Introduction of the euro
Encyclopedia
The euro
came into existence on 1 January 1999, although it has been a goal of the European Union
(EU) and its predecessors since the 1960s. After tough negotiations, particularly due to opposition from the United Kingdom
, the Maastricht Treaty
entered into force in 1993 with the goal of creating economic and monetary union
by 1999 for all EU states except the UK and Denmark (even though Denmark has a fixed exchange rate policy with the euro).
In 1999 the currency was born virtually and in 2002 notes and coins began to circulate. It rapidly took over from the former national currencies
and slowly expanded
behind the rest of the EU
. In 2009 the Lisbon Treaty formalised its political authority, the Euro Group
, alongside the European Central Bank
.
in Europe were raised well before establishing the European Communities
. For example, already in the League of Nations
, Gustav Stresemann
asked in 1929 for a European currency against the background of an increased economic division due to a number of new nation states in Europe after WWI
. At this time memories of the Latin Monetary Union
involving principally France
, Italy
, Belgium
and Switzerland
and which, for practical purposes, had disintegrated following the First World War, will have figured prominently in the minds of policy makers.
A first attempt to create an economic and monetary union between the members of the European Economic Community
goes back to an initiative by the European Commission
in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation." This was followed up at a meeting of the European Council
at The Hague
in December 1969. The European Council tasked Pierre Werner, Prime Minister of Luxembourg, with finding a way to reduce currency exchange rate volatility. His report was published in October 1970 and recommended centralisation of the national macroeconomic policies entailing "the total and irreversible fixing of parity rates and the complete liberation of movements of capital." But he did not propose a single currency or central bank. An attempt to limit the fluctuations of European currencies, using a snake in the tunnel
, failed.
In 1971, US President
Richard Nixon
removed the gold backing from the US dollar
, causing a collapse in the Bretton Woods system
that managed to affect all of the world's major currencies. The widespread currency floats and devaluations set back aspirations for European monetary union. However in March 1979 the European Monetary System
(EMS) was created, fixing exchange rates onto the European Currency Unit
(ECU), an accounting currency
, in order to stabilise exchange rates and counter inflation. It also created the European Monetary Cooperation Fund
(EMCF).
In February 1986 the Single European Act
formalised political co-operation
within the Community
including competency in monetary policy. European Council summit in Hannover on 14 June 1988 began to outline monetary co-operation. France
, Italy
and European Commission
backed a fully monetary union with a central bank, which British Prime Minister
Margaret Thatcher
opposed.
The Hannover European Council asked Commission President
Jacques Delors
to chair an ad hoc committee of central bank governors to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. This way of working was derived from the Spaak method
.
France and the UK were opposed to German reunification
, and attempted to influence the Soviet Union
to stop it. However, in late 1989 France extracted German commitment to the Monetary Union in return for support for German reunification.
The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions such as the European System of Central Banks
(ESCB), which would become responsible for formulating and implementing monetary policy. It laid out monetary union being accomplished in three steps. Beginning the first of these steps, on 1 July 1990, exchange controls were abolished, thus capital movements were completely liberalised in the European Economic Community
. Leaders reached agreement on currency union with the Maastricht Treaty
, signed on 7 February 1992. It agreed to create a single currency, although without the participation of the United Kingdom
, by January 1999.
Gaining approval for the treaty was a challenge. Germany
was cautious about giving up its stable currency, i.e. the German Mark
, France approved the treaty by a narrow margin and Denmark
refused to ratify until they got an opt out from monetary union as the United Kingdom, an opt-out which they maintain as of 2011. On 16 September 1992, known in the UK as Black Wednesday
, the British pound sterling
was forced to withdraw from the fixed exchange rate system due to a rapid fall in the value of the pound.
Delors' second stage began in 1994 with creation of the European Monetary Institute
, succeeding the EMCF, under Maastricht. It was created as the forerunner to the European Central Bank
. It met for the first time on 12 January under its first President, Alexandre Lamfalussy
. After much disagreement, in December 1995 the name euro was adopted for the new currency (replacing the name Ecu used for the previous accounting currency), on the suggestion of then-German finance minister Theo Waigel. They also agreed on the date 1 January 1999 for its launch.
On 17 June 1997 the European Council
decided in Amsterdam to adopt the Stability and Growth Pact
, designed to ensure budgetary discipline after creation of the euro, and a new exchange rate mechanism (ERM II) was set up to provide stability above the euro and the national currencies of countries that hadn't yet entered the eurozone. Then, on 3 May 1998, at the European Council in Brussels, the 11 initial countries that would participate in the third stage from 1 January 1999 were selected. In order to participate in the new currency, member states had to meet strict criteria
such as a budget deficit of less than 3% of their GDP, a debt ratio of less than 60% of GDP
, low inflation
, and interest rates close to the EU average. Greece
failed to meet the criteria and was excluded from participating on 1 January 1999.
On 1 June 1998 the European Central Bank
succeeded the European Monetary Institute
. However it wouldn't take on its full powers until the euro was created on 1 January 1999. The bank's first President was Wim Duisenberg
, former head of the EMI and the Dutch central bank
. The conversion rates between the 11 participating national currencies and the euro were then established. The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998, so that one ECU would equal one euro. These rates were set by Council Regulation 2866/98 (EC), of 31 December 1998. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro.
The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new notes
and coins
were introduced on 1 January 2002. Beginning on 1 January 1999, all bonds and other forms of government debt by Eurozone nations were denominated in euros.
On the first day of trading, 5 January, since its launch, the euro climbed to 1.19 USD
. It was rapidly taken up and dealers were surprised by the speed at which it replaced the national currencies. Trading in the Deutsche Mark was expected to continue in parallel but vanished as soon as the markets opened. However, by the end of 1999 the euro had dropped to parity with the dollar leading to emergency action from the G7 to support the euro in 2001.
Later in 2000, Denmark held a referendum
on whether to abandon their opt-out from the euro. The referendum resulted in a decision to retain the krone
, and also set back plans for a referendum in the UK as a result. The procedure used to fix the irrevocable conversion rate of 340.750 between the Greek drachma
and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced as a virtual currency, the conversion rate for the Greek drachma was fixed several months beforehand, in Council Regulation 1478/2000 (EC), of 19 June 2000.
, Finland
, France
, the Netherlands
, and Spain
, the new coins would bear the date of striking, so those 5 countries would be the only ones to strike euro coins dated 1999, 2000, and 2001. Small numbers of coins from Monaco
, Vatican City
, and San Marino
were also struck. These immediately became popular collector's items, commanding premiums well above face value. New issues continue to do so to this day.
Meanwhile, a parallel task was to educate the European public about the new coins. Posters were issued showing the designs, which were used on items ranging from playing cards to T shirts. As a final step, on 15 December 2001, banks began exchanging "euro starter kits
", plastic pouches with a selection of the new coins in each country (generally, between 10 and 20 euros worth—though Finland's contained one of each coin, totalling €3.88). They would not be usable in commerce until 1 January, when notes would be made available as well. Larger starter kits, containing a roll of each denomination, were available as well in some nations.
Retailers and government agencies had a considerable task as well. For items to be sold to the public, dual pricing was commonly utilised. Postage stamps for governments (as well as stamps issued by the United Nations Postal Administration
for the UN offices in Vienna) often bore denominations both in the legacy currency and euros, assuring continued utility beyond 2001. Banks bore a huge task, not only in preparation for the change of the notes and coins, but also in the back office. Beginning in 1999, all deposits and loans were technically in euros, but deposits and withdrawals continued in the legacy currency. Statements would bear balances in both currencies beginning no later than 1 July 2001, and earlier if required by the customer's needs.
Beginning on 1 December 2001, coins and notes were distributed from secure storage, first to large retailers, and then to smaller ones. It was widely expected that there would be massive problems on and after 1 January. Such a changeover, across twelve populous countries, had never been attempted before.
