History Of The Euro Essay, Research Paper
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-?-vis the dollar or the yen. The participating national currencies will no longer be listed independently on the foreign exchange markets vis-?-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. References 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: