The euro was developed in an effort to "create one of the largest and most powerful economic areas of the world". The euro was introduced on January 1, 2002 to 12 European countries. These countries included Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. While there were many beneficial reasons for European countries to unite and switch to a single currency, one must ask why Great Britain, Sweden, and Denmark chose not to adopt it. Did cultural, economic or political reasons play a part in this decision or was it a combination?
A major catalyst to the acceleration of Forex trading was the rapid development of the euro-dollar market, where US dollars are deposited in banks outside the USA border. Similarly, the European market are those where assets are deposited outside the currency rightful owner country market. The euro-dollar market first came into being in the 1950s when Russia's oil revenue — all in dollars — was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. European markets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
The European Market
The changeover to the euro is the largest monetary changeover in world history, and it is the culmination of a process begun decades ago. The introduction of the euro as a circulating currency is the realization of a Europe in which people, services, capital and goods can move freely. Such a common European market was envisioned back in 1957 with the Treaty of Rome. It declared a common European market to be a European objective with the aim of increasing economic prosperity and contributing to a closer union among the peoples of Europe.Planning for its implementation began in 1957 with the signing of the Treaty of Rome. This was a little over four decades prior to the euro's actual introduction on January 1, 2002. The Treaty of Rome "declared a common European market to be a European objective with the aim of increasing economic prosperity and contributing to a closer union among the peoples of Europe".
In 1979 the European Monetary System (EMS) went into operation. The EMS "was designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries." (Hill 676) "It used a mechanism called the European currency unit (ECU). The ECU is an entity that is used for accounting purposes only". At that time, there were only eight member nations that agreed to hold exchange rates within certain limits.
Next, the Single European Act was signed in 1986. This act revised the objectives of the Treaty of Rome and was a commitment to create a single market by the end of 1992. Subsequently, the heads of state and government of the European Community asked the European Commission to develop a schedule for the implementation of a common currency.
The Treaty on European Union was agreed to in Maastrict in 1991. It went into effect in November 1993 after ratification of the member states. It called for an economic and monetary union by 1999 as well as a political union including foreign and security policy. This set the date for the launch of the common currency in the European Union (EU). However, Great Britain and Denmark negotiated to keep their national currencies. Sweden opted out at a later time.
The European single market was achieved as of January 1, 1993. In 1995 the European Council adopted the name euro for the single currency. Then in 1998 eleven EU member states qualified to be part of the Economic and Monetary Union when it began on January 1, 1999. Greece joined as the 12th member in January 2001.
The European Central Bank was also inaugurated in June 1998 in Frankfurt, Germany. The European Central Bank is part of the European System of Central Banks. Their primary mission is to maintain price stability and conduct monetary policy for the euro area. They were also responsible for managing the development and introduction of the euro.
The euro was adopted by 11 member states of the euro area on January 1, 1999. This is when the European Economic and Monetary Union (EMU) went into operation with the euro. At this point, the exchange rates of participating currencies were set and the 11 member states began implementing a common monetary policy. Finally, on "January 1, 2001 the euro was introduced as legal tender and old currency could no longer be used for non-cash transactions, such as checks and bank transfers".
One common denominator throughout the planning and preparation of the introduction to the euro is that six countries remained involved throughout the entire process. These countries included Belgium, Denmark, Germany, Spain, France, Luxembourg, Netherlands, and Ireland. It appears that each one of these countries was motivated to introduce the euro in an effort to try to stabilize the economy and promote trade.
In addition to all of the careful planning and preparation, a very detailed implementation plan was created to ensure a smooth rollout of the euro. From January 1, 1999 - December 31, 2001, the euro could only be used for non-cash transactions. There were no euro notes or coins in circulation at this time. However, price tags, bank statements and other documents and systems began reflecting amounts in euros. Additionally, the conversion rates for national currencies of the member states and euro were fixed.
In preparation for the changeover, euro notes and coins were delivered to banks in the 12 member states in September 2001. At this point in time, the banks began distributing the euro notes and coins to retailers and other institutions. Then in December 2001 the euro coins were distributed by banks to the general public. "In Germany, people were given the option to exchange 20 DM for a "starter kit" containing €10.23 in coins".
On January 2002, euro notes and coins entered circulation as legal tender in the euro zone. Conversion of all bank accounts and corporate books in the euro area were completed. Finally, all salary and social security transactions and all new contracts were transacted in euro.
Between January 1, 2002 and February 28, 2002 the euro as well as old currencies was accepted in most euro-area countries. Consumers had the option to make purchases using the old currencies, but received their change in euros. The aim at this time was to have most cash transactions made in euro by mid-January 2001.
Given the difficulty and length of implementation, there must have been compelling reasons for these countries to agree to switch to one common currency. Overall it was felt that the main benefit was that a single market needs a single currency. In fact, some of the main marketing slogans used by the European Monetary Union prior to the introduction of the euro were "one market, one money" and "the value of the euro is the value of Europe".