As midnight struck to usher in 2002, a celebration took place outside European Central Bank offices in Frankfurt. A huge illuminated mock-up of a euro coin was displayed in front of the building.
When the celebration began, the new coins and notes had already been valid for one hour in Greece and Finland. In fact, they had been valid for three hours on the French island of Réunion
in the Indian Ocean
. The first official purchase using euro coins and notes took place there, for one kilogram of lychee
s. The coming of midnight in Frankfurt at the ECB offices, though, symbolised the transition.
In Finland, the Central Bank had opened for an hour at midnight to allow citizens to exchange currency, while a huge euro pyramid had decorated Syntagma Square
in Athens
, as the euro was welcomed to continental Europe. Other countries noted the coming of the euro as well—Paris's Pont Neuf
was decorated in EU colours, while in the northern German town of Gifhorn
a sombre, symbolic funeral for the Deutsche Mark took place.
Except for Germany
, the plan for introduction of the new currency was basically the same. Banks would accept the exchange of legacy currencies, begin to dispense euros from ATM
s, and only euros would be available as withdrawals were made, beginning on 1 January. Merchants would accept legacy currency, but give change only in euros. In Germany, the Deutsche Mark would no longer be a legal tender on 1 January, but would have to be exchanged at the banks.
Despite the massive amounts of euros available, chaos was feared. In France, these fears were accentuated by a threatened postal workers' strike. The strike, however, was settled. Similarly, workers at the French bank BNP Paribas
threatened to disrupt the introduction of euro currency with a strike. That was also settled.
In practice, the roll-out was smooth, with few problems. By 2 January, all ATMs in 7 countries and at least 90 percent in 4 others were issuing euros rather than legacy currency, with Italy, the worst offender, having 85% of ATMs dispensing euros. The unexpected tendency of consumers to spend their legacy currency, rather than exchange it at banks, led to temporary shortages of euro small change, with some consumers being given change in legacy currency.
Some businesses did take advantage of the currency exchange to raise prices. According to a study by the Deutsche Bundesbank
, there was a price rise, but consumers refused to buy as much. A coffee bar in Italy that took advantage of the transition to raise coffee prices by a third was ordered to pay compensation to customers.
However, even after the official dates, they continued to be accepted for exchange by national central banks for varying periods—and indefinitely in Austria
, Germany
, Ireland
, and Spain
. Coins from those four countries, Italy, and Finland remain exchangeable. The earliest coins to become non-convertible were the Portuguese escudo
s, which ceased to have monetary value after 31 December 2002, although banknotes remain exchangeable until 2022. All banknotes current on 1 January 2002 will remain valid until at least 2012.
Efforts to secure the return of German coins continue. In 2005, Deutsche Telekom modified 50,000 pay phones to take Deutsche Mark coins, at least on a temporary basis. Callers were allowed to use DM coins, at least initially, with the Mark pegged to equal one euro, almost twice the usual rate.
In France, receipts still indicate the value of products in the legacy currency along with the euro value, as do receipts in Slovenia. In other eurozone countries this has long been considered unnecessary. In June 2008, The New York Times
reported that many merchants in the French town of Collobrières, in Provence
, choose to accept exchangeable franc notes.
at $1.5916 on 14 July 2008. As its values increased against the pound sterling
in the late-2000s, peaking at 97.73p on 31 December 2008, its international usage grew rapidly. The euro grew in importance steadily, with its share of foreign exchange reserves rising from nearly 18% in 1999 to 25% in 2003 - while the dollar share fell by an equivalent margin. Alan Greenspan
in 2007 said the eurozone
had profited from the euro's rise and claimed it was perfectly conceivable that it could trade equally or become more important than the US dollar in the future.
theory; other reasons include similar skepticism of monetary unification as an evolutionary process as opposed to a political project that ignored fundamental elements of economics and a distrust of pegged currency exchange rates (as opposed to floating exchange rates) as a basis and an alternative to a single European currency.
Fred Bergsten of the Peterson Institute for International Economics in Washington DC was one of a few American economists optimistic about the euro. His analysis focused on European political economy rather than technical considerations like the theory of optimum currency area seeing its implications as ambiguous enough to permit a basically political decision. In the same vein, Jeffry Frieden, Political Scientist at Harvard, points out that most US economists failed to systematically include political factors in their analysis. By focusing only on the pure economics of the matter, they led themselves to unrealistic predictions. Charles Goodhart of the London School of Economics echoes a similar sentiment.
Some believed that a strong central state, which a sound euro seemingly required, would impede European economic liberalization. On the other hand, some credit the euro's success to the European Central Bank's (ECB) ability to follow a stability-oriented monetary policy without undue influence from national interests. This would not be possible without a certain amount of centralized power and decent incentives. George Selgin suggests that the ECB had an incentive to keep inflation low out of a desire to secure for the euro a prominent position in the international monetary market.
acceded to the eurozone. These were Slovenia in 2007, Cyprus and Malta in 2008 and Slovakia in 2009. Most other 2004 countries faced greater difficulties in fulfilling the criteria to join.
on 1 January 2007. The exchange rate between the euro and tolar had been set on 11 July 2006 at 239.640 SIT, but unlike the previous launches, cash and non-cash transactions were introduced simultaneously.
Cyprus replaced the Cypriot pound
with the euro
on 1 January 2008.
A formal letter of application to join the eurozone was submitted on 13 February 2007. On 16 May 2007 the European Commission
, backed by the European Central Bank
, gave its go-ahead for the introduction in January 2008.
The campaign to inform the citizens of Cyprus about the euro officially began in Cypriot media on 9 March 2007. On 15 March 2007, the Cypriot House of Representatives passed the necessary laws for the introduction of the euro on 1 January 2008. The European Commissioner for Economic & Financial Affairs
Joaquín Almunia
, on 16 May 2007, recommended that Cyprus adopt the euro as scheduled and the European Parliament concurred on 21 June 2007, the date was confirmed by the EU leaders. The final decision was taken by the EU finance ministers (Ecofin
) on 10 July 2007 and the conversion rate was fixed at 0.585274 CYP. On 23 October 2007, the coin designs
were officially published in the Official Journal of the European Union
.
On 1 January 2008 the euro replaced the Cypriot pound as the official currency. The euro is only used in the government-controlled areas of the Republic, the Sovereign Base Areas
of Akrotiri and Dhekelia
(under UK jurisdiction, outside the EU) and in the United Nations Buffer Zone in Cyprus
. The de facto Turkish Republic of Northern Cyprus
continues to use the new Turkish lira as its primary currency and the euro as its secondary currency.
Malta replaced the Maltese lira
with the euro on 1 January 2008. The aims were officially confirmed on 26 February 2007. On 16 May 2007, the Commissioner for Economic & Financial Affairs of the EU, Joaquín Almunia
, recommended that Malta adopt the euro as scheduled, a decision later confirmed by the Council of Finance Ministers of 10 July 2007. On the same day, dual displaying became mandatory and the first Maltese euro coins were struck at Monnaie de Paris
. The first Maltese euro coins were available for the public on 1 December 2007, as business starter packs worth €131 each started being available for small businesses to fill up their cash registers with sufficient amount of euro coins before the €-day (Jum €). Mini-kits each worth €11.65 were available for the general public on 10 December 2007. Maltese coins which were current at the time of the euro transition may be exchanged through 1 February 2010.
Maltese citizens could obtain euro information directly from their town or village between December 2007 and January 2008. From the Euro Centres (Ċentru l-ewro) which opened during the day. People trained specifically on matters related to the changeover to the euro were available to provide council at euro centres along with information materials.
In December 2007, as part of the euro changeover celebrations, streets of Valletta
were covered with carpets depicting euro coins. Celebrations reached climax on New Year’s Eve with a firework display near the Grand Harbour area, several other activities had to be moved indoors because of the stormy weather that struck the island on that night.
