Euro (currency)
The euro (€) is the official currency used by twenty member states of the European Union (EU), aimed at fostering economic integration and stability among its participants. The pursuit of a common currency began in the 1960s, driven by the desire to reduce exchange rate volatility and enhance competitiveness against larger global markets. Officially launched as an accounting currency in 1999, the euro transitioned to physical banknotes and coins in 2002, replacing the national currencies of several EU nations, including France, Germany, and Spain, with Lithuania and Croatia being the latest adopters in 2015 and 2023, respectively.
The euro's inception was influenced by historical economic challenges, including the aftermath of World War II, with early advocates like Pierre Werner emphasizing the need for a unified monetary system to ensure lasting peace and economic security. While some countries, notably the UK, opted to maintain their national currencies due to concerns over economic flexibility, many EU member states have benefited from the euro. The integration facilitated by the euro has reportedly increased GDP across Europe and made European companies more competitive globally. However, fluctuations in its value, such as a significant drop against the US dollar in 2022, highlight ongoing challenges in the eurozone economy.
On this Page
Euro (currency)
The euro (symbol: €) is a single European currency used by twenty member states of the European Union (EU). Beginning in the 1960s, many European nations pushed for a common currency that would strengthen bonds among countries, stabilize exchange rates, and make the European market more competitive against large markets such as the United States and China. It took nearly four decades before this common currency came to fruition. In 1999, the euro was launched as an accounting currency, and in 2002, it replaced the national currencies of France, Germany, Spain, Italy, Greece, Portugal, Luxembourg, Austria, Finland, the Republic of Ireland, Belgium, and the Netherlands. Several other EU member states later adopted the euro, including Austria, Cyprus, Estonia, Latvia, Luxembourg, Malta, Portugal, Slovakia, Slovenia and Spain. The nineteenth member to adopt the euro as its currency was Lithuania in 2015, followed by Croatia in 2023. In August 2022, the euro dropped to its lowest value against the US dollar in twenty years.
Brief History
The Treaty of Rome, signed in 1957, was the first official document stating the objective to form a common market throughout Europe. Individual national currencies throughout Europe were subject to exchange-rate volatility. Leaders in the financial community believed that a unified monetary system would offset that volatility and strengthen Europe's presence in the global economy.
Pierre Werner, the former prime minister of Luxembourg, was the first European leader to lobby specifically for the creation of a single European currency. Claiming that the turmoil of World War II was caused by the economic instability of the 1930s, Werner believed that lasting peace in Europe was tied directly to the continent's economic security. In 1970, he circulated his report on the issue, which stated that the establishment of a single European currency could be accomplished by 1980. Werner believed that all financial decisions relating to the common currency should be made above the national level and should be accountable directly to the European Parliament. He knew that this would mean a massive loss of national sovereignty within European nations, but he believed that it was necessary for the survival of the European economy.
Advisors to Edward Heath, who was the British prime minister at that time, noticed this as well and thought that what Werner was advocating for was a European federal state. Heath's advisors believed that when it came to fiscal policy, the individual countries in Europe would have less autonomy than the states in the United States. Nevertheless, Werner's report was formally adopted by finance officers in six European countries and was even endorsed by Great Britain.
Werner's plan was put on the back burner when the Bretton Woods system, which had governed local exchange rates, collapsed in 1971. US President Richard Nixon ended the US dollar's convertibility to gold because foreign-held dollars had exceeded the US gold stock. The following year, European leaders established an agreement in which their currencies would move against one another within a 4.5 percent limit. Oil price volatility a few years later, however, caused the participating countries to abandon the agreement. The single European financial market was not adopted until 1985.
In 1989, a group of high-ranking financial officials presented the Delors Report outlining a preparatory period for the proposed euro that would last between 1990 and 1999. Steps to be taken included allowing the free movement of capital throughout the internal market, preparing the European banks, and fixing exchange rates. The European Council approved the recommendation in December 1991 and further laid out the "Maastricht convergence" criteria, which had to be met to participate. Inflation and interest rates were to be kept low, individual national deficits could not exceed 3 percent, and exchange rates had to be stable.
