History of the Euro Can Be Traced Term Paper

  • Length: 5 pages
  • Sources: 2
  • Subject: Economics
  • Type: Term Paper
  • Paper: #88879410

Excerpt from Term Paper :

History of the euro can be traced back as far as World War II when European leaders agreed that economic ties could promote growth in Europe (Martel). As a result of the Bretton Woods (New Hampshire, USA) agreement of 1944, the International Monetary Fund (IMF) opened for business in 1947 and a fixed rate of exchange was set between the U.S. dollar and other world currencies, based on the gold standard ("Euro Timeline"). Between 1951-1952 on the initiative of Robert Schuman and Jean Monnet of France, the European Coal and Steel Community (ECSC) was founded by six countries: Belgium, France, Italy, Luxemburg, the Netherlands and West Germany ("Euro Timeline"). The ECSC would become the basis for the future "Common Market" (EEC, EC) and European Union (EU) ("Euro Timeline"). On March 25, 1957 the same six countries signed the Treaty of Rome, thereby creating the European Economic Community (EEC) and the European Atomic Energy Community (EURATOM) ("Euro Timeline"). In July 1967 the European Community (EC) was formed by the merger of the ECSC, EEC and EURATOM ("Euro Timeline"). In 1979 the ECU (European Currency Unit) was created as an artificial currency, a composite of national currencies in the new European Monetary System (EMS) that would eventually evolve into the euro ("Euro Timeline").

Throughout the next 20 years Europe's borders become easier to cross making a unified currency more attractive to travelers and businesses ("Euro Timeline"). In 1992 the culmination of fifty years of agreements and alliances, the Maastrict Treaty was signed creating a 1/1/99 deadline for a shared currency, one exchange rate policy and a shared economic policy (Martel). The 12 EC countries signed the Maastricht Treaty creating the new European Union (EU) ("Euro Timeline"). In order to address concerns over debt and borrowing, members of the euro have to observe budgetary rules contained in the stability and growth pact ("Short History").

For the first two years of its existence, the euro was only an electronic currency used by banks for accounting purposes ("Short History"). The first notes and coins were issued on January 1, 2002, when the euro became legal tender for all transactions in Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain ("Short History"). The only EU states not to adopt the currency were Britain, Denmark and Sweden ("Short History"). The euro interest rate is set by the European Central Bank (ECB), based in Frankfurt ("Short History"). Launched at $1.18, the euro plunged to almost $0.80 early on, then rose, peaking at nearly $1.60 in 2007-2008, before falling back to around $1.30 on its 10-year anniversary (Boskin).

II. Pro's of Euro

Supporters of the euro say that it has increased competitiveness by making prices more transparent, cut costs for businesses, boosted inward investment and brought prices down in the shops ("Short History"). Prior to the euro's introduction it was believed that a single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce instability outside those countries because the euro would have the enhanced credibility of being used in a large currency zone ("Special Report"). It was also proposed that consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders and businesses would no longer have to pay hedging costs in order to insure themselves against the threat of currency fluctuations ("Special Report").

Indeed, the predictions were correct and the euro created a more stable economy across its member countries, however the world experienced a financial downturn in 2008 after the U.S. market's credit crisis ("Soros Positive"). The downturn in the U.S. economy has seen the dollar losing ground in the world market and there has even been talk that the euro will replace the U.S. dollar as the world reserve currency as the stronger currency ("Soros Positive").

The other benefits of introducing the euro have been lower transaction costs and greater transparency (Boskin). Having neither the cost and inconvenience of constant currency transactions nor the uncertainty that arises from fluctuations among currencies as benefited the euro countries (Boskin). The pricing of goods and labor throughout the currency area, which previously had different exchange rates, has become much more transparent (Boskin). These twin benefits complement the scale advantages of free-trade areas (Boskin). Low inflation, no currency risk, decreased transaction costs, and greater transparency have made the euro a success (Boskin). The weaker economies get the inflation credibility of the ECB and protection from severe exchange-rate swings avoiding continuous competitive devaluations (Boskin).

III. Con's of the Euro

Opponents say that the Euro has increased unemployment and stifled growth by denying national governments the flexibility to adjust their interest rates in the light of local conditions ("Short History"). The problems with the recent bailouts of Greece and Ireland have also brought the problems of a unified currency system to the forefront, as the stronger economies have been supporting the weaker ones. This is especially poignant in Germany where concerns are that the euro will become a transfer union where the more stable countries with stricter budgetary controls will end up transferring huge sums of money to countries like Spain and Greece that have higher inflation and fewer budgetary constraints (Evans). Germans were strong opponents of the euro's introduction, but German leaders promised it would be just as stable as the Deutschmark, which has lately proven to be untrue (Evans). German citizens have expressed anger over bailing out other countries at their expense, but the German leadership has vowed to make the euro work (Evans). Germany is the Euro zone's biggest economy and seen as a stabilizing force among more volatile economies in the Southern Europe ("Soros Positive"). With limited labor mobility, and the euro removing the other shock absorber (exchange-rate adjustments), great pressure will fall on those countries with the worst downturns (Boskin). The financial crisis and deepening recession have created many challenges for the Euro (Boskin). The euro zone's less competitive economies are tethered to monetary policy (interest rates) set by the European Central Bank, but pursue diverse approaches to bank bailouts and fiscal stimulus (Boskin).

The bailout of Ireland and Greece and maybe that of Portugal in the near future is not as worrisome as the possibility of bank failures in Spain whose economy is larger than all of the other countries combined (Minder). Reflecting the worries of investors, the yield spread between the Spanish 10-year government bonds and those of Germany continued to widen recently to as high as 2.59 percentage points, the biggest gap since the introduction of the euro (Minder). Spanish banks could suffer if Portugal's financial problems worsen as Spain is not only Portugal's biggest trade partner, it is also its biggest creditor, with Spanish banks holding $78 billion of Portuguese debt (Minder).

III. Future of the Euro

Another issue related to the current crisis of the Euro zone is the effect it will have on other geographic areas, such as Asia, who have considered adopting a unified currency system similar to the euro (Wheatley). Policy makers in Asia have been heading in the direction of closer cooperation by formalizing the network of emergency central bank loans they set up in Chiang Mai, Thailand, in 2000 to try to prevent a repeat of the 1997-98 Asian financial crises (Wheatley). The Chiang Mai initiative may have been the first step to a more ambitious monetary coordination for Asia, however since the bailouts of Greece and Ireland have exposed the frailties of a common currency area with deeper economic and institutional resources than Asia can offer, it is not likely to occur anytime soon (Wheatley). The deep history surrounding the creation of the euro is another factor that is absent in Asia as the countries of Europe brought together their economies, and then…

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