Slovakia
adopted the euro on 1 January 2009. The koruna
was part of ERM II from 28 November 2005, requiring that it trade within 15% of an agreed central rate; this rate was changed on 17 March 2007 and again on 28 May 2008. The rate of 30.126 SKK from May 2008 was finally confirmed on 8 July 2008.
To assist the process of conversion to the euro, on 1 April 2008, the National Bank of Slovakia
(NBS) announced their plan for withdrawal of the Slovak koruna
notes and coins. A few days later, on 5 April 2008, Slovakia officially applied to enter the eurozone. On 7 May 2008, the European Commission
approved the application and asked member states to endorse the bid during the EU finance ministers' meeting in July 2008.
Slovakia fulfilled the euro convergence criteria. At 2.2%, Slovakia's twelve-month inflation was well below the 3.2% threshold. However, for March 2008 annual inflation was 3.6%. Fiscal deficit was 2.2% versus the reference value of 3.0%. And finally, the government debt ratio was 29.4% of GDP in 2007, well below the maximum ratio of 60.0%. Public opinion supported the switch, with 58% in favour and 35% opposed, but 65% worried about the inflationary impacts of the adoption. Three months after the adoption of the currency 83 percent of Slovaks consider Slovakia's decision to adopt the euro to have been right.
Publicity for the transition from the koruna to the euro on 1 January 2009 included an "euromobile", with a professional actor driving around the countryside holding impromptu quiz shows about the euro. Winners received euro T shirts, euro conversion calculators, and chocolate euro coins. Euro starter kits, available for 500 koruna, were a popular Christmas gift in 2008. The coins therein, however, were not valid as legal tender in the Eurozone until 1 January 2009, with koruna exchanged through 17 January 2009, though redeemable at the central bank in Bratislava until a date to be determined. Anyone using Slovakian euro coins before 1 January could have been fined. Businesses using the transition to raise prices also were subject to penalty.
in the third quarter of 2008, official figures confirmed in January 2009. The EU was in negative growth for the 2nd, 3rd and 4th quarters of 2008 and the first quarter of 2009 before returning to positive growth (for the Eurozone as a whole). Despite the recession, Estonia acceded to the Eurozone and Iceland put in an EU application in order to join the euro, seeing it at the time as a safe haven.
, the meeting of euro finance ministers, with an official president. Jean-Claude Juncker
served as president before and after formalisation and has been an advocate of strengthening the group, economic co-operation and common representation. Appetite for stronger economic cooperation grew due to the recession and the potential failure of some weaker eurozone members. However Germany had opposed previous moves to strengthen the euro group, such as French President Nicolas Sarkozy
's attempts at euro group summits, due to fears of undermining the ECB's independence. Jean-Claude Trichet
, who succeeded Duisenberg as ECB president in 2003, fended off numerous attacks from Sarkozy at the start of the recession. Before that formalisation of the Euro Group, Eurozone leaders held an extraordinary summit in reaction to the financial crisis on 11 October 2008 in Paris. Rather than the Euro Group meeting as finance minsters, they met as head of states or government (similar to the European Council
) in order to define a joint action plan for the eurozone and the European Central Bank to stabilise the European economy
. These such meetings would be where many euro governance reforms would be agreed.
The leaders hammered out a plan to confront the financial crisis which will involve hundreds of billions of euros of new initiatives to head off a feared "meltdown". They agreed a bank rescue plan: governments would buy into banks to boost their finances and guarantee interbank
lending. Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems. In the Great Depression
, so-called "beggar-thy-neighbour" measures taken unilaterally by countries are considered to have deepened the economic loss
.
Despite initial fears by speculators in early 2009 that the stress of such a large recession could lead to the breakup of the eurozone, the euro's position actually strengthened as the year progressed. Far from the poorer performing economies moving further away and becoming a default risk, bond yield spreads between Germany and the weakest economies decreased easing the strain on these economies. Much of the credit for the turn around in fortunes has been attributed to the ECB, which injected €500bn into the banks in June. Indeed the euro became to be seen as a safe haven, as countries outside it such as Iceland fared worse than those with the euro. Iceland subsequently applied to the EU get get the benefit of using a larger currency with the support of the ECB.
However with the risk of a default in Greece and other members in late 2009-10, eurozone
leaders agreed to agree provisions for bailing out member states who could not raise funds (triggered for Greece in April 2010). This was a u-turn on the EU treaties which rule out any bail out of a euro member in order to encourage them to manage their finances better. Yet with Greece struggling to restore its finances, other member states also at risk and the repercussions this would have on the rest of the eurozone economy; a temporary bail out mechanism was agreed and devised in the form of a special purpose vehicle
(SPV) named "European Financial Stability Facility
" (complemented by the European Financial Stabilisation Mechanism
and funds form the International Monetary Fund
), aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The crisis also spurred consensus for further economic integration and a range of proposals such as a "European Monetary Fund" or federal treasury.
However, in June 2010, broad agreement was finally reached on a controversial proposal for member states to peer review each others' budgets prior to their presentation to national parliaments
. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments. If a country was to run a deficit, they would have to justify it to the rest of the EU while countries with a debt more than 60% of GDP would face greater scrutiny. The plans would apply to all EU members, not just the eurozone, and have to be approved by EU leaders along with proposals for states to face sanctions before they reach the 3% limit in the Stability and Growth Pact
. Poland has criticised the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states. In June 2010 France agreed to back Germany's plan for suspending the voting rights of members who breach the rules.
In late 2010/early 2011 it was agreed to replace the European Financial Stability Facility and European Financial Stability Mechanism with a larger and permanent European Stability Mechanism
(ESM). The ESM required a treaty amendment to allow it and a separate treaty to establish it but, if ratified successfully, would be established in time to take over when the old facilities expire in 2013. Meanwhile, in order to support Italy and prevent it having to ask for a bail-out later, the ECB controversially started buying Italian bonds, as it had done with Greece.
In March 2011 was initiated a new reform of the Stability and Growth Pact
aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The Euro Plus Pact
sets out a wide range of reforms to take place in the Eurozone to ensure and the French and German governments further agreed to push for a 'true economic government' that would involve twice-yearly eurozone leader summits and a financial transactions tax.
, Central Bank
and Parliament
for accession on 1 January 2011 with Estonia adopting the currency on that date.
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
came into existence on 1 January 1999, although it has been a goal of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
(EU) and its predecessors since the 1960s. After tough negotiations, particularly due to opposition from the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
entered into force in 1993 with the goal of creating economic and monetary union
Economic and monetary union
An economic and monetary union is a type of trade bloc which is composed of an economic union with a monetary union. It is to be distinguished from a mere monetary union , which does not involve a common market. This is the fifth stage of economic integration...
by 1999 for all EU states except the UK and Denmark (even though Denmark has a fixed exchange rate policy with the euro).
In 1999 the currency was born virtually and in 2002 notes and coins began to circulate. It rapidly took over from the former national currencies
Currencies of the European Union
There are fourteen currencies of the European Union as of 2011, the principal currency being the euro. The euro is used by the institutions of the European Union and by the eurozone states, which account for 17 of the 27 member states of the European Union...
and slowly expanded
Enlargement of the eurozone
The enlargement of the eurozone is a continuing process within the European Union . All member states of the EU, except for Denmark, the United Kingdom and de facto Sweden, are obliged to adopt the euro as their sole currency when they meet the criteria...
behind the rest of the EU
Enlargement of the European Union
The Enlargement of the European Union is the process of expanding the European Union through the accession of new member states. This process began with the Inner Six, who founded the European Coal and Steel Community in 1952...
. In 2009 the Lisbon Treaty formalised its political authority, the Euro Group
Euro Group
The Euro Group or Eurogroup is a meeting of the finance ministers of the eurozone . It is the political control over the euro currency and related aspects of the EU's monetary union such as the Stability and Growth Pact...
, alongside the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
.
