Europe in 12 lessons – Lesson 6: The Euro

The Euro is the
single currency shared by 17 of the 27 member states of the European Union.
Each of the new EU member states is expected to adopt the euro once it meets
the necessary criteria. In the long run, virtually all EU countries should join
the euro area.

The euro gives consumers in Europe considerable
advantage. Travellers are spared the cost and inconvenience of changing
currencies. Shoppers can directly compare prices in different countries. Prices
are stable thanks to the European Central Bank, whose job is to maintain this
stability. Moreover the euro has become a major reserve currency, alongside the
US dollar. During the 2008financial crises, having a common currency protected
euro area countries from competitive devaluation and from attack by
speculators.

Its creation

At the European Council in Madrid in June 1989,
EU leaders adopted a three stage plan for economic and monetary union (EMU):

1.  Stage one began on 1 July 1990, involved completely free movement of
capital within the EU, increasing the Structural Funds to remove inequalities
and economic convergence.

2. Stage two
began on 1 January 1994. It involved setting up the European Monetary Institute
(EMI) in Frankfurt made up of the central banks of the EU countries; making
national central banks independent of government control and introducing rules
to curb national budget deficits.

3. Stage three was
the birth process of the euro. From 1 January 1999 to 1 January 2002, the euro
was phased in as the common currency of EU countries that participated.

Counties having the Euro currency

Denmark, Sweden and the UK decided, for political and
technical reasons, not to adopt the euro when it was launched. Slovenia joined
the euro area in 2007, followed by Cyprus and Malta in 2008 and Slovakia in
2009 and Estonia in 2011. More countries are let to join once they have meet
the 5 convergence criteria:

Price stability, Interest
rates, Deficits, Public
debt & Exchange
rate stability

The Stability
and Growth Pact

In June 1997, the Amsterdam European Council adopted a
Stability and Growth Pact. This was a permanent commitment to budgetary
stability, and made it possible for penalties to be imposed on any country in
the euro area whose budget deficit exceeds 3% of GDP.

Macroeconomic convergence since 2007: the effects of
the crises

The 2008 financial crisis considerably increased
public debt in most EU countries. Having a common currency however protected
euro-area countries from competitive devaluation and from attack by
speculators. In 2010 the EU member states decided to set up a financial
stabilisation mechanism for the Euro area, providing €750B in funds from the member
states.

At the same time, the EU member states and
institutions brought provisions designed to strengthen the EU's economic
governance: prior discussion of national budget plans, monitoring national
economies and tightening the rules on competitiveness and reviewing the
sanctions to be applied if countries breach the financial rules. The EU is
having to take tougher action to ensure the member states manage their budgets
responsibly and support one another financially.

This is a way to ensure the euro remains credible as a
single currency and that the member states can, together, face the economic
challenges of globalisation.