Euro Turns Five: Europe's Grand Experiment
| Author | Hamid Faruqee |
| Position | Senior Economist in the IMF's European Department |
| Pages | 14-15 |
Page 14
This January marked the five-year anniversary of the European single currency-the euro. A historic milestone in the process of European integration, the euro has created a new monetary reality for 300 million Europeans that few would have believed possible a generation ago. While the future course of this "grand monetary experiment" remains unknown, the euro has already seen significant changes in its brief existence. Like most five-year-olds, the euro has had its share of ups and downs, and its role-both within Europe and over-seas-continues to evolve and expand.
The birth of the euro marked a watershed in the postwar history of European integration. Fifty years of endeavor to create a closer union and a cooperative future for the people of Europe in the aftermath of the Second World War, in many ways, culminated in the advent of the single currency. The process that led to Economic and Monetary Union (EMU) with the euro as its currency was accomplished in three distinct stages.
The initial stage was the removal of all restrictions on capital movements between member states by July 1990. With the full liberalization of capital, the European "single market" had a deeper financial dimension. Greater fluidity of financial markets, however, also raised the stakes on possible tensions within an exchange rate regime of currency bands. The second and third stages provided for a compact enshrined in the Treaty of European Union (Maastricht Treaty), setting the groundwork for the euro. Maastricht specified nominal criteria for the adequate convergence of the economies of future participants in the euro in four areas: inflation, interest rates, exchange rates, and government finances. The second stage also laid out the blueprint for a new institutional architecture to form and operate the currency area, including the establishment of the European Monetary Institute as the precursor to a European central bank. The third stage commenced on January 1, 1999, when 11 countries fixed their exchange rates to the euro.
Adopting the single currency also meant adopting a single monetary policy. Under the Maastricht Treaty, the independent European Central Bank (ECB) safeguards the euro's value by pursuing its primary objective-maintaining price stability. What...
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