Early ideas
First ideas of an economic and monetary unionEconomic and monetary union
An economic and monetary union is a type of trade bloc which is composed of an economic union with a monetary union. It is to be distinguished from a mere monetary union , which does not involve a common market. This is the fifth stage of economic integration...
in Europe were raised well before establishing the European Communities
European Communities
The European Communities were three international organisations that were governed by the same set of institutions...
. For example, already in the League of Nations
League of Nations
The League of Nations was an intergovernmental organization founded as a result of the Paris Peace Conference that ended the First World War. It was the first permanent international organization whose principal mission was to maintain world peace...
, Gustav Stresemann
Gustav Stresemann
was a German politician and statesman who served as Chancellor and Foreign Minister during the Weimar Republic. He was co-laureate of the Nobel Peace Prize in 1926.Stresemann's politics defy easy categorization...
asked in 1929 for a European currency against the background of an increased economic division due to a number of new nation states in Europe after WWI
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
. At this time memories of the Latin Monetary Union
Latin Monetary Union
The Latin Monetary Union was a 19th century attempt to unify several European currencies, at a time when most circulating coins were still made of gold and silver...
involving principally France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
and Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and which, for practical purposes, had disintegrated following the First World War, will have figured prominently in the minds of policy makers.
A first attempt to create an economic and monetary union between the members of the European Economic Community
European Economic Community
The European Economic Community The European Economic Community (EEC) The European Economic Community (EEC) (also known as the Common Market in the English-speaking world, renamed the European Community (EC) in 1993The information in this article primarily covers the EEC's time as an independent...
goes back to an initiative by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation." This was followed up at a meeting of the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
at The Hague
The Hague
The Hague is the capital city of the province of South Holland in the Netherlands. With a population of 500,000 inhabitants , it is the third largest city of the Netherlands, after Amsterdam and Rotterdam...
in December 1969. The European Council tasked Pierre Werner, Prime Minister of Luxembourg, with finding a way to reduce currency exchange rate volatility. His report was published in October 1970 and recommended centralisation of the national macroeconomic policies entailing "the total and irreversible fixing of parity rates and the complete liberation of movements of capital." But he did not propose a single currency or central bank. An attempt to limit the fluctuations of European currencies, using a snake in the tunnel
Snake in the tunnel
The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies...
, failed.
In 1971, US President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
removed the gold backing from the US dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
, causing a collapse in the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
that managed to affect all of the world's major currencies. The widespread currency floats and devaluations set back aspirations for European monetary union. However in March 1979 the European Monetary System
European Monetary System
There are three stages of monetary cooperation in the European Union.-Background:European currency exchange rate stability has been one of the most important objectives of European policy makers at least since the Second World War....
(EMS) was created, fixing exchange rates onto the European Currency Unit
European Currency Unit
The European Currency Unit was a basket of the currencies of the European Community member states, used as the unit of account of the European Community before being replaced by the euro on 1 January 1999, at parity. The ECU itself replaced the European Unit of Account, also at parity, on 13...
(ECU), an accounting currency
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
, in order to stabilise exchange rates and counter inflation. It also created the European Monetary Cooperation Fund
European Monetary Cooperation Fund
The European Monetary Cooperation Fund is an institution and a fund established in 1973 by members of the European Exchange Rate Mechanism of the European Union to stabilise exchange rates. It was succeeded by the European Monetary Institute which is now part of the European Central Bank....
(EMCF).
In February 1986 the Single European Act
Single European Act
The Single European Act was the first major revision of the 1957 Treaty of Rome. The Act set the European Community an objective of establishing a Single Market by 31 December 1992, and codified European Political Cooperation, the forerunner of the European Union's Common Foreign and Security Policy...
formalised political co-operation
European political cooperation
The European Political Cooperation was introduced in 1970 and was the synonym for European Union foreign policy coordination until it was superseded by the Common Foreign and Security Policy in the Maastricht Treaty ....
within the Community
European Economic Community
The European Economic Community The European Economic Community (EEC) The European Economic Community (EEC) (also known as the Common Market in the English-speaking world, renamed the European Community (EC) in 1993The information in this article primarily covers the EEC's time as an independent...
including competency in monetary policy. European Council summit in Hannover on 14 June 1988 began to outline monetary co-operation. France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
and European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
backed a fully monetary union with a central bank, which British Prime Minister
Prime Minister of the United Kingdom
The Prime Minister of the United Kingdom of Great Britain and Northern Ireland is the Head of Her Majesty's Government in the United Kingdom. The Prime Minister and Cabinet are collectively accountable for their policies and actions to the Sovereign, to Parliament, to their political party and...
Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
opposed.
Relaunch
President of the European Commission
The President of the European Commission is the head of the European Commission ― the executive branch of the :European Union ― the most powerful officeholder in the EU. The President is responsible for allocating portfolios to members of the Commission and can reshuffle or dismiss them if needed...
Jacques Delors
Jacques Delors
Jacques Lucien Jean Delors is a French economist and politician, the eighth President of the European Commission and the first person to serve three terms in that office .-French Politics:...
to chair an ad hoc committee of central bank governors to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. This way of working was derived from the Spaak method
Spaak method
The Spaak-method of negotiating is named after Paul-Henri Spaak, who applied this method at the Intergovernmental Conference on the Common Market and Euratom in 1956 at Val Duchesse castle in preparing for the Treaties of Rome in 1957....
.
France and the UK were opposed to German reunification
German reunification
German reunification was the process in 1990 in which the German Democratic Republic joined the Federal Republic of Germany , and when Berlin reunited into a single city, as provided by its then Grundgesetz constitution Article 23. The start of this process is commonly referred by Germans as die...
, and attempted to influence the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
to stop it. However, in late 1989 France extracted German commitment to the Monetary Union in return for support for German reunification.
The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions such as the European System of Central Banks
European System of Central Banks
The European System of Central Banks is composed of the European Central Bank and the national central banks of all 27 European Union Member States.-Functions:...
(ESCB), which would become responsible for formulating and implementing monetary policy. It laid out monetary union being accomplished in three steps. Beginning the first of these steps, on 1 July 1990, exchange controls were abolished, thus capital movements were completely liberalised in the European Economic Community
European Economic Community
The European Economic Community The European Economic Community (EEC) The European Economic Community (EEC) (also known as the Common Market in the English-speaking world, renamed the European Community (EC) in 1993The information in this article primarily covers the EEC's time as an independent...
. Leaders reached agreement on currency union with the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
, signed on 7 February 1992. It agreed to create a single currency, although without the participation of the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, by January 1999.
Gaining approval for the treaty was a challenge. Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
was cautious about giving up its stable currency, i.e. the German Mark
German mark
The Deutsche Mark |mark]], abbreviated "DM") was the official currency of West Germany and Germany until the adoption of the euro in 2002. It is commonly called the "Deutschmark" in English but not in German. Germans often say "Mark" or "D-Mark"...
, France approved the treaty by a narrow margin and Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
refused to ratify until they got an opt out from monetary union as the United Kingdom, an opt-out which they maintain as of 2011. On 16 September 1992, known in the UK as Black Wednesday
Black Wednesday
In politics and economics, Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after they were unable to keep it above its agreed lower limit...
, the British pound sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
was forced to withdraw from the fixed exchange rate system due to a rapid fall in the value of the pound.
Second stage
European Monetary Institute
The European Monetary Institute was the forerunner of the European Central Bank , operating between 1994 and 1997.-History:The EMI was created 1 January 1994 to oversee the second stage in the creation of monetary union. The EMI itself took over from the earlier European Monetary Cooperation Fund...
, succeeding the EMCF, under Maastricht. It was created as the forerunner to the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
. It met for the first time on 12 January under its first President, Alexandre Lamfalussy
Alexandre Lamfalussy
Baron Alexandre Lamfalussy , is a European economist and central banker.Born in Hungary, Lamfalussy studied at the Catholic University of Leuven and Nuffield College, Oxford, where he received his doctorate in economics...