The introduction of euro banknotes and coins in 2002 marked the largest currency changeover in history. To prepare for the euro's launch in the first twelve participating countries, 14 billion notes and 52 billion coins were produced, and 7.8 billion notes and 40 billion coins were distributed to 218,000 banks and post offices, nearly 3 million stores, and 302 million people. At the same time, 9 billion national notes and 107 billion national coins were removed from circulation.
Although euro banknotes and coins did not come into circulation in 2002, the euro was launched as an accounting currency on January 1, 1999. It is customary in business for those buying and selling goods internationally to record transactions in their home country's currency, no matter which currency is used to process the transaction. For instance, if an American professional traveling in Germany purchases something with a credit card, the transaction will be processed in euros. However, the professional's United States–based credit card company will record the transaction in US dollars. The three-year transition leading up to the launch of euro coins and notes allowed member countries to get accustomed to the concept of the euro.
Impact
One notable holdout to the adoption of the euro was the United Kingdom, which favored keeping its own national currency, the pound sterling (£). Tony Blair, the prime minister at the time the euro was introduced, believed that the euro failed to meet the five economic tests he and his advisors had laid out for adoption. They thought that the euro did not have enough flexibility to account for local market fluctuations, so the United Kingdom declined to convert. Concerns also existed about ratios of debt to gross domestic product (GDP) that did not align with UK fiscal policy. In 2016, the United Kingdom voted to leave the EU altogether, a move nicknamed "Brexit."
Other member states, however, have found the conversion to the euro to be a positive one. Officials believe that the single market has significantly increased the GDP in Europe and that exports from Europe have received a major boost. The elimination of trade barriers has created cost advantages and made European companies more competitive globally. German officials also believe that the reduction of trade barriers within Europe has made companies headquartered there more attractive to foreign investors. Further, they suspect that the rise of China and other emerging economies combined with continued US market dominance makes the single European market an absolute necessity for continued competitiveness. They believe, however, that room for improvement exists, and they would like to see more trade among EU member states.
Bibliography
"Accounting Currency: What It Is, How It Works." Investopedia, 4 July 2021, www.investopedia.com/terms/a/accounting-currency.asp. Accessed 25 Nov. 2024.
"A Brief History of the Euro." National Bank of Belgium, www.nbb.be/en/notes-and-coins/brief-history-euro. Accessed 23 Nov. 2024.
Carew, Sinéad. "Euro Slump to Two-Decade Low, Oil Tumbles as Recession Fears Intensify." Reuters, 5 July 2022, www.reuters.com/markets/europe/global-markets-wrapup-1-2022-07-05. Accessed 23 Nov. 2024.
"Creation of the Bretton Woods System." Federal Reserve History, www.federalreservehistory.org/essays/bretton‗woods‗created. Accessed 23 Nov. 2024.
"History of Euro." Euro Dollar Currency, www.euro-dollar-currency.com/history‗of‗euro.htm. Accessed 23 Nov. 2024.
"The History of the Euro." European Commission, european-union.europa.eu/institutions-law-budget/euro/history-and-purpose‗en. Accessed 23 Nov. 2024.
"The Maastricht Convergence Criteria." National Bank of Belgium, www.nbb.be/en/monetary-policy/general-framework/institutional-framework-monetary-policy/maastricht-convergence. Accessed 23 Nov. 2024.
"Pierre Werner." The Telegraph, 27 June 2002, www.telegraph.co.uk/news/obituaries/1398495/Pierre-Werner.html. Accessed 23 Nov. 2024.
Vetter, Stefan. "The Single European Market 20 Years On." EU Monitor, 31 Oct. 2013, www.dbresearch.com/PROD/RPS‗EN-PROD/PROD0000000000444504/The‗Single‗European‗Market‗20‗years‗on%3A‗Achievemen.pdf. Accessed 23 Nov. 2024.
"Why the U.K. Doesn't Use the Euro." Investopedia, 2 July 2023, www.investopedia.com/ask/answers/100314/why-doesnt-england-use-euro.asp. Accessed 23 Nov. 2024.