The introduction of the Euro

Autor: Pichler Mario

Dossier for the Preliminary Examination
The introduction of the Euro

1 Contents
1 Contents 2
2 Background. 2
3 What has already happened. - The present situation 2

3.1 The position of the ECB. 2

4 What is going to happen during the following years. (Prospects, Dangers, Chances) 2
5 Connections: 2
6 References: 2
2 Background.
The origins of the idea of a single European currency can be traced back to the 19^th century. During the 1920ies and the 1930ies the idea became public again. In the year 1962 the European Commission proposed establishing a single European currency for the first time. However it still took more than one and a half decades until the European Monetary System was founded in the year 1978.¹ In the year 1992 the Maastricht treaty was signed and so the criteria that each country had to meet in order to be allowed to take part in EMU were fixed. According to this criteria no country is allowed to have a deficit than exceeds 3% of GDP and public debts must not be higher than 60% of GDP. Long term interest rates must not be more than 2% higher than the average of the three best performing countries and inflation must not exaggerate the average of the three best countries by 1.5%.²

3 What has already happened. - The present situation
On January 1^st 1999³ one major step towards a closer European union was taken. The conversion rates of the present European currencies that were fixed and announced⁴ on December 31^st 1998 were put into force. At that time the "most momentous currency innovation since the establishment of the United States Dollar in 1792"⁵ came into being.
About one-hundred and fifty days have already passed since the Euro′s birth on January 1^st 1999 and since then the new currency has actually had quite a turbulent life already.
The first thing I want to deal with in this case is certainly one of the most discussed issues concerning the introduction. It is the Euro′s rate in comparison to the Dollar. As we all know during the first months the Euro lost more than 10 per cent against the Dollar which was a surprise even to Wim Duisenberg himself as he admitted in an interview. On Thursday May 20^th the price for 1 Euro was about $ 1.0668⁶ while it was $ 1.17 on December 31^st 1998. Critics took occasion to condemn EMU as a whole and to claim the immediate stop of the process of economic integration. Other economists try to point out the positive aspects for European economy and especially for our exports. Apart from that according to these economists Euro′s downswing compared to the dollar is mainly due to the good economic performance of the USA and the consequently high Dollar.
One other important occurrence was the cut in interest rate that ECB carried out on Thursday the 8^th of April 1999.⁷ According to Duisenberg this measure was taken in order to stimulate European economy. Just a few days before, on Tuesday, March 30,quite a dissatisfying forecast of economic growth was published. The European Commission revised the figures from 2.6 to 2.2. percent annual growth for the following year in the 11 Euro nations. In the whole Union things are even worse. Economists predict about 2.1 percent growth in 1999⁸, while the USA experience a booming economy. Especially Germany, whose economy covers about one third of Europe′s allover output suffers: Sachs predicts only 1.4⁹ percent growth rate for Europe′s largest economy. However this rate cut was only possible because the risk of inflation is actually quite low at the moment.¹⁰
Price stability is certainly the most important maxim in European monetary policy. Contrary to the US. monetary policy European monetary strategy is far more concerned with this issue while the American Federal Reserve also takes aspects as growth and unemployment into consideration. Many experts consider this to be actually the wrong policy because according to their point of view "deflation, rather than inflation is the greater risk in Euroland."¹¹
3.1 The position of the ECB.
In my description of the process of introducing a new currency I want to dedicate a special chapter to the organisation which is undoubtedly the most important in this process, the European Central Bank (ECB), an institution that is not undisputed. First problems emerged during the recommendation of the central banks President in spring 1998¹² because France pledged for its candidate Jean Claude Trichet (whose article from TIME-Magazine I will refer to later in my essay) while the other nations favoured Wim Duisenberg. Finally Duisenberg was appointed by guaranteeing France some other high posts in the ECB.
The position of ECB is actually quite an interesting one, not only in comparison to national European central banks, but also in comparison to its American Counterpart the Federal Reserve. So ECB is obviously one of the most independent and most single minded central banks in the world.
The Fed is required by law to take unemployment and output into consideration in making their policy and has to give periodic reports to the Congress. Consequently the Fed′s monetary policy is also influenced by the American government. In contrast European Central Bank is not allowed to "seek or take instructions from Community investors or bodies, from any government of a member state or from any other body."¹³ ECB is certainly contracted to support the general economic guidelines of the union, but without forgetting the main maxim of price stability.