. After much disagreement, in December 1995 the name euro was adopted for the new currency (replacing the name Ecu used for the previous accounting currency), on the suggestion of then-German finance minister Theo Waigel. They also agreed on the date 1 January 1999 for its launch.
On 17 June 1997 the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
decided in Amsterdam to adopt the Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
, designed to ensure budgetary discipline after creation of the euro, and a new exchange rate mechanism (ERM II) was set up to provide stability above the euro and the national currencies of countries that hadn't yet entered the eurozone. Then, on 3 May 1998, at the European Council in Brussels, the 11 initial countries that would participate in the third stage from 1 January 1999 were selected. In order to participate in the new currency, member states had to meet strict criteria
Convergence criteria
The euro convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union and adopt the euro as their currency...
such as a budget deficit of less than 3% of their GDP, a debt ratio of less than 60% of GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, low inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, and interest rates close to the EU average. Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
failed to meet the criteria and was excluded from participating on 1 January 1999.
On 1 June 1998 the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
succeeded the European Monetary Institute
European Monetary Institute
The European Monetary Institute was the forerunner of the European Central Bank , operating between 1994 and 1997.-History:The EMI was created 1 January 1994 to oversee the second stage in the creation of monetary union. The EMI itself took over from the earlier European Monetary Cooperation Fund...
. However it wouldn't take on its full powers until the euro was created on 1 January 1999. The bank's first President was Wim Duisenberg
Wim Duisenberg
Willem Frederik "Wim" Duisenberg was a Dutch politician of the Labour Party . He was the first President of the European Central Bank from 1 July 1998 until 31 October 2003. He was instrumental in the Introduction of the euro in the European Union in 2002. He was also credited for making numerous...
, former head of the EMI and the Dutch central bank
De Nederlandsche Bank
De Nederlandsche Bank is the central bank of the Netherlands. It is part of the European System of Central Banks .-History:...
. The conversion rates between the 11 participating national currencies and the euro were then established. The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998, so that one ECU would equal one euro. These rates were set by Council Regulation 2866/98 (EC), of 31 December 1998. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro.
Launch
Euro banknotes
Euro banknotes are the banknotes of the euro, the currency of the eurozone and have been in circulation since 2002. They are issued by the national central banks of the euro area or the European Central Bank...
and coins
Euro coins
There are eight euro coin denominations, ranging from one cent to two euros . The coins first came into use in 2002. They have a common reverse, portraying a map of Europe, but each country in the eurozone has its own design on the obverse, which means that each coin has a variety of different...
were introduced on 1 January 2002. Beginning on 1 January 1999, all bonds and other forms of government debt by Eurozone nations were denominated in euros.
On the first day of trading, 5 January, since its launch, the euro climbed to 1.19 USD
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
. It was rapidly taken up and dealers were surprised by the speed at which it replaced the national currencies. Trading in the Deutsche Mark was expected to continue in parallel but vanished as soon as the markets opened. However, by the end of 1999 the euro had dropped to parity with the dollar leading to emergency action from the G7 to support the euro in 2001.
Later in 2000, Denmark held a referendum
Danish euro referendum, 2000
A referendum on joining the Euro was held in Denmark on 28 September 2000. It was rejected by 53.2% of voters with a turnout of 87.6%.-Background:...
on whether to abandon their opt-out from the euro. The referendum resulted in a decision to retain the krone
Krone
-General:* Crown * ADC KRONE, formerly The KRONE Group, a German telecommunications company acquired by ADC Telecommunications* KRONE LSA-PLUS, a popular telecommunications connector* Krone an der Brahe, the German name for Koronowo, Poland...
, and also set back plans for a referendum in the UK as a result. The procedure used to fix the irrevocable conversion rate of 340.750 between the Greek drachma
Greek drachma
Drachma, pl. drachmas or drachmae was the currency used in Greece during several periods in its history:...
and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced as a virtual currency, the conversion rate for the Greek drachma was fixed several months beforehand, in Council Regulation 1478/2000 (EC), of 19 June 2000.
Minting
The designs for the new coins and notes were announced between 1996 and 1998, and production began at the various mints and printers early in 1999. The task was large, and would require the full three years. In all, 7.4 billion notes and 38.2 billion coins would be available for issuance to consumers and businesses on 1 January 2002. In 7 nations, the new coins, struck in the run-up to 1 January 2002, would bear a 2002 date. In BelgiumBelgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
, and Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
, the new coins would bear the date of striking, so those 5 countries would be the only ones to strike euro coins dated 1999, 2000, and 2001. Small numbers of coins from Monaco
Monaco
Monaco , officially the Principality of Monaco , is a sovereign city state on the French Riviera. It is bordered on three sides by its neighbour, France, and its centre is about from Italy. Its area is with a population of 35,986 as of 2011 and is the most densely populated country in the...
, Vatican City
Vatican City
Vatican City , or Vatican City State, in Italian officially Stato della Città del Vaticano , which translates literally as State of the City of the Vatican, is a landlocked sovereign city-state whose territory consists of a walled enclave within the city of Rome, Italy. It has an area of...
, and San Marino
San Marino
San Marino, officially the Republic of San Marino , is a state situated on the Italian Peninsula on the eastern side of the Apennine Mountains. It is an enclave surrounded by Italy. Its size is just over with an estimated population of over 30,000. Its capital is the City of San Marino...
were also struck. These immediately became popular collector's items, commanding premiums well above face value. New issues continue to do so to this day.
Meanwhile, a parallel task was to educate the European public about the new coins. Posters were issued showing the designs, which were used on items ranging from playing cards to T shirts. As a final step, on 15 December 2001, banks began exchanging "euro starter kits
Euro starter kits
Euro starter kits are packs of euro coins of all the eight denominations sealed in a plastic bag. The scope of these kits is primarily to familiarise the citizens of that nation that is going to join the eurozone with the new currency, the euro. Another objective is to fill up cash registers well...
", plastic pouches with a selection of the new coins in each country (generally, between 10 and 20 euros worth—though Finland's contained one of each coin, totalling €3.88). They would not be usable in commerce until 1 January, when notes would be made available as well. Larger starter kits, containing a roll of each denomination, were available as well in some nations.
Retailers and government agencies had a considerable task as well. For items to be sold to the public, dual pricing was commonly utilised. Postage stamps for governments (as well as stamps issued by the United Nations Postal Administration
United Nations Postal Administration
The United Nations Postal Administration is the postal agency of the United Nations. It issues postage stamps and postal stationery, denominated in United States dollars for the United Nations offices in New York, in Swiss francs for the offices in Geneva and in euros for the offices in Vienna...
for the UN offices in Vienna) often bore denominations both in the legacy currency and euros, assuring continued utility beyond 2001. Banks bore a huge task, not only in preparation for the change of the notes and coins, but also in the back office. Beginning in 1999, all deposits and loans were technically in euros, but deposits and withdrawals continued in the legacy currency. Statements would bear balances in both currencies beginning no later than 1 July 2001, and earlier if required by the customer's needs.
Beginning on 1 December 2001, coins and notes were distributed from secure storage, first to large retailers, and then to smaller ones. It was widely expected that there would be massive problems on and after 1 January. Such a changeover, across twelve populous countries, had never been attempted before.
Change of currency
When the celebration began, the new coins and notes had already been valid for one hour in Greece and Finland. In fact, they had been valid for three hours on the French island of Réunion
Réunion
Réunion is a French island with a population of about 800,000 located in the Indian Ocean, east of Madagascar, about south west of Mauritius, the nearest island.Administratively, Réunion is one of the overseas departments of France...
in the Indian Ocean
Indian Ocean
The Indian Ocean is the third largest of the world's oceanic divisions, covering approximately 20% of the water on the Earth's surface. It is bounded on the north by the Indian Subcontinent and Arabian Peninsula ; on the west by eastern Africa; on the east by Indochina, the Sunda Islands, and...
