Euro

Origins of the Euro

The Euro was introduced in 1999 to progress towards a closer political union. Before its existence, the common market was attempting to function across eight different currency zones resulting in trade between states being negatively affected by currency instability. To reduce currency instability, an exchange rate mechanism was introduced and this was used as a building block to create the single currency of today. The exchange rate mechanism has fixed exchange rate bands and participating countries could vary within those bands to eventually narrow the margins, therefore making it more difficult for states to use their currency in the exchange rate mechanism. Each state used economic policies to keep their currency roughly in line with other currencies, so that eventually all currencies would be locked together at the same value in perpetuity in relation to the average value of all currencies as part of the Delors plan 1989. Each state had to prepare to join the Euro, every economy was to converge together so on certain key economic measures it would look like the economies were identical, they had to give up control of some aspects of economic policy for example the management of montary policy. However the issue with this is if one econom is in recession, another is and so on due to the contagion effect a single currency would have. The interest rates of the Euro were set by an independent body, the European Central bank based in Frankfhurt and uses a model based on the Bundesbank in Germany. 

Timeline of the introduction of the Euro

While the Delors plan had set out to eventually converge all currencies into a single one, it had not yet set a date. The European central bank was set up in 1994 and in 1995 it was announced that the Euro was to be introduced in 3 stages. In 1998, it was determined which states had met the convergence critera and in 1999 currencies would be locked together permanently with a fixed exchange rate at the point of entry, the value was decided by an average value of all participating currencies. The electronic currency was introduced, at this point, there were no notes or coins and the Euro took the physical form of the country's home currency. In 2001, notes and coins were issued and national currencies were withdrawn. 

Convergence criteria

The convergence criteria was a set of standards which member countries had to meet to be able to join the Euro as entry was not automatic. A weak currency would be prone to inflation therefore they wanted inflation proof economies and for the Euro to be a strong currency. The criteria were: similar low inflation rates, similar interest rates, government borrowing had to be under control; budget defecits of no more than 3% of domestic GDP, national debt could not be more than 60% of GDP and currency had to have remained in the narrow band of the exchange rate mechanism for the previous 2 years. The delors…