Surprisingly, businesses wanted the euro. Adopting the euro lowered their transaction costs through eliminating the cost and administrative overhead of exchanging currencies between one country and another. It also eliminated currency exchange rate risk. The introduction of the "euro also lifted barriers to free trade in goods, services, labor and capital". As a result, they realized lower prices for products and services. Another added benefit is that the euro made it much easier to compare prices for the same goods and services between countries. This not only helps the business but customers as well.
ref: http://www.germany.info/relaunch/info/publications/infocus/euro/welcome.html
Why the Euro? Objectives of European Monetary Union
"The value of the euro is the value of Europe."For the first time since the Roman empire Europe - from Lapland to Portugal - will share a common legal tender. The introduction of the euro and the completion of the common market will create one of the largest and most powerful economic areas in the world. With a population of 303 million, the euro zone is markedly larger than its closest competitors, the U.S. (276 million) and Japan (127 million). The euro area contributes 16% of global GDP, the U.S. 22% and Japan 7%. The euro also will give new impetus to political unification.
There are numerous objectives to European Monetary Union:
- Price Stability
- International Market Equilibrium
- Budgetary Discipline
- Economic Growth and Reform
Nearly three years after its introduction as a trading currency, the euro has proven a positive factor for economic policy despite the current weak worldwide economic environment. The euro lifts the last hurdles to true European integration and allows unimpeded and efficient exchange of goods, services, labor and capital. The macroeconomic political branches have reacted calmly and appropriately to fluctuations in the overall economic situation. This indicates that a reliable and trustworthy stability structure has developed in recent years. Moreover, the euro has improved the prospects for a swifter recovery from current economic troubles. The 12 EU member states are bound closely by their common market and their common currency. The introduction of the single cash currency to consumers in all 12 countries on January 1, 2002 should tighten this cooperation and reinforce the strength of this powerful new economic presence.
Price Stability
Europe's history sets the backdrop for the chief objective of the single European currency: price stability. In the first half of the 20th century, wild price fluctuations wreaked havoc on European economic and political stability. After World War I, prices in Germany skyrocketed, leading to the precarious conditions that in part gave rise to the Second World War. In 1948, the deutschmark was created with the express intention of controlling inflation. For several decades, the German Bundesbank (the federal reserve bank) has been entrusted with this goal.The institution charged with safeguarding medium-term price stability in the euro zone is the European Central Bank (ECB), modeled on the German Bundesbank and headquartered in Frankfurt. In the words of its president, Wim Duisenberg, "The people of Europe need to be confident that their new currency can sustain its value over time and that the ECB is an institution they can trust." The approach is based on a broad consensus among central banks - not just in Europe but worldwide - that the best macroeconomic contribution monetary policy can make toward improving the economic outlook and raising standards of living is to credibly maintain price stability. The ECB has defined "price stability" as an increase of the euro area consumer price index of less than 2%.
International Market Equilibrium
A stable common currency is the keystone of European monetary union. The effects of the September 11 terrorist attacks made clear how vital the broad-based euro is to the stability of world financial markets. In the days following the attacks, the euro-dollar exchange rate remained remarkably constant, at roughly €1=US$ 0.90. Without the euro, foreign exchange markets might have been shaken into crisis. Moreover, slowing economic growth around the world gives the European common market new significance. Economic experts put euro zone GDP growth at 1.7% in 2001 and at 1.8% in 2002, considerably faster than projected U.S. and Japanese economic growth in the same periods. Thus the euro area can play a significant role in shoring up and stabilizing a weakening world economy.The euro is worth more than just the sum of its parts. The region's say in the further development of the world trade and finance system has been bolstered considerably by the advent of its single currency. Due to the massive size of this market, the euro is the second most important trading currency, offering a credible alternative to the U.S. dollar. Moreover, the euro zone capital market is the second largest and second most liquid in the world. International acceptance of the euro should also reflect the importance of the euro zone in the globalized economy.
The role of the euro as a trading and reserve currency can be developed much further. Roughly 60% of all world trade is now conducted in U.S. dollars, just 15% in euros. However, within the euro zone, this number jumps to 70%. International reserves also remain largely in dollars (66%) rather than euros (13%). ECB officials are optimistic that this will change once the euro is introduced as the single legal cash currency of the 12 euro countries. This is already happening. China, for example, announced in November 2001 that it had been buying euros for the last two months and intended to increase the single currency's share in its immense $200 billion foreign exchange reserves.
Monetary union means that exchange-rate adjustments are no longer possible in the euro area. The exchange-rate distortions caused by external shocks throughout Europe's history, and the attendant expansion of interest-rate spreads, are both things of the past. This makes investment in the euro zone safer and more calculable.
One of the euro's biggest coups has come in the euro bond market. Sharing one large currency zone has allowed euro-zone companies to raise huge amounts of money to finance investments and expansion. The euro bond market has overtaken the dollar bond market in size and given the region's industries a huge boost.