. The first official purchase using euro coins and notes took place there, for one kilogram of lychee
Lychee
The lychee is the sole member of the genus Litchi in the soapberry family, Sapindaceae. It is a tropical and subtropical fruit tree native to Southern China and Southeast Asia, and now cultivated in many parts of the world...
s. The coming of midnight in Frankfurt at the ECB offices, though, symbolised the transition.
In Finland, the Central Bank had opened for an hour at midnight to allow citizens to exchange currency, while a huge euro pyramid had decorated Syntagma Square
Syntagma Square
Syntagma Square , is located in central Athens, Greece. The Square is named after the Constitution that King Otto was forced to grant the people after a popular and military uprising, on September 3, 1843....
in Athens
Athens
Athens , is the capital and largest city of Greece. Athens dominates the Attica region and is one of the world's oldest cities, as its recorded history spans around 3,400 years. Classical Athens was a powerful city-state...
, as the euro was welcomed to continental Europe. Other countries noted the coming of the euro as well—Paris's Pont Neuf
Pont Neuf
The Pont Neuf is, despite its name, the oldest standing bridge across the river Seine in Paris, France. Its name, which was given to distinguish it from older bridges that were lined on both sides with houses, has remained....
was decorated in EU colours, while in the northern German town of Gifhorn
Gifhorn
Gifhorn is a town and capital of the district Gifhorn in the east of Lower Saxony, Germany. It has a population of about 42,000 and is mainly influenced by the small distance to the industrial and commercially important cities nearby, Brunswick and Wolfsburg...
a sombre, symbolic funeral for the Deutsche Mark took place.
Except for Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, the plan for introduction of the new currency was basically the same. Banks would accept the exchange of legacy currencies, begin to dispense euros from ATM
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
s, and only euros would be available as withdrawals were made, beginning on 1 January. Merchants would accept legacy currency, but give change only in euros. In Germany, the Deutsche Mark would no longer be a legal tender on 1 January, but would have to be exchanged at the banks.
Despite the massive amounts of euros available, chaos was feared. In France, these fears were accentuated by a threatened postal workers' strike. The strike, however, was settled. Similarly, workers at the French bank BNP Paribas
BNP Paribas
BNP Paribas S.A. is a global banking group, headquartered in Paris, with its second global headquarters in London. In October 2010 BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over $3.1 trillion. It was formed through the merger...
threatened to disrupt the introduction of euro currency with a strike. That was also settled.
In practice, the roll-out was smooth, with few problems. By 2 January, all ATMs in 7 countries and at least 90 percent in 4 others were issuing euros rather than legacy currency, with Italy, the worst offender, having 85% of ATMs dispensing euros. The unexpected tendency of consumers to spend their legacy currency, rather than exchange it at banks, led to temporary shortages of euro small change, with some consumers being given change in legacy currency.
Some businesses did take advantage of the currency exchange to raise prices. According to a study by the Deutsche Bundesbank
Deutsche Bundesbank
The Deutsche Bundesbank is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks . Due to its strength and former size, the Bundesbank is the most influential member of the ESCB. Both the Deutsche Bundesbank and the European Central Bank are...
, there was a price rise, but consumers refused to buy as much. A coffee bar in Italy that took advantage of the transition to raise coffee prices by a third was ordered to pay compensation to customers.
Aftermath
Nations were allowed to keep legacy currency in circulation as legal tender for two months, until 28 February 2002. The official date on which the national currencies ceased to be legal tender varied from member state to member state. The earliest date was in Germany; the Mark officially ceased to be legal tender after 31 December 2001. Most member states, though, permitted their legacy currency to remain in circulation the full two months. The legacy currency was exchangeable at commercial banks in the currency's nation for a further period, generally until 30 June 2002.However, even after the official dates, they continued to be accepted for exchange by national central banks for varying periods—and indefinitely in Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, and Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
. Coins from those four countries, Italy, and Finland remain exchangeable. The earliest coins to become non-convertible were the Portuguese escudo
Portuguese escudo
The escudo was the currency of Portugal prior to the introduction of the Euro on 1 January 1999 and its removal from circulation on 28 February 2002. The escudo was subdivided into 100 centavos....
s, which ceased to have monetary value after 31 December 2002, although banknotes remain exchangeable until 2022. All banknotes current on 1 January 2002 will remain valid until at least 2012.
Efforts to secure the return of German coins continue. In 2005, Deutsche Telekom modified 50,000 pay phones to take Deutsche Mark coins, at least on a temporary basis. Callers were allowed to use DM coins, at least initially, with the Mark pegged to equal one euro, almost twice the usual rate.
In France, receipts still indicate the value of products in the legacy currency along with the euro value, as do receipts in Slovenia. In other eurozone countries this has long been considered unnecessary. In June 2008, The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
reported that many merchants in the French town of Collobrières, in Provence
Provence
Provence ; Provençal: Provença in classical norm or Prouvènço in Mistralian norm) is a region of south eastern France on the Mediterranean adjacent to Italy. It is part of the administrative région of Provence-Alpes-Côte d'Azur...
, choose to accept exchangeable franc notes.
Early growth
After dropping to an interday low of $0.8296 on 26 October 2001, and a brief crash to $0.8115 on 15 January 2002, the euro soon recovered from its early slump. Its value last closed below $1.00 on 6 November 2002 ($0.9971), and increased rapidly from there. It peaked at $1.35 in 2004, and reached its highest value versus the U.S. dollarUnited States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
at $1.5916 on 14 July 2008. As its values increased against the pound sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
in the late-2000s, peaking at 97.73p on 31 December 2008, its international usage grew rapidly. The euro grew in importance steadily, with its share of foreign exchange reserves rising from nearly 18% in 1999 to 25% in 2003 - while the dollar share fell by an equivalent margin. Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
in 2007 said the eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
had profited from the euro's rise and claimed it was perfectly conceivable that it could trade equally or become more important than the US dollar in the future.
US economists on the euro, 1989–2002
A survey of US economists and their views on the EMU and euro from 1989–2002 found that the euro had gone much better than many expected. Academic economists, overall, were more skeptical than Federal Reserve economists who adopted a more pragmatic approach. The skepticism appears to have resulted from the strong influence of the optimum currency areaOptimum currency area
In economics, an optimum currency area , also known as an optimal currency region , is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a...
theory; other reasons include similar skepticism of monetary unification as an evolutionary process as opposed to a political project that ignored fundamental elements of economics and a distrust of pegged currency exchange rates (as opposed to floating exchange rates) as a basis and an alternative to a single European currency.
Fred Bergsten of the Peterson Institute for International Economics in Washington DC was one of a few American economists optimistic about the euro. His analysis focused on European political economy rather than technical considerations like the theory of optimum currency area seeing its implications as ambiguous enough to permit a basically political decision. In the same vein, Jeffry Frieden, Political Scientist at Harvard, points out that most US economists failed to systematically include political factors in their analysis. By focusing only on the pure economics of the matter, they led themselves to unrealistic predictions. Charles Goodhart of the London School of Economics echoes a similar sentiment.
Some believed that a strong central state, which a sound euro seemingly required, would impede European economic liberalization. On the other hand, some credit the euro's success to the European Central Bank's (ECB) ability to follow a stability-oriented monetary policy without undue influence from national interests. This would not be possible without a certain amount of centralized power and decent incentives. George Selgin suggests that the ECB had an incentive to keep inflation low out of a desire to secure for the euro a prominent position in the international monetary market.
Late 2000s enlargements
Between 2007 and 2009, several states from the 2004 enlargement2004 enlargement of the European Union
The 2004 enlargement of the European Union was the largest single expansion of the European Union , both in terms of territory, number of states and population, however not in terms of gross domestic product...
acceded to the eurozone. These were Slovenia in 2007, Cyprus and Malta in 2008 and Slovakia in 2009. Most other 2004 countries faced greater difficulties in fulfilling the criteria to join.
