the countries of EC can work together
for the mutual benefit of the community. There also may be discrimination occur between
the countries of EU and non-EU countries. Currie describes in his article how "the ins
could discriminate against the outs by exploiting loopholes in existing single market
directives, devising forms of market opening in new, currently closed areas (for example,
European gas and electricity markets), or, in the financial area, by claiming that the
interests of EMU monetary policy are paramount. (This last is a tactic that the likely
participants in EMU have already used over access to Target, the financial settlement
system for Euros.) Or they may simply fail to represent the interests of the outs as
strongly and negotiations often arrive at a balancing of national interests. Finally they
may simply flout the rules: by the time that companies or governments have been to the
European court, commercial damage may already have been done (Currie)." 
Currie surmises:
"With the right policies, Europe could become an economic powerhouse. Without them, it
will continue to decline and lose out to other parts of the world, notably Asia.
Moreover, the EU must also face the need to open to the eastern part of Europe, to avoid
the political and social unrest that will otherwise result. Getting these policies right
will not be easy. If EMU proceeds, the lack of exchange-rate flexibility will mean that
regional unemployment and industrial balance will emerge as even more important policy
issues than hitherto. The future of the EU will depend on its capacity to address these
fundamental issues. Much will depend on whether there are European leaders in the next
decade with the right strategic vision for Europe and the capacity to realize it. But
that requires a vigorous and informed public debate so that these crucial issues are at
the forefront of European politics. Europe faces momentous developments over the next few
years and in the first decade of the next century. EMU is a risky venture: ensuring that
it works well will be fundamental to the future prosperity of the region and the well
being of its people (Currie)."
The Euro, for better or worse, will become a reality and irreversible truth by July of
2002. Thirteen billion banknotes are in production in denominations of 5, 10, 20, 50,
100, 200, and 500. Euro coins will be produced in denominations of .01, .02, .05, .10,
.20, .50, 1,and 2. Their initial amount will total seventy billion. It has been a long
road for monetary union in Europe, but the everlasting benefits that union could produce
for the people may be well worth the wait. One will just have to wait and see. 
Bibliography
Ball, Don. International Business, The Challenge of Global Competition. Boston: 
Irwin McGraw-Hill., 1999.
Currie, David. "The Pros and Cons of EMU." 1998. 
URL: http://www.hm-treasury.gov.uk/pub/html/docs/emupc/main.html. 1999.
De Grauwe, Paul. The Economics of Monetary Integration. New York: 
Oxford University Press., 1997.
Emerson, Michael.The ECU Report. London: Pan Books Limited., 1991.
Kenen, Peter. Economic and Monetary Union in Europe. New York: 
Cambridge University Press., 1995.