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The Euro - success and its significance
by Harriet Matejka, Honorary Professor, Graduate Institute of International Studies, Geneva
.
Article added on March 1, 2002
 
On January 1, 1999, a common currency, the Euro, was adopted by, at the time, eleven EU countries. A fixed exchange rate was established between each of the national currencies and the Euro, and, thereby, between the national currencies themselves. The pegging was permanent so that the exchange rate risk, and its cost, disappeared within the Euro area. Internationally, the Euro rate was flexible in terms of other currencies and, starting initially at 1 Euro to $1.18, depreciated to an average of $0.88 in the first eight weeks of 2002. On January 1, 2002, Euro notes and coin replaced the national currencies of the twelve EU countries, which, by then, were members of the area. Only Denmark, Sweden and the UK chose to remain outside it. The event was hailed as historic. Was it? Or was it just one further step along the road to full economic integration and, more exhilaratingly, the union of a continent?
 
The introduction of Euro notes and coin was, first, a technical feat. Begun well before the adoption of the common currency in 1999, it involved the design of six notes and coin, their production and delivery to banks and stores, the counseling of producers and distributors, and the information of, and assistance to, the public. By the fourth quarter of 2001, bank statements were issued in Euro, during December Euro coin kits were sold to the population, shortly after mid-night on December 31, bank automats delivered Euro notes, and on January 2, 2002, prices were expressed in Euro and queues of clients were forming in banks across Europe to exchange old money for new. The German mark ceased to be legal tender on December 31, 2001 already, the guilder on January 27, the punt on February 10, the French franc on February 17, 2002, and the remaining eight currencies ceased to be so on February 28, 2002.
 
The substitution of Euro for national notes and coin aroused three fears. They were that robbery would impede the introduction of the new currency, that price conversion would be inflationary, and that citizens would refuse to give up their national currencies. But these fears proved unfounded. Cash transports were, with few exceptions, not intercepted and ships carrying notes and coin to Guadeloupe and other points overseas arrived safely. Price conversion led to rounding but no inflationary drift could be discerned. Surveillance was strict and continues. In France, for instance, retail chains have agreed to the Ministry of Finance's request that they maintain the dual pricing in francs and Euro begun on January 2 until June 2002. The inhabitants of the twelve countries, finally, rushed to substitute Euro for their national currencies.
 
The Euro rush came as a surprise in Germany in particular. For national currency is widely believed to be one of the symbols of national identity, like the national flag and the national anthem, and thus difficult to abandon for emotional reasons. The behaviour of the inhabitants of the Euro area was thus variously interpreted to mean a waning of national sentiment or, on the contrary, a waxing of a new European sentiment. But the explanation may be purely economic. Money is a good which exchanges for any other good. The population of the twelve were asked to exchange their national currencies for money which had the same properties, including convertibility, as their own, but which had the added advantage of being legal tender in an area of 304 million inhabitants. Clearly the new currency was preferable to the old.
 
Second, the introduction of the Euro notes and coin is bringing economic gain. To begin with, the common currency, in replacement of the twelve national monies, has eliminated the cost of converting one into another. Transaction cost has fallen. Further, the transparency introduced by area-wide Euro prices promotes comparison, exchange and a more efficient allocation of resources. To this should be added the increase in demand for Euro given the elimination of conversion cost. Other things equal, therefore, the Euro must strengthen relative to other currencies, and the benefit be a fall in the cost of visible and invisible imports.

Third, and essentially, the introduction of Euro notes and coin all but completes the creation of the European monetary union. Barriers to the free flow of money within the area remain. Thus bank charges are higher for cross-frontier transfers within it than they are for domestic transfers. And, in general, charges on the use of bank-cards are higher elsewhere in the area than they are domestically. But, following the adoption of a new EU regulation on December 13, 2001, these discriminatory barriers against Euro partners are scheduled to disappear by July 1, 2002, in the case of bank-cards, and of July 1, 2003, in the case of transfers. Thereafter, charges on bank-cards, and those on transfers, will be uniform throughout the union. The efficiency with which the introduction of the Euro as legal tender has been conducted has also revived the debate on membership of the area in the three EU countries that remain outside it. In the UK, the minister for European Affairs has even gone so far as to suggest that the referendum on entry could take place before the next general election. Given its implications for monetary union, the introduction of Euro notes and coin can thus be regarded as a major contribution towards the full economic integration of the EU.
  
The institutional framework for the macroeconomic regulation of the monetary union remains incomplete, it is true. For while the ECB is in charge of monetary policy, no European finance ministry exists to take charge of fiscal policy. Taxation and budgets remain national. But the introduction of Euro notes and coin will act as an integration lever here too. Area-wide Euro prices will reveal differences in taxation, notably VAT, rates among member countries and set in motion pressures for their standardization. Uniform rates will, in turn, require closer budget coordination and, possibly, EU funding. In short, the Euro as legal tender will prompt integration in the fiscal field.
 
Lastly, the success of the switch to Euro notes and coins has freed the EU for the convention which started on February 28 and is to propose a reform of the EU's institutions in preparation for eastern enlargement. This is expected to take place in 2004. With the creation of the monetary union behind it, the EU is also free to undertake the further tasks of building an European army and of conceiving and conducting a common foreign policy. In sum, the introduction of the Euro as legal tender, constitutes not only a major advance towards full economic integration, it is also serving to bring the union of the continent closer. But does this suffice to make it an historic event which will remain in people's memories down the ages? Time only can tell.

Books suggested by Louis Gerber:
Essential are the works by Robert A. Mundell, Nobel Prize, Economic Sciences, 1999, "for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas":
- Mundell: "A Theory of Optimum Currency Areas", 1961, American Economic Review 51: 657-665.
- Mundell: "Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates", 1963, Canadian Journal of Economics 29: 475-485.
- Mundell: International Economics, New York, MacMillan, 1968.
 

- Michael Burda & Charles Wyplosz: macroeconomics: A European Text. OUP, third ed., 2001. Get it from Amazon.co.uk.
- David. K.H. Begg, Charles Wyplosz, ed. et al.: Emu: Prospects and Challenges for the Euro. Blackwell Publishers, 1998. Get it from Amazon.com.
- Robert A. Mundell, Armand Clesse, ed.: The Euro As a Stabilizer in the International Economic System. Kluwer Academic Publishers. Get it from Amazon.com.






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