Euro Currency

On May 3, 1998, leaders of the European Union (EU) concluded an agreement to establish a European Monetary Union (EMU) and, on January 1, 1999, to launch a common EMU currency, called the “euro.” The new European currency made its debut in two phases. The first phase lasted between January 1, 1999, and January 1, 2002. During this phase, the banknotes and coins of the traditional national currencies such as the French francs and Deutsche Marks continued to circulate and the euro only existed as a “virtual currency.” The second phase began on January 1, 2002. In the second phase, banknotes and coins in euro superseded the banknotes and coins of the traditional national currencies.

Initially, 11 countries agreed to adopt the euro, Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Austria, Finland, and Ireland. Later, Greece, Cyprus, Malta, and Slovena joined the euro zone. For now, Britain, Sweden, and Denmark plan to retain their own national currencies. Some economists have named the new monetary zone “Euroland.”

The historic agreement to form the EMU provides that responsibility for management of monetary policy in Europe falls to a newly established European Central Bank (ECB). Central banks regulate money supplies, interest rates, and credit conditions, and currently each member of the EMU has its own central bank to share in the implementation of the ECB’s monetary policy. The major challenge facing the ECB is the formulation of a monetary policy that can meet the needs of such diverse economies as Germany and Portugal. A single European monetary policy means a single interest rate all across Europe, regardless of economic conditions in each country.

The president of the ECB normally serves an eight-year term. To ease tensions, the first president, Dutchman Wim Duisenberg, kept his promise to step down after four years in favor of Frenchman Jean-Claude Trichet. Frenchman Christain Noyer served as the first vicepresident of the ECB. The first president, vice-president, and a four-member board, with representatives from Germany, Italy, Spain, and Finland, oversaw the management of the ECB during its first years. Reaching an agreement on the leadership of the ECB was the last major hurdle to finalizing the agreement.

A common European currency renders transparent differences in wages, labor costs, and prices among European countries, forcing high-cost countries to enact reforms to improve efficiency and lower costs. Uncompetitive countries no longer have the option of devaluing domestic currencies, making their exports cheaper to foreigners and their imports more expensive compared to domestic goods. The new currency system, by increasing competition between European national economies and coming on line amid an inflation-free recovery, suffered fears of currency weakness that might be expected to undercut a new currency without a track record. To bolster the euro, EMU countries had five times more gold and currency reserves than did the United States.

By increasing cross-border competition and trade, the EMU economically strengthened Europe in the global economy. European leaders envision that the euro, supported by an economic bloc with more inhabitants than the United States, is well positioned to challenge the dominance of the dollar in the global market place.

Nevertheless, the introduction of the euro was not met with universal applause. Europe suffered from high unemployment rates—in some countries the highest since the 1930s—and much of the blame was pinned on the economic integration of Europe. The introduction of the euro was seen as a further step down the road of economic integration, forcing companies to undertake more streamlining to remain competitive by laying off more workers.

The euro was introduced in 1999 at a value of 1 euro = $1.16. To the embarrassment of the European Central Bank, the currency had lost nearly one-fourth of its value by January 2002, equaling much less than one U.S. dollar. After the introduction of euro banknotes and coins in January 2002, the euro began to gain strength. On June 3, 2010, the euro stood at 1 euro = $1.38.