Euro Currency

Euro Currency

On 3 May 1998 leaders of the European Union (EU) concluded an agreement to establish a European Monetary Union (EMU) and, on 1 January 1999 to launch a common EMU currency, called the euro. Euro notes and coins will enter into circulation and replace national currencies by 1 July 2002.

Initially, 11 countries have agreed to adopt the euro, Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Austria, Finland, and Ireland. Greece will probably join the euro zone by 2001, and 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 manage its domestic monetary policy. A major challenge facing the ECB will be the search for a monetary policy that can meet the needs of such diverse economies as Germany and Portugal. A single European monetary policy will mean a single interest rate all across Europe, regardless of economic conditions in each country.

The president of the ECB will normally serve an eight-year term but the first president, Dutchman Wim Duisenberg, has promised to step down after four years in favor of Frenchman Jean-Claude Trichet. Frenchman Christain Noyer will serve as vice-president of the ECB, and a four-member board, with representatives from Germany, Italy, Spain, and Finland, will oversee the management of the bank. Reaching an agreement on the leadership of the ECB was the last major hurdle to finalizing the agreement.

A common European currency will make 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 will no longer have the option of devaluing their currencies, rendering 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, has been spared the fears of currency weakness that might be expected to undercut a new currency without a track record. Also, to bolster the euro EMU countries have five times more gold and currency reserves than the United States.

By increasing cross-border competition and trade, the EMU should economically strengthen 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 has not been met with universal applause. Europe currently suffers from high unemployment rates—in some countries the highest since the 1930s—and much of  the blame is pinned on the economic integration of Europe. The euro is 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. So far Britain, Denmark, and Sweden have remained aloof, fearing the euro will aggravate economic ills and involve some loss of sovereignty.