The euro (ISO CODE = EUR) is the official currency of the European Union. The euro sign € is the letter E crossed by two lines which indicate the stability of the euro. This euro symbol is inspired by the Greek epsilon, pointing back to the cradle of European civilisation and the first letter of "Europe" (COM/97/0418).
The launch of the single currency, on 1 January 1999, marked the beginning of the third stage of economic and monetary union (EMU). The Council Decision of 3 May 1998 (98/317/EC) declared that 11 of the then 15 EU Member States (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) had fulfilled the necessary conditions for the adoption of the single currency, while Monaco, San Marino and the Vatican City (non-EU Member States) were allowed to adopt the euro on the ground of monetary agreements with the EU. The Council Regulation 2866/98/EC defined that one euro was equal to: 13.7603 Austrian schillings, 40.3399 Belgian francs, 2.20371 Dutch guilders, 5.94573 Finnish markkas, 6.55957 French francs, 1.95583 German marks, 0.787564 Irish pounds, 1,936.27 Italian lire, 40.3399 Luxembourgian francs, 6.55957 Monegasque francs, 200.482 Portuguese escudos, 166.386 Spanish pesetas.
Two years later, on 19 June 2000, the Council decided (2000/427/EC) that Greece could join the euro area in January 2001 (1 EUR = 340.75 Greek drachmas). After the EU enlargement to 27 States in 2004, also the new EU members were required to fulfil the condition for the euro adoption. This commitment was considered a necessary step in order to maintain the potential benefits of a currency union such as a strong policy discipline, an economic and financial integration of the economy with the euro area, a reduction of transaction costs and a decrease in the interest rates via the elimination of the exchange rate risk premium. Slovenia was the first of the EU-10, in January 2007, to abandon the national currency and to introduce the euro (1 EUR = 239.64 Slovenian tolars), followed by Cyprus and Malta in 2008 (1 EUR = 0.585274 Cypriot pounds and 0.4293 Maltese liri), and Slovakia in 2009 (1 EUR =30.126 Slovak korunas).
1. Conditions for the euro adoption
According to article 140 of the Treaty on the Functioning of the European Union (ex art.121 of the EC Treaty), Member States have to meet two basic conditions to join the EMU. First, the Member State's national legislation, including its national central bank regulation, must be compatible with the acquis communautaire. The second requirement entails the achievement of a high degree of sustainable convergence, whose assessment is based on the following criteria:
- Price stability
Article 140(1), first indent, of the Treaty requires: "the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best performing Member States in terms of price stability". This means that, as explained by article 1 of Protocol on convergence criteria (No 13), a Member State should perform an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1.5 percentage points that of, at most, the three best performing Member States in terms of price stability. Inflation is measured on a comparable basis, using the Harmonised Index of Consumer Prices (HICP).
- Government budgetary position
Article 140(1), second indent, of the Treaty requires: "the sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive [...] ".
According to Article 126 of the Treaty, Member States present an excessive deficit if:
(a) the ratio of the planned or actual government deficit to GDP exceeds a reference value unless:
- either the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively,
- the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;
(b) the ratio of government debt to GDP exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace. The reference values are set in the Protocol on the excessive deficit procedure respectively as 3 and 60 percent of GDP.
- Exchange rate stability
Article 140(1), third indent, of the Treaty requires: "the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the euro".
With regard to the participation in the Exchange Rate mechanism of the European Monetary System (from January 1999, the Exchange-rate mechanism (ERM) has been substituted by the Exchange-rate mechanism II (ERM II)), as also specified in article 3 of Protocol (No 13), it is aimed to ensure that a Member State has respected the normal fluctuation margins without severe tensions for at least the last two years before the examination. For the same period the Member State is also required not to have devalued its currency’s bilateral central rate against the euro on its own initiative. In particular, the absence of "severe tensions" is generally assessed by analysing the degree of deviation of exchange rates from the ERM II central rates against the euro and by using other indicators, such as short-term interest rate differentials vis-à-vis the euro area, and other variables, as well as international financial assistance in stabilising the currency.
- Convergence of long-term interest rates
Article 140(1), fourth indent, of the Treaty requires: "the durability of convergence achieved by the Member State with a derogation and of its participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels".
In particular, article 4 of Protocol (No 13) on the convergence stipulates that: "a Member State has had an average nominal long-term interest rate that does not exceed by more than two percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates shall be measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions". In case no harmonised long-term interest rate is available, a broad analysis of financial markets is conducted, taking into account the level of government debt, the level of spreads directly derived from monetary and financial statistics, sovereign credit ratings and other relevant indicators, with a view to assessing the durability of the convergence achieved by the Member State and of its participation in the ERM II1.
The European Commission and, in parallel, the ECB (according to art. 140 of the Treaty) report to the Council of the European Union (the Council) at least once every two years … or at the request of a Member State with a derogation … "on the progress made in the fulfilment by the Member States of their obligations regarding the achievement of economic and monetary union". The "convergence report" is the final document issued that contains a preliminary assessment for each member state. Then, the Council of EU finance ministers (ECOFIN) takes the final decision, after receiving the opinion of the Parliament.
