The Euro — New Currency for an Old Continent

A JUBILANT French finance minister gave the fresh coin a bite and declared: “This is the real thing, it’s no copy. It’s the first produced in France as well as in Europe.” The coin was the first euro struck at France’s official mint. The date was Monday, May 11, 1998.

What is the euro? How will housewives, workers, tourists, and businesses across Europe be affected by it? Will there be any repercussions for the global economy? Before you throw away your deutsche marks, lire, or francs, you may do well to learn the answers to these questions.

How Did the Idea Develop?

When the Maastricht Treaty transformed the European Community into the European Union (EU), on November 1, 1993, one of the fundamental goals was to introduce a single currency for the member states. Since Roman times, Europe has not shared such a single currency. It was decided that the name of the new currency would be the euro. Not all EU countries are participating in this monetary union. Only 11 of the 15 EU countries are now in a position to put the euro into use. These countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Greece did not meet the economic criteria for participation. The other three—Britain, Denmark, and Sweden—have opted out at present.

The introduction of the euro will be gradual. As of January 4 of this year, the euro began to be traded on international currency exchanges in noncash transactions. Euro coins and bank notes will be introduced over a six-month period starting on January 1, 2002—after which the participants’ former currencies will probably become the stuff of museums and memorabilia boxes. It has been estimated that the euro will replace 12 billion bank notes and 70 billion coins, a total weight of 300,000 tons. It is hoped that, in time, the remaining EU countries will also be in a position to enter the single-currency club.

Austria’s finance minister said about the changeover to the euro: “We stand at the dawn of a new era in the integration of Europe.” However, in Europe public opinion about the euro has been divided between the 47 percent who feel that the single currency will transform Europe into an economic powerhouse and the 40 percent who believe that the euro will cripple the European economy. Some have even suggested that the single currency may lead to war! In between are the undecided “Euroskeptics,” those who see the advantages of having a single currency in Europe but question its eventual success.

Some View It as a Blessing

The highest executive body of the EU, the European Commission, has declared: “By creating the single currency, Europe will be offering its citizens, its children and its partners . . . a more concrete symbol of the common destiny it has freely chosen: that of building a community based on peace and prosperity.”

Advocates of the euro cite the many potential benefits of a single currency. The elimination of foreign exchange costs would have the most direct impact. The example sometimes cited is that of the tireless European traveler who visits all 14 countries of the EU outside his own. If, for instance, he starts with 1,000 deutsche marks and changes his money in each country, he will end up with only 500 marks as a result of exchange costs alone!

Likewise, exports and imports will no longer bear the cost of foreign exchange. Similarly, a single currency will eliminate the indirect cost of currency fluctuations. When a country’s currency loses value, imported goods become more expensive in that country. This often leads to inflation. Thus, under a single currency, without the risk of exchange rate changes, Europe should become more attractive to foreign investors.

Promoters of the euro also envision a reduction in prices across Europe. Customers and businesses alike are now able to compare prices easily, and when euro coins and bills are introduced in 2002, it will be even simpler. Differences in the price of the same product in various parts of Europe are expected to shrink, benefiting the consumer.

Others View It as a Curse

Enter the critics. They feel that the euro will put the European economy in a straitjacket, destroying its flexibility and stifling its growth. They predict that a single currency will increase unemployment, attract massive speculative attacks on the money markets, and cause political tensions. Such political tensions have already been apparent. Take, for example, the dispute between Germany and France over who should be the head of the European Central Bank, the overseeing watchdog for the euro. More rows like that one may be expected as each EU member state pursues its own agenda.

In some EU countries, unemployment is presently at record levels. Many blame the spending cuts and tax increases required to conform to the single-currency criteria as the cause of this. Across Europe there are protests against austere financial policies that include slashing generous welfare, pension, and health-care programs. How long can such strict financial discipline last? Will some countries be tempted to loosen their belts a little after the euro becomes a reality? Would such a lax policy then wreak havoc on the single European currency system?

Others point to the deep sentimental attachment people have to their country’s currency. Currency is more than what is in your pocket. For many it is also their country’s history, a symbol as significant as a flag. The national currency is the code in which a people earns, counts, estimates, deals, and saves. While the Germans, for example, will see the numbers on their bank accounts halved by the euro conversion, the Italians’ numbers will shrink sharply by a factor of 2,000 when the lira goes. According to one study, the switch to the euro will be a “traumatising” experience for many Europeans.

One Size Fits All?

Some economists in the EU and in the United States stress that although there is considerable political will for a single currency, Europe’s economies are fragmented, its people are rooted in their home countries, and its cultures are immensely different. Thus, unlike residents of the United States, people in Europe who lose their jobs are less likely to pick up and move long distances to find work. Some experts believe that such fragmentation deprives the euro nations of the shock absorbers needed to share an economy and thus a currency.

Under the single currency system, critics say, individual governments will lose their flexibility in dealing with economic problems. They say that the euro will shift power from individual countries to the new European Central Bank, in Frankfurt, Germany. In turn, this will increase the pressure for coordination of tax rules and other economic policies throughout the continent. The critics argue that the executive and legislative bodies in Brussels and Strasbourg will gain power. Indeed, the Maastricht Treaty calls for a political union that will eventually be responsible for foreign and defense policies as well as for economic and social policies. Will this transition be smooth and trouble free? Only time will tell.

“A Huge Gamble”

In the meantime, banks and supermarkets are already starting the move to the euro, setting up euro accounts and posting euro prices next to those in local currencies. The goal is to make the switch in the year 2002 as smooth as possible. A popular French magazine has already distributed more than 200,000 calculators programmed to convert between French francs and euros.

Will the euro one day rival the U.S. dollar in power? Many feel that after the euro has gained acceptance, the United States will probably not enjoy as much of an easy ride on world economies. They predict that the euro will become a global reserve currency alongside the dollar. Jill Considine, of the New York Clearing House Association, says: “There’s going to be a new competitive landscape.”

What will the future of the euro be? German editor Josef Joffe calls the single currency “Europe’s colossal coin toss” and “a huge gamble.” He adds: “If it fails, it may contaminate much of what Europe has achieved in the last 50 years.” The French finance minister echoed the feelings of many Europeans when he said: “There’s a lot of optimism and a lot of fear.”

EURO FACT SHEET

? One euro is worth a little more than one U.S. dollar

? Euro bills will be in seven denominations: 5, 10, 20, 50, 100, 200, and 500 euros

? On one side the euro bills will have a map of Europe with some typical bridges, and on the other, representations of windows or gateways

? The words “EURO” and “????” will both appear on bank notes, to represent Roman and Greek lettering

? Euro coins will be in eight denominations: 1, 2, 5, 10, 20, and 50 cents as well as 1 and 2 euros

? The coins will have a universal European image on one side and a national image on the other