Euro Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The euro is the currency of those member states of the European Union (EU) that (1) want to use a common currency with other members of the Union, and (2) meet the criteria for joining the “eurozone.” As of July 2008, 15 countries within the EU use the euro as their currency: Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, and Finland. Other countries (Bulgaria, Czech Republic, Denmark, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia, Sweden, and the United Kingdom) are members of the EU but do not use the euro as their currency. Of these, Denmark and the United Kingdom have decided to “opt out” from participation, while the remainder (many of the newest EU members plus Sweden) have yet to meet the “convergence criteria” for adopting the single currency.

The euro is an artificial or a synthetic currency that was launched on January 1, 1999. It first became the new official currency of 11 countries, replacing the old national currencies—such as the Deutsche mark and the French franc—in two stages. For the first three years of its existence, the euro was a virtual currency used by financial institutions for cashless payments and accounting purposes. Old currencies continued to be used for cash payments. The euro then appeared as banknotes and coins on January 1, 2002, for all transactions and the older national currencies were phased out of use within three months. In addition to the original 11, Greece adopted the euro in 2001, Slovenia in 2007, and Cyprus and Malta in 2008.

National currencies were converted into euros at fixed rates. One euro, for example, was worth 1.95583 Deutsche marks, 0.787564 Irish pounds, and 239.640 Slovenian tolars. These fixed rates are now only of historical interest. Euro’s value in all other currencies of the world is free to fluctuate according to the dictates of market forces. In early July 2008, one euro was worth 1.57 U.S. dollars and 0.79 UK pounds.

The launching of the euro was the culmination of the process of integration of European economies that had begun in 1957 with the Treaty of Rome. The first step in this integration process was the formation of a common market, followed after many other steps by the establishment in 1979 of the European Monetary System, whose main objective was to reduce the volatility of exchange rates between the currencies of the European Economic Community.

The final step in the establishment of one currency, the euro, was the 1992 Maastricht Treaty (Treaty on European Union), which committed the EU members to have a common currency and set out the ground rules for the establishment of the common currency. These conditions came to be known as “convergence criteria” (or “Maastricht criteria”). The objective of stipulating these criteria was to ensure that the countries that adopt a common currency have comparable monetary conditions before forming a monetary union. These criteria were applied quite flexibly in 1998 to allow the first 11 countries to launch the euro in 1999. When the euro came into being, monetary policy became the responsibility of the independent and newly created European Central Bank (ECB). National central banks of the member states adopting the euro then became arms of the ECB for overseeing the implementation of the monetary policy within their jurisdictions.

Benefits And Drawbacks

The euro, as a single currency, confers a number of benefits on the countries that use it. Elimination of national currencies reduces the risk inherent in changing exchange rates between these currencies. Elimination of exchange rate risks stimulates trade between the countries and encourages integration of financial markets. Use of one currency also permits transparency of prices. People traveling between countries can make price comparisons more easily than if they have to convert prices from one currency to another. Research indicates that prices of goods between member countries have converged since the introduction of the euro. One currency also eliminates some transaction costs for financial transactions.

There are also some drawbacks for countries that give up their national currencies. Most important of these is the loss of monetary independence. Countries using the euro have surrendered an important tool— their monetary policy—for managing economic fluctuations to a central authority—the European Central Bank. There is now one monetary policy within the whole of the eurozone. Each country has only a limited voice in setting this policy. Should there be higher inflation or a recession in one region of the eurozone compared to other regions, monetary policy cannot be adjusted to accommodate the needs of one region. A country with its own currency can change its interest rates to manage the economic shock. Introduction of the euro also resulted in an initial bout of inflation as traders took advantage of confusion surrounding the conversion of prices from local currencies into euros and raised their prices.

Soon after its introduction, the euro fulfilled the expectations of many by becoming an important international currency. Of all international reserves, 26.5 percent were held in euros at the end of 2007 compared to only about 15.4 percent at the end of 1995 (in currencies that now constitute the euro). By early 2008, the volume of international bonds raised in euros exceeded the volume of such bonds raised in the U.S. dollar—a currency that used to dominate transactions in international financial markets. By early 2007, the value of outstanding banknotes in euros exceeded those in dollars. Some of these numbers, however, may represent a slightly distorted picture due to a significant decline in the value of the U.S. dollar compared to the euro since 2002.

Usage of the euro is expected to continue its growth. It is expected that Slovakia will join the eurozone in 2009, Bulgaria, Estonia, Lithuania and perhaps Hungary in 2010, the Czech Republic in 2012, and Poland in 2015 or later.

Bibliography:

Building the Financial Foundations of the Euro (Routledge, 2008);
Menzie Chinn and Jeffrey Frankel, “The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency,” voxeu.org (cited March 2009);
Paul de Grauwe, Economics of Monetary Union (Oxford University Press, 2007);
Kenneth H. F. Dyson, The Euro at Ten: Europeanization, Power, and Convergence (Oxford University Press, 2008);
Madeleine Hösli, The Euro: A Concise Introduction to European Monetary Integration (L. Rienner Publishers, 2005);
Philip King and Sharmila King, International Economics, Globalization, and Policy: A Reader (McGraw-Hill Irwin, 2009);
The Euro (The Stationery Office/Tso, 2008)

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