2. Coins and banknotes
Euro banknotes and coins were introduced as the sole legal tender for the first time on 1 January 2002. Since then, four more cash changeovers have been pursued following the euro adoption in Slovenia, Cyprus, Malta and Slovakia. Euro coins exist in eight different denominations: 1, 2, 5, 10, 20 and 50 cents, €1, €2. They present a common side and a national side. For the selection of the design of the first common sides, a competition was organised at European level, and on 16 June 1997 the Amsterdam European Council decided and made public the winning series. The €2 and €1, 50, 20 and 10 cent common side designs have been modified on 7 June 2005 by the Council. Indeed, the original design was the European Union before it was enlarged from 15 to 25 Member States in 2004, so since 2005, also the new entrants have been represented. The remaining denominations, showing Europe in relation to Africa and Asia on a globe, remained unchanged overtime. Euro coins incorporate sophisticated features that protect them against counterfeiting. Banknotes series also comprise different denominations, that is €5, €10, €20, €50, €100, €200 and €500, and they present uniform designs inspired to architectural styles from different periods in Europe's history. The banknotes as well incorporate sophisticated security features preventing the production of counterfeits.
3. The process of euro adoption
The origins of the introduction of a single currency date back to the Barre report of February 1969. Raymond Barre, the Vice-President of the Commission with special responsibility for monetary affairs, expressed the need for greater coordination of Member States’ economic policies to limit the scope for speculative attacks against the European currencies. Indeed, since November 1968, the United States economic imbalances undermined the international credibility of the dollar and, consequently, the European money market was affected by strong instability. The plan launched by Raymond Barre resulted, at the Hague summit in December of the same year, in the official decision to realize an economic and monetary union by stages. In accordance with the directives issued by the Conference of Heads of State or Government, in October 1970 the Group presided by Pierre Werner proposed a plan. The achievement of the EMU should have been realized in a decade following three main phases: the liberalization of capital movements, the irrevocable fixing of parities, and the replacement of national currencies with a single currency. However, the proposal of irrevocably fixing parities soon came in contrast with the collapse of the Bretton Woods Agreements in 1971, and the subsequent first oil crisis. The attempts to limit the international economic crisis delayed the full realization of the plan and led to the creation of the so-called "snake", which allowed currencies to move within a fluctuation band. In accordance with this experiment, in March 1979, the European Exchange Rate Mechanism (ERM) was officially introduced as part of the European Monetary System (EMS). The central rate value was determined as a weighted average of the participating currencies, the European Currency Unit (ECU). The monetary integration process experimented a revival seven years later. In 1986, the Single European Act was adopted with the aim of conceaving a European single internal market on both the economic and monetary ground. The decisive step toward the single currency adoption was taken in 1992, when the Maastricht Treaty defined the three stages of the EMU and set out the economic and legal conditions member states had to meet to join it. In September of the same year, all currencies participating in the EMS came under strong speculative attacks that marked the renewal of a need for monetary stability. In the second stage of the EMU, the European Monetary Institute (EMI) was established, anticipating the institution of as the European Central Bank (ECB), and the general term ECU was replaced by the "Euro"at the Madrid summit in 1995. In June 1997, the European Council in Amsterdam agreed to the Stability and Growth Pact and set up the ERM II, which would succeed the European Monetary System and the ERM after the launch of the euro. The second stage was concluded with the council regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro.
France, Germany, Austria, Belgium, the Netherlands, Luxembourg, Finland, Ireland, Italy, Spain, and Portugal were declared ready to adopt the euro in 1999 and the European Central Bank (ECB) was founded. The regulation was amended in occasion of the enlargement of the euro area, by regulation (EC) No 2596/2000 on the introduction of the euro in Greece as from 1 January 2001, by regulation (EC) No 1647/2006 on the introduction of the euro in Slovenia as from 1 January 2007, and by regulation (EC) No 835/2007 and No 836/2007 on the introduction of the euro in Cyprus and Malta respectively as from 1 January 2008.
The adoption of the single currency as legal tender in the euro area since 2002 has affected the international money market, gradually changing the trade invoicing and asset denomination in world transactions, as well as the international reserves composition.
1.Source: European Central Bank Statistics, http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html
The euro has limited the dollar hegemony and the euro dollar exchange rate is generally used to evaluate its performance. After an initial appreciation on its first trading (1.1819 USD per euro on 5 January 1999) a strong downtrend started, which culminated on 25 October 2000, when the euro slumped to its weakest level of 1 EUR = 0.8272 USD. Since the end of 2002, the euro climbed on an uptrend that picked up to 1.3668 USD on 30 December 2004. After a flat phase, the euro appreciated against the dollar in 2006 to 1.2958 USD. The incidence of the sub-prime crisis, with a weakened dollar, led the single currency to break the psychological barrier of 1.50 in February 2008, offset in 2009, in the presence of portfolio flows towards some US economic segments and a closing gap between the interest rates of the two world economies2. When the financial market tensions seemed vanishing, the euro came under severe pressure and slumped to 1.2424$, as a consequence of the unsustainability of the Greek public finance3.
Updated data and charts on USD/EUR exchange rates can be found at http://uk.finance.yahoo.com/q?s=EURUSD=X. On the European Central Bank (ECB) website (http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html), data on all the currencies quoted against the euro (base currency) and the nominal effective exchange rates of the euro, based on weighted averages of bilateral euro exchange rates against 21 major trading partners of the euro area (http://www.ecb.int/stats/exchange/effective/html/index.en.html), are available.
Council of the European Union (The euro and the economic policy) www.consilium.europa.eu
Official Euro Website: http://www.ecb.int/euro/html/index.en.html
1 ECB Convergence Report 2010.
2 ECB Annual Report 2009.
3 For a snapshot of the euro's performance against the U.S. dollar since its launch in January 1999, read also "Timeline: Milestones in euro's history since 1999", http://www.reuters.com/article/idUSTRE64G2KP20100517
EUROPEAN CENTRAL BANK, Special edition of the Monthly Bulletin, May 2008
EUROPEAN CENTRAL BANK, ECB Annual Report 2009, April 2010
EUROPEAN CENTRAL BANK, ECB Convergence Report 2010, May 2010.
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