Creating The Euro Zone
The introduction of euro notes on January 1, 2002 was the culmination of a long, drawn-out process to transform the European Union into a monetary union. The idea to introduce a single currency in Europe had been floated as early as 1969, when heads of state and government commissioned Luxembourg’s Prime Minister Pierre Werner to construct a blueprint for achieving monetary union. These plans stalled throughout the 1970’s, although from 1979 EU states developed an exchange rate mechanism that featured fixed but adjustable exchange rates. The Maastricht Treaty, signed in 1991, formally laid out the path to a single currency. Maastricht, also known as the Treaty on European Union, created the European Central Bank, which would control monetary policy in the envisaged currency union. The treaty also set out the convergence criteria, which were economic performance indicators that countries would have to achieve before they would be allowed to adopt the euro.
The European Central Bank in Frankfurt
What factors explain the desire to form a monetary union? In part, the adoption of a common currency was a natural outgrowth of the creation of a single market, a project that had been given impetus by the European Commission headed by Jacques Delors from 1985-1994. The single market refers to the elimination of barriers to the free movement of goods, capital, services, and people between the member states. Given the increased economic ties and interdependencies that had arisen as a result of the single market project, a common currency would simplify economic exchanges and negate the need to exchange currencies. In addition to these practical benefits, others believed that a single currency would have symbolic importance, signifying Europe’s commitment to integration. The provisions of the Maastricht Treaty dealing with the common currency created opt-out options for Denmark and the United Kingdom, neither of which wished to join the monetary union. Sweden, while not having negotiated a formal opt-out, has also not joined. All states that join the European Union following Maastricht, however, are required to adopt the euro once they have met the convergence criteria. Currently, 17 of the EU’s 27 member states use the euro.
There have been criticisms of the currency union from both theoretical and practical sides. On the practical side, many point to the fact that the convergence criteria were not treated very seriously from the outset, as even Germany and France, the leading economic powers in the euro zone, were allowed to join despite having exceeded the debt and deficit limits set by the treaty. Some have argued that this lax attitude towards flouting the convergence criteria enabled the huge deficits in places like Greece and elsewhere that led to the recent currency crisis. Others have criticized the euro on theoretical grounds, arguing that the EU does not constitute an Optimum Currency Area (OCA). An OCA should have high capital and labor mobility, a mechanism for fiscal transfers to disadvantaged regions, and similar business cycles. See here and here for forceful critiques of the idea that Europe is an OCA. Other scholars have demonstrated that the euro has not increased trade among member states to the degree that was expected.
Does the recent euro crisis reflect structural flaws that no amount of economic and institutional reform can hope to reform? If the eurozone were to break up, would that spell doom for the broader European integration project? Or can the right mix of policy reforms at the domestic and EU levels help avoid the predictions of the pessimists? Overall, has the euro been a success, and has it lived up to its promises? These are some of the most important questions that observers will be asking in the near future. The EU Center at Indiana University blog “Across the Pond” continually covers the European Debt Crisis and its impact on the US.
For an excellent analysis of the history and politics of the euro, see The Euro: The Politics of the New Global Currency, by David Marsh.
For more information on the One State, One World series, please visit http://indianapublicmedia.org/onestateoneworld/. This episode of One State One World is produced in partnership of WFIU Public Radio and the EU Center at Indiana University through a grant from the European Union.