What's new in the EU: The euro at ten

Ten years after European leaders launched the euro, it's time to take a look at what the common currency has done for Europe.

eu flag biz 88 (photo credit: )
eu flag biz 88
(photo credit: )
In May 1998 European leaders took the historic decision to launch the euro. Ten years later, and with some 320 million Europeans in 15 countries using the same currency and participating in an integrated EU market, it's time to take a look at what the common currency has done for Europe. In addition to integrating the European marketplace, the euro-zone has also helped run sound public finances and macroeconomic policies - all of which the European Commission claims have created more jobs. Average government budget deficits in the EU fell to a record low of 0.6% of GDP in 2007 (compared to 4% in the 80s and 90s). Reflecting this trend, the Commission was able last week to recommend to the Council to close the surveillance procedures on the Czech Republic, Italy, Portugal and Slovakia for running excessive deficits. Now, the European Monetary Union (EMU) will have to be adapted to meet Europe's new challenges of globalization, scarce natural resources, climate change and the ageing population. Slovakia has received the go-ahead for euro acceptance in 2009. A report from last week has found that Slovakia meets the requirements for joining the euro - stable prices and exchange rates; low interest rates, government deficits and debt; and compatible national laws. The other EU countries assessed (mostly recent members from the East, but reportedly also Sweden) were found not to meet the conditions for membership. The path to unified currency Monetary union was a recurring ambition of the European Union from the late 1960s, with its promise of currency stability and an environment for higher growth and employment. However, a variety of political and economic obstacles barred the way until the signing of the Maastricht Treaty (the Treaty on European Union or EU Treaty) in 1992. At various times, weak political commitment, divisions over economic priorities, lack of economic convergence and developments in international currency markets outside the Union's control all played their part in frustrating progress towards EMU. Nevertheless, the second half of the 20th century saw a constant search by the Member States for deeper economic cooperation as a means of strengthening the political bonds between them and protecting the common market. The European Monetary System (EMS) was built on the concept of stable but adjustable exchange rates defined in relation to the newly created European currency unit (ECU) - a basket currency based on a weighted average of EMS currencies. Within the EMS, currency fluctuations were controlled through the exchange rate mechanism (ERM) and kept within ±2.25% of the central rates (with the exception of the lira, which was allowed to fluctuate by ±6%). While the EMS's primary purpose was to reduce exchange-rate instability - seen as damaging to trade, investment and economic growth - its creation was helped by a new consensus among Member States that controlling and reducing inflation had to become an economic priority. The EMS was a new departure because exchange rates could only be changed by mutual agreement of participating Member States and the Commission - an unprecedented transfer of monetary autonomy. The first tangible manifestation of European monetary cooperation was the euro, which was enshrined as a goal in the Maastricht Treaty in 1992, born as a virtual currency in 1999 and first appeared as cash in people's pockets in 2002. The euro is not the currency of all European Union member countries. Many of the newer EU members are still working towards meeting the conditions required to adopt the single currency, while the UK and Denmark have negotiated opt-outs from the obligation to join. But, while the economic and monetary union (EMU) is still evolving, the scale of the impact on the lives of Europeans is considerable. Benefits of the euro-zone The citizens of the Member States which are part of the euro-zone are said to gain from the stability created by the macroeconomic framework of the EMU, which brings price stability and sound public financial practices. Individuals and enterprises benefit from the ease with which they can travel and conduct business across borders. The EMU facilitates trade integration, reduces costs and can help generate growth and jobs. A single currency makes prices comparable, leading to greater competition and more opportunity. As capital markets integrate, investment becomes easier and cheaper. The euro's emergence as a strong international currency in turn grants Europe a stronger role in the world. With the euro now a familiar part of daily life from the Mediterranean to the Arctic Circle, it provides tangible evidence of a common European identity. syrquin@013.net The author is the head of the International Department at GSCB Law Firm