euro

euro The single currency adopted by eleven states of the European Union in 1999. Following the creation of a single market through the Single European Act by 1993 the Maastricht Treaty of 1992 instituted the European Monetary Union (EMU). During a transition period, in which monetary policies were to be harmonized further and economic convergence was to be achieved, a European Currency Institute was created in 1994. The Institute coordinated monetary policies, as all the future members' national central banks had achieved autonomy from national political interference. The convergence criteria used to decide whether an applicant could be accepted for membership were: (1) a national budget deficit below 3 per cent of GDP; (2) total public debts below 60 per cent of GDP, or moving towards that target; (3) an inflation rate no more than 1.5 per cent above the countries with the lowest rate; (4) a stable national currency against the other members of the European Monetary System for at least two years. A Stability and Growth Pact was adopted in 1997, which created penalties for members who had been accepted into the single currency but who were subsequently failing to meet the first three criteria.

On 1 July 1998 Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, the Netherlands, Portugal, and Spain were admitted to the final stage of EMU. On 1 January 1999, the euro was formally adopted. The member states' currencies were locked in their exchange rate, while the successor of the ECI, the European Central Bank (ECB) in Frankfurt, took all decisions about the interest rate. In 2001 Greece became the twelfth member of the euro-zone, and on 1 January 2002 euro bank notes and coins were introduced to replace the old national denominations.

There has been a significant risk attached to the introduction of a single currency for twelve states with very different economies, labour markets, and social and fiscal policy traditions. However, the euro could also act as a stimulus for economic harmonization, and for the liberalization of labour and capital markets. The single currency grew out of the recognition that in a context of globalization and free capital flows, individual governments could only exert limited influence on the outcomes of monetary policies. This had become evident during the 1980s and early 1990s, when the national central banks of the EC member states were forced to shadow the decisions of the German central bank without having any influence over its decisions. For this reason, the ECB was created largely on the successful model of the German central bank, so that the ECB was relatively well respected by the financial markets from the start. This, in turn, has meant that the low interest and inflation rates previously enjoyed by Germany were extended to the entire euro-zone. Ironically, it was Germany which, along with France, precipitated the currency's first crisis. From 2001, they ran budget deficits which violated the Stability and Growth pact underpinning the Euro. This had little short-term impact on currency stability, but the political costs proved significant. The perception of French and German arrogance encouraged new member states to insist on their own national interest at the unsuccessful 2003 Intergovernmental Conference.

http://www.ecb.int