Euro Essay

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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:   

  1. Building the Financial Foundations of the Euro (Routledge, 2008);
  2. 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);
  3. Paul de Grauwe, Economics of Monetary Union (Oxford University Press, 2007);
  4. Kenneth H. F. Dyson, The Euro at Ten: Europeanization, Power, and Convergence (Oxford University Press, 2008);
  5. Madeleine Hösli, The Euro: A Concise Introduction to European Monetary Integration (L. Rienner Publishers, 2005);
  6. Philip King and Sharmila King,  International   Economics, Globalization, and Policy: A Reader (McGraw-Hill Irwin, 2009);
  7. The Euro (The Stationery Office/Tso, 2008)

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