Slovenia
Slovenia was the first country to join the eurozone after the launch of the coins and banknotes. Participation in ERM II began on 28 June 2004 and on 11 July 2006 the Council of EU adopted a decision allowing Slovenia to join the euro area as from 1 January 2007. The euro replaced the Slovenian tolarSlovenian tolar
The tolar was the currency of Slovenia from 1991 until the introduction of the euro on 1 January 2007. It was subdivided into 100 stotins...
on 1 January 2007. The exchange rate between the euro and tolar had been set on 11 July 2006 at 239.640 SIT, but unlike the previous launches, cash and non-cash transactions were introduced simultaneously.
Cyprus
Cypriot pound
The pound, also known as the lira , was the currency of Cyprus, including the Sovereign Base Areas in Akrotiri and Dhekelia, until 31 December 2007, when the Republic of Cyprus adopted the euro...
with the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
on 1 January 2008.
A formal letter of application to join the eurozone was submitted on 13 February 2007. On 16 May 2007 the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, backed by the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
, gave its go-ahead for the introduction in January 2008.
The campaign to inform the citizens of Cyprus about the euro officially began in Cypriot media on 9 March 2007. On 15 March 2007, the Cypriot House of Representatives passed the necessary laws for the introduction of the euro on 1 January 2008. The European Commissioner for Economic & Financial Affairs
European Commissioner for Economic & Financial Affairs
The Commissioner for Economic and Monetary Affairs and the Euro is the member of the European Commission responsible for economic and financial affairs. The current Commissioner is Olli Rehn .-Responsibilities:...
Joaquín Almunia
Joaquín Almunia
Joaquín Almunia Amann is a Spanish politician and prominent member of the European Commission, currently responsible for Competition under the second mandate of President Barroso. He was previously responsible for Economic and Monetary Affairs in Barroso's previous mandate...
, on 16 May 2007, recommended that Cyprus adopt the euro as scheduled and the European Parliament concurred on 21 June 2007, the date was confirmed by the EU leaders. The final decision was taken by the EU finance ministers (Ecofin
Council of the European Union
The Council of the European Union is the institution in the legislature of the European Union representing the executives of member states, the other legislative body being the European Parliament. The Council is composed of twenty-seven national ministers...
) on 10 July 2007 and the conversion rate was fixed at 0.585274 CYP. On 23 October 2007, the coin designs
Cypriot euro coins
Cypriot euro coins feature three separate designs for the three series of coins. Cyprus has been a member of the European Union since 1 May 2004, and is a member of the Economic and Monetary Union of the European Union...
were officially published in the Official Journal of the European Union
Official Journal of the European Union
The Official Journal of the European Union is the official gazette of record for the European Union . It is published every working day in all of the official languages of the member states. Only legal acts published in the Official Journal are binding.It was first published on 30 December 1952 as...
.
On 1 January 2008 the euro replaced the Cypriot pound as the official currency. The euro is only used in the government-controlled areas of the Republic, the Sovereign Base Areas
Sovereign Base Areas
The Sovereign Base Areas are military bases located on territory in which the United Kingdom is sovereign, but which are separated from the ordinary British territory....
of Akrotiri and Dhekelia
Akrotiri and Dhekelia
The Sovereign Base Areas of Akrotiri and Dhekelia are two British-administered areas comprising a British Overseas Territory on the island of Cyprus administered as Sovereign Base Areas of the United Kingdom...
(under UK jurisdiction, outside the EU) and in the United Nations Buffer Zone in Cyprus
United Nations Buffer Zone in Cyprus
The United Nations Buffer Zone in Cyprus runs for more than along what is known as the Green Line and has an area of . The zone partitions the island of Cyprus into a southern area effectively controlled by the government of the Republic of Cyprus , and the northern area...
. The de facto Turkish Republic of Northern Cyprus
Turkish Republic of Northern Cyprus
Northern Cyprus or North Cyprus , officially the Turkish Republic of Northern Cyprus , is a self-declared state that comprises the northeastern part of the island of Cyprus...
continues to use the new Turkish lira as its primary currency and the euro as its secondary currency.
Malta
Maltese lira
The lira was the currency of Malta from 1972 until 31 December 2007. The lira was abbreviated as Lm, although the traditional ₤ sign was often used locally...
with the euro on 1 January 2008. The aims were officially confirmed on 26 February 2007. On 16 May 2007, the Commissioner for Economic & Financial Affairs of the EU, Joaquín Almunia
Joaquín Almunia
Joaquín Almunia Amann is a Spanish politician and prominent member of the European Commission, currently responsible for Competition under the second mandate of President Barroso. He was previously responsible for Economic and Monetary Affairs in Barroso's previous mandate...
, recommended that Malta adopt the euro as scheduled, a decision later confirmed by the Council of Finance Ministers of 10 July 2007. On the same day, dual displaying became mandatory and the first Maltese euro coins were struck at Monnaie de Paris
Monnaie de Paris
The Monnaie de Paris or, more administratively speaking, the "Direction of Coins and Medals", is an administration of the French government charged with issuing coins as well as producing medals and other similar items. Many ancient coins are housed there...
. The first Maltese euro coins were available for the public on 1 December 2007, as business starter packs worth €131 each started being available for small businesses to fill up their cash registers with sufficient amount of euro coins before the €-day (Jum €). Mini-kits each worth €11.65 were available for the general public on 10 December 2007. Maltese coins which were current at the time of the euro transition may be exchanged through 1 February 2010.
Maltese citizens could obtain euro information directly from their town or village between December 2007 and January 2008. From the Euro Centres (Ċentru l-ewro) which opened during the day. People trained specifically on matters related to the changeover to the euro were available to provide council at euro centres along with information materials.
In December 2007, as part of the euro changeover celebrations, streets of Valletta
Valletta
Valletta is the capital of Malta, colloquially known as Il-Belt in Maltese. It is located in the central-eastern portion of the island of Malta, and the historical city has a population of 6,098. The name "Valletta" is traditionally reserved for the historic walled citadel that serves as Malta's...
were covered with carpets depicting euro coins. Celebrations reached climax on New Year’s Eve with a firework display near the Grand Harbour area, several other activities had to be moved indoors because of the stormy weather that struck the island on that night.
Slovakia
Slovakia
The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south...
adopted the euro on 1 January 2009. The koruna
Slovak koruna
In 1993, coins were introduced in denominations of 10, 20 and 50 haliers, 1, 2, 5 and 10 korunas. The 10 and 20 halier coins were taken out of circulation on 31 December 2003....
was part of ERM II from 28 November 2005, requiring that it trade within 15% of an agreed central rate; this rate was changed on 17 March 2007 and again on 28 May 2008. The rate of 30.126 SKK from May 2008 was finally confirmed on 8 July 2008.
To assist the process of conversion to the euro, on 1 April 2008, the National Bank of Slovakia
National Bank of Slovakia
National Bank of Slovakia , is the central bank of Slovakia, which is a member of the European Union and the European System of Central Banks. Since 1 January 2009, it has also been a member of Eurosystem.-History:...
(NBS) announced their plan for withdrawal of the Slovak koruna
Slovak koruna
In 1993, coins were introduced in denominations of 10, 20 and 50 haliers, 1, 2, 5 and 10 korunas. The 10 and 20 halier coins were taken out of circulation on 31 December 2003....
notes and coins. A few days later, on 5 April 2008, Slovakia officially applied to enter the eurozone. On 7 May 2008, the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
approved the application and asked member states to endorse the bid during the EU finance ministers' meeting in July 2008.