4 What is going to happen during the following years.
(Prospects, Dangers, Chances)
So now after I have dealt with the basic facts and the current affairs that occurred around the introduction we also have to ask what might be the long term consequences of the introduction of the new single currency for Europe′s economy and what can be done in order to make sure that EMU is going to be a success. One thing is that the Euro must win confidence both among people in Europe and among business partners all over the world.¹⁴ I doubt weather the heavy losses the Euro had to bear during the first few months of its existence helped to establish this confidence. Nevertheless European politicians do not miss any chance to show their confidence in the new currency. Yves-Thibault de Silguy, commissioners for economic, financial and monetary affairs puts it like that "One day [...] you will be asking why the dollar is down against the Euro."¹⁵ Also many analysts are convinced that the Euro will be a match for the dollar within the following five years or maybe even less.¹⁶ From my point of view this will certainly still take some time. But even though I would suggest not to answer this fall of the Euro with exaggerated reactions. I think we should be aware of the advantages for our exports and let the Euro′s rate go its way. After quite a while it will have found its own level.
One other aspect that must not be forgotten during the following years is the problem of the "Ins" and the "Outs" whose precise status is not defined in the Maastricht treaty. This might bring about serious problems in the future because what is going to happen is a division of the Union into Euro and non Euro countries.¹⁷ In this case I think it is absolutely necessary to integrate these countries into EMU as quickly as possible in order to avoid severe economic tensions.
Apart from that, politicians have to be aware of the potential danger that emerges because fiscal policies are governed by the national governments, while ECB is responsible for monetary policies.¹⁸ Consequently it is of great importance that the member countries comply the Maastricht treaty, the Amsterdam treaty and the rules for fiscal co-ordination laid down in the Stability and Growth Pact.¹⁹ However in this case it must not be forgotten to keep the system flexible enough to deal with local, so called asymmetric²⁰ economic shocks. We must not forget that the measure of national currency devaluation will not be available in the future.
So after the first little tooting troubles have been solved, in the long run there are also a lot of problems and dangers this young monetary union will have to face. In this case it will be absolutely necessary to have a well working European Central Bank, whose importance and responsibilities I have already described before, and member countries that take any effort to cooperate for a Union that Economic integration as it is in the USA.
5 Connections:
I would like to connect my topic with following chapters from "Opening Doors"
Chapter 4: Global business (p. 97 - 128)
Chapter 19: Money and financial institutions (p. 535 - 565)

6 References:
_ The history of an idea, The Economist, A survey of EMU, March 11^th 1998, p. 4
_ Ready, willing, able?, The Economist, A survey of EMU, March 11^th 1998, p. 10
_ URL: http://europa.eu.int/euro/html/calendrier.html?lang=5
_ The stage is set; The Economist, January 2^nd 1999, p. 65
_ Europe′s adventure begins; The Economist, January 2^nd 1999, p. 15
_ Trading the Euro; The Wall Street Journal Europe, May 20th 1999 p. 15
_ ECB makes surprise half-point cut in main interest rate, Financial Times, April 9^th 1999, p. 1
_ JAMES, Barry; Euro-Zone growth looks set to slow, The International Herald Tribune, March 31^st 1999 p. 11
_ European rates, Financial Times, April 8^th 1999, p. 17
_ Cut aimed at stimulating euro-zone economy, Financial Times, April 9^th 1999, p. 3
_ One hundred days of Euro, Financial Times, April 10^th 1999, p. 6
_ European rates of change, Financial Times, April 9^th 1999, p. 13
_ Gambling on the Euro; The Economist, January 2^nd 1999, p. 19
_ Euro-Zone Growth Looks Set to Slow, International Herald Tribune, March 31^st 1999, p 11
_ Ins and outs, The Economist, January 2^nd 1999, p. 21
_ De Grauwe, Paul; Risks of a roofless Euroland; TIME, Jannuary 11^th 1999, p. 29
_ TRICHET, Jean-Claude; It′s only the beginning; TIME, Jannuary 11^th 1999, p. 28
_ Nature or nurture, TIME, Jannuary 11^th 1999, p. 20

Pichler Mario, 9756993, 151 Page

1 The history of an idea, The Economist, A survey of EMU, March 11^th 1998, p. 4

2 Ready, willing, able?, The Economist, A survey of EMU, March 11^th 1998, p. 10

3 URL: http://europa.eu.int/euro/html/calendrier.html?lang=5

4 The stage is set; The Economist, January 2^nd 1999, p. 65

5 Europe′s adventure begins; The Economist, January 2^nd 1999, p. 15

6 Trading the Euro; The Wall Street Journal Europe, May 20th 1999 p. 15

7 ECB makes surprise half-point cut in main interest rate, Financial Times, April 9^th 1999, p. 1

8 JAMES, Barry; Euro-Zone growth looks set to slow, The International Herald Tribune, March 31^st 1999 p. 11

9 European rates, Financial Times, April 8^th 1999, p. 17

10 Cut aimed at stimulating Euro-zone economy, Financial Times, April 9^th 1999, p. 3

11 European rates of change, Financial Times, April 9^th 1999, p. 13

12 URL: http://europa.eu.int/euro/html/calendrier.html?lang=5

13 Gambling on the Euro; The Economist, January 2^nd 1999, p. 19

14 TRICHET, Jean-Claude; It′s only the beginning; TIME, January 11^th 1999, p. 28

15 Euro-Zone Growth Looks Set to Slow, International Herald Tribune, March 31^st 1999, p 11

16 Nature or nurture, TIME, January 11^th 1999, p. 20

17 Ins and outs, The Economist, January 2^nd 1999, p. 21

18 De Grauwe, Paul; Risks of a roofless Euroland; TIME, January 11^th 1999, p. 29

19 TRICHET, Jean-Claude; It′s only the beginning; TIME, January 11^th 1999, p. 28

20 Gambling on the Euro; The Economist, January 2^nd 1999, p. 19