Economic and Monetary Union and the Euro

5. What the Euro has brought?

1 January, 2007 marked the fifth anniversary of the euro, in its form as a physical currency. Its introduction has widely been seen as a success story. The strong and stable euro has become one of the two leading international currencies in the global economy.

Eurozone members benefit from being part of a larger currency bloc. It’s much harder, for example, for speculators to make quick gains on trading currencies and thereby remove much of the pressure which affects value. Speculators brought chaos to the ERM in the early 1990s and caused first the pound and then the lira to drop, but they have not, thus far, caused major damage to the euro. As a consequence, the Eurozone is more capable of absorbing price hikes than individual member-states. The euro's influence is also spreading further. Trade outside the Eurozone accounts for just over one-third of Eurozone gross domestic product (GDP), yet exchange rates have an effect on this. A strong euro harms exporters and discourages foreign investment in the Eurozone but helps importers and Eurozone investments elsewhere in the world.

For EU citizens, travelling within the Eurozone is far easier, with no cumbersome changes of currency needed. Also, comparing prices of goods and services is easy, which contributes to the better functioning of the internal market and supports healthy competition, thus benefiting consumers. The overall economic and price stability brought by the euro is favourable for the whole economic climate, from families to businesses. Current figures estimate that the introduction of the euro has boosted intra-euro area trade by 5-15%.

While the euro’s practical benefits are widely acknowledged, the changed economic-policy-making environment it has ushered in has caused problems for politicians. Not only have governments found it difficult to work with the economic policy constraints of the euro, some have taken to blaming the euro for constraining their efforts.

Perhaps the most frequent complaint from member states is that they are unable to set their own interest rates. Recently, a number of politicians, notably in Germany, France and Italy, have called for lower interest rates to stimulate growth. But with the ECB setting its main rate at just 2% from June 2003 until December 2005, these individuals seemed oblivious to the fact that the Eurozone countries had lower interest rates than they’d had for decades. The inability of member states to alter interest rates also means they cannot unilaterally lower interest rates to encourage investment or raise them to encourage saving. A single European currency means a single European monetary policy. Even if there is no single European economic policy, all the Eurozone member states have to operate their own economic policies within limits set by the EU.

Eurozone-scepticism

Many people, especially the elderly, still tend to convert euros into their former currency, especially when high sums are involved. In November 2006, the Deutsche Bundesbank published a survey suggesting that 77% of German citizens still calculate in marks. 94% of them had no idea that EUR 500-notes were purple and 74% hated having a EUR 100-note screened in a scanner. Even today more than 14.4 billion D-Marks (around 7.2 billion EUR) are still being saved in cupboards or socks. It seems that some German citizens don’t trust their new currency, and as the old mark can always be exchanged for free at federal banks, there’s no hurry. This is, perhaps, indicative of a general level of caution on the part of Europeans, but it is also a symptom of mistrust many member states have towards the EU.

The main fear of the euro is price inflation – which was significantly fuelled by reporting following the 2002 euro changeover. The average citizen could manage a rough conversion from the old currency to the euro. But only those who systematically wrote down prices would have had an accurate view of the changing prices for a broad spectrum of goods. In practice, therefore, individuals gained an impression of the changing prices from a small number of low-value, everyday purchases – a cup of coffee or a beer, a loaf of bread, a newspaper, etc. – whose prices they remembered. Low-value items purchased daily and the prices of some services have shown a more considerable price increase than higher-priced goods and services. Low-value purchases seem much altered when their prices are rounded, as is the case with most Eurozone countries.

Rounded prices make life easier for both buyer and seller (the 1 cent and 2 cent coins are no longer produced in the Netherlands or Finland, although they remain legal tender) but they tend to give the wrong impression about the relative value of the euro.

In this context there’s another phenomenon: The further the use of the old currency dates back, the stronger the feeling that prices have risen. The reason for this is that prices in euro of today are being compared to prices in the past. Often neglected, however, is that with the old currency there would have been higher prices due to inflation.

Belying the general impression, surveys done for the Commission have shown that, overall, the changeover to the euro did not bring significant price increases. Overall the effect of the cash changeover on prices was on average smaller than 0.3%.

Some new member states are considering holding referendums on whether to join the Eurozone once they have fulfilled the convergence criteria. Denmark and Sweden have both held referendums on joining the euro since 1999 with negative results on each occasion.

In June 2005, Stern magazine reported that 56% of German respondents said they’d favour a return to the Mark. Some Italian politicians have called for Italy to withdraw from the euro, most famously Silvio Berlusconi. The separatist “Northern League” of Italy proposed to hold a referendum on returning Italy to the Lira, and many far-right parties throughout the EU have called for a return to national currencies, although these are more concerned with nationalism than with the EMU and the success of the euro.

The European Commission, for its part, has ruled out the possibility of any Eurozone country abandoning the new currency. The euro is here to stay, as the benefits far outweigh any problems, on national as well as European level.

Future of the EMU

The major issue for the EMU in the coming years, as for the Union as a whole, will be European vs. national interests. In January 2007, the Financial Times reported that a majority of the citizens of France, Italy and Germany believed that the euro had damaged their national economies while having a positive effect on the EU economy as a whole. By contrast, a different survey conducted for the International Herald Tribune showed confidence in the euro. According to the March 2007 survey, 89 percent of the people in France and Italy, 93 percent in Spain and 83 percent in Germany believe the euro to be the standard currency in Europe in the year 2057.

Whether or not the perceptions of Eurozone sceptics are well-placed when it comes to national economies is debatable, as it might be argued that larger, more established countries must experience economic downturns in order to bring new member states up to par. In fact, the euro area in 2006 recorded its highest growth since 2000 and further growth projections have been revised upwards. Too, the German economy began to recover in the beginning of 2007. Thus, the Eurozone economy remains strong, with recent fluctuations in interest rates less for the euro than for the dollar.

The euro has displaced the dollar as the pre-eminent currency in international bond markets and the euro now accounts for just over 25% of international reserves, having gained ground at the expense of the dollar.

eu4journalists

Dossiers

Basics

Contact Guide