Slovakia fulfilled the euro convergence criteria. At 2.2%, Slovakia's twelve-month inflation was well below the 3.2% threshold. However, for March 2008 annual inflation was 3.6%. Fiscal deficit was 2.2% versus the reference value of 3.0%. And finally, the government debt ratio was 29.4% of GDP in 2007, well below the maximum ratio of 60.0%. Public opinion supported the switch, with 58% in favour and 35% opposed, but 65% worried about the inflationary impacts of the adoption. Three months after the adoption of the currency 83 percent of Slovaks consider Slovakia's decision to adopt the euro to have been right.
Publicity for the transition from the koruna to the euro on 1 January 2009 included an "euromobile", with a professional actor driving around the countryside holding impromptu quiz shows about the euro. Winners received euro T shirts, euro conversion calculators, and chocolate euro coins. Euro starter kits, available for 500 koruna, were a popular Christmas gift in 2008. The coins therein, however, were not valid as legal tender in the Eurozone until 1 January 2009, with koruna exchanged through 17 January 2009, though redeemable at the central bank in Bratislava until a date to be determined. Anyone using Slovakian euro coins before 1 January could have been fined. Businesses using the transition to raise prices also were subject to penalty.
Recession era
As a result of the global financial crisis that began in 2007/2008, the eurozone entered its first official recessionRecession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in the third quarter of 2008, official figures confirmed in January 2009. The EU was in negative growth for the 2nd, 3rd and 4th quarters of 2008 and the first quarter of 2009 before returning to positive growth (for the Eurozone as a whole). Despite the recession, Estonia acceded to the Eurozone and Iceland put in an EU application in order to join the euro, seeing it at the time as a safe haven.
Reform
In 2009, the Lisbon Treaty formalised the Euro GroupEuro Group
The Euro Group or Eurogroup is a meeting of the finance ministers of the eurozone . It is the political control over the euro currency and related aspects of the EU's monetary union such as the Stability and Growth Pact...
, the meeting of euro finance ministers, with an official president. Jean-Claude Juncker
Jean-Claude Juncker
Jean-Claude Juncker is a Luxembourg politician, 23rd and current Prime Minister of Luxembourg, since 20 January 1995. He is the longest standing head of government of any European Union state...
served as president before and after formalisation and has been an advocate of strengthening the group, economic co-operation and common representation. Appetite for stronger economic cooperation grew due to the recession and the potential failure of some weaker eurozone members. However Germany had opposed previous moves to strengthen the euro group, such as French President Nicolas Sarkozy
Nicolas Sarkozy
Nicolas Sarkozy is the 23rd and current President of the French Republic and ex officio Co-Prince of Andorra. He assumed the office on 16 May 2007 after defeating the Socialist Party candidate Ségolène Royal 10 days earlier....
's attempts at euro group summits, due to fears of undermining the ECB's independence. Jean-Claude Trichet
Jean-Claude Trichet
Jean-Claude Trichet is a French civil servant who was the president of the European Central Bank, a position he held from 2003 to 2011. He is also a member of the Board of Directors of the Bank for International Settlements...
, who succeeded Duisenberg as ECB president in 2003, fended off numerous attacks from Sarkozy at the start of the recession. Before that formalisation of the Euro Group, Eurozone leaders held an extraordinary summit in reaction to the financial crisis on 11 October 2008 in Paris. Rather than the Euro Group meeting as finance minsters, they met as head of states or government (similar to the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
) in order to define a joint action plan for the eurozone and the European Central Bank to stabilise the European economy
Economy of the European Union
The economy of the European Union generates a GDP of over €12,279.033 billion according to the International Monetary Fund , making it the largest economy in the world...
. These such meetings would be where many euro governance reforms would be agreed.
The leaders hammered out a plan to confront the financial crisis which will involve hundreds of billions of euros of new initiatives to head off a feared "meltdown". They agreed a bank rescue plan: governments would buy into banks to boost their finances and guarantee interbank
Interbank
Interbank is a Peruvian provider of financial services.-History:In 1897, Elias Mujica opened an agency at Jiron de la Union in Lima's historical center under the name of Banco Internacional...
lending. Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems. In the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, so-called "beggar-thy-neighbour" measures taken unilaterally by countries are considered to have deepened the economic loss
Pure economic loss
Economic loss refers to financial loss and damage suffered by a person such as can be seen only on a balance sheet rather than as physical injury to the person or destruction of property...
.
Despite initial fears by speculators in early 2009 that the stress of such a large recession could lead to the breakup of the eurozone, the euro's position actually strengthened as the year progressed. Far from the poorer performing economies moving further away and becoming a default risk, bond yield spreads between Germany and the weakest economies decreased easing the strain on these economies. Much of the credit for the turn around in fortunes has been attributed to the ECB, which injected €500bn into the banks in June. Indeed the euro became to be seen as a safe haven, as countries outside it such as Iceland fared worse than those with the euro. Iceland subsequently applied to the EU get get the benefit of using a larger currency with the support of the ECB.
However with the risk of a default in Greece and other members in late 2009-10, eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
leaders agreed to agree provisions for bailing out member states who could not raise funds (triggered for Greece in April 2010). This was a u-turn on the EU treaties which rule out any bail out of a euro member in order to encourage them to manage their finances better. Yet with Greece struggling to restore its finances, other member states also at risk and the repercussions this would have on the rest of the eurozone economy; a temporary bail out mechanism was agreed and devised in the form of a special purpose vehicle
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
(SPV) named "European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...
" (complemented by the European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...
and funds form the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
), aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The crisis also spurred consensus for further economic integration and a range of proposals such as a "European Monetary Fund" or federal treasury.
However, in June 2010, broad agreement was finally reached on a controversial proposal for member states to peer review each others' budgets prior to their presentation to national parliaments
National parliaments of the European Union
The national parliaments of the European Union are those legislatures responsible for each member state of the European Union . They have a certain degree of institutionalised influence which was expanded under the Treaty of Lisbon to include greater ability to scrutinise proposed EU...
. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments. If a country was to run a deficit, they would have to justify it to the rest of the EU while countries with a debt more than 60% of GDP would face greater scrutiny. The plans would apply to all EU members, not just the eurozone, and have to be approved by EU leaders along with proposals for states to face sanctions before they reach the 3% limit in the Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
. Poland has criticised the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states. In June 2010 France agreed to back Germany's plan for suspending the voting rights of members who breach the rules.
In late 2010/early 2011 it was agreed to replace the European Financial Stability Facility and European Financial Stability Mechanism with a larger and permanent European Stability Mechanism
European Stability Mechanism
The European Stability Mechanism is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism...
(ESM). The ESM required a treaty amendment to allow it and a separate treaty to establish it but, if ratified successfully, would be established in time to take over when the old facilities expire in 2013. Meanwhile, in order to support Italy and prevent it having to ask for a bail-out later, the ECB controversially started buying Italian bonds, as it had done with Greece.
In March 2011 was initiated a new reform of the Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The Euro Plus Pact
Euro Plus Pact
The Euro-Plus Pact, also initially called the Competitiveness Pact or later the Pact for the Euro, is a 2011 plan in which the member states of the European Union make concrete commitments to a list of political reforms which are intended to improve the fiscal strength and competitiveness of each...
sets out a wide range of reforms to take place in the Eurozone to ensure and the French and German governments further agreed to push for a 'true economic government' that would involve twice-yearly eurozone leader summits and a financial transactions tax.
Estonia
Despite speculation that the crisis in Greece could spread and that the euro might fail, newer EU states still continued to press for membership. In 2010 Estonia gained the support of the European CommissionEuropean Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
and Parliament
European Parliament
The European Parliament is the directly elected parliamentary institution of the European Union . Together with the Council of the European Union and the Commission, it exercises the legislative function of the EU and it has been described as one of the most powerful legislatures in the world...
for accession on 1 January 2011 with Estonia adopting the currency on that date.
External links
- EMU: A Historical Documentation (European Commission)
- The euro (European Commission Economic and Financial Affairs)
- What is the European Monetary Union? University of Iowa Center for International Finance and Development
- Economic and Monetary Union of the European Union European Navigator