Budgetary Discipline
All euro member nations were required to meet strict economic stability criteria to gain admission to European monetary union. The Stability and Growth Pact that governs the individual states ensures that these conditions are maintained. Debts and deficits have been reduced and stabilized through 2006. The single capital market and low inflation are designed to ensure low long-term interest rates. This should, in turn, attract additional investment and spur national structural reforms.Economic Growth and Reform
Economic union exerts a healthy pressure for economic and financial policy change - even when they come up against various political interests. A faulty national economic and financial policy will now be "paid for" in terms of growth and employment more quickly and transparently than in the past. "The euro and globalization are exerting pressure on policies and markets in Europe to become more flexible," says Dr. Jürgen Stark, deputy governor of the Bundesbank. "At the same time, however, the reforms will - in the medium to long term - accelerate the pace of economic growth and enhance the attractiveness of the euro area as well as the single currency."Germany has reacted to this pressure and the economy has benefited. In the 1990s, during the lead-up to euro, many state-owned enterprises were privatized, and markets were liberalized and deregulated, particularly in high-growth telecommunications, media and energy sectors. Taxes and pensions have been reformed to invigorate the economy. "Monetary union requires flexibility at a national level," says Dr. Stark, "since exchange rates are no longer available as an adjustment parameter."
Responsible wage policy will pay higher dividends in the future. More investment should ultimately lead to more growth and, given the right conditions in the labor markets, higher employment. A large part of German and European unemployment is caused by structural factors. The intensifying competition within the euro area will, however, demand increased flexibility of labor and goods markets. A stability-oriented budgetary policy by the ECB improves the scope for promoting growth and employment while guaranteeing price stability.
Finally, the disappearance of transaction costs can boost economic growth and make goods cheaper for consumers. Smaller firms in the euro zone are finding customers in regions they previously never bothered to export to. According to most recent estimates, monetary union will bring savings equal to 1% of total euro area GDP, as currency transaction costs are done away with. In Germany alone, this amounts to €20 billion.
ref: http://www.germany.info/relaunch/info/publications/infocus/euro/welcome.html
Why Great Britain, Sweden and Denmark chose not to adopting the Euro
While there clearly were advantages to adopting the euro, Great Britain, Sweden, and Denmark chose not to switch to a single currency. The following arguments from Great Britain illustrate many of the reasons that the other non-adopting countries identified. Some of these examples do not universally apply but are indicative of the scope of the problem.First, Great Britain was afraid that switching to the euro would mean giving up control of their economy. As a result, they would lose flexibility to switch their own interest rates if economic conditions warranted movement of the rate. Instead of being able to respond quickly to the economic environment these countries would have to wait for the EMU to review and decide on each the situation.
Case in point, the British economy is different compared to the rest of the European countries.
"Britain does more of their trade (57 percent) with countries outside the Eurozone. They also receive large amounts of their investment from the United States. The Bank of England currently sets interest rates according to the needs of the British economy. Inside the euro we would have to accept a single interest rate set by the European Central Bank in Frankfurt which would usually be wrong for us<".As a result, Britain was adamant that they needed different policies in order to set policy on interest rates, taxes and spending.
Another consideration was the economic performance of the country. According to the Organization for Economic Cooperation and Development (OECD), as of 2002, Britain had the best outlook of any country. They also had the highest gross domestic product (GDP) per head than both Germany and France. Additionally, they had the lowest inflation in the European Union (EU) along with the highest take home pay. Obviously, they did not want to put the positive aspects of their economic environment at risk. The risks associated with adopting a single currency far outweighed the proposed benefits.
As an example, there was a strong sentiment in the British community that it was not necessary to adopt the euro in order to trade with Europe. For two years beginning in 1990 the British pound was linked with Europe in the Exchange Rate Mechanism with disastrous consequences; unemployment doubled and 100,000 businesses were lost. When contemplating adopting the euro they did not want to make the same mistake again.
The reality of multiple countries adopting the euro required each country to assume the same tax base. This was required regardless of the each country's economic environment at that time. Without a doubt, some countries benefited while others did not. Taxes in some product categories such as cigarettes and alcohol lowered but overall they increased by over 16%. The British economy was thriving in its own right. Unemployment was lower in Britain than in the countries that adopted the euro. Great Britain's economy experienced lower inflation. Also, Great Britain received more foreign investment than both Germany and France combined. Assuming the same tax base would have a negative impact on Great Britain's favorable economic environment.
Great Britain does more of their trade in dollars than euros. At the time the euro was being considered for adoption, it was believed that doing so would destabilize British trade.
Another argument against Great Britain adopting the euro had to do with the financial solvency of other countries. For example, several of the major euro economies had bankrupt state pension systems. Adopting the euro would dilute the solvency of Great Britain's pension systems and therefore would not be economically viable.
Adopting countries had a strong incentive to move forward because of significant inadequacies of economic base conditions such as their public services infrastructures. They saw the euro as a solution to streamline infrastructure improvements. Conversely, Great Britain did not have the same inadequacies and therefore predicted that adoption of the euro would erode the quality of the same infrastructure categories. "In February 2002, the Government was warned by the European Commission that if they were inside the euro, they would have had to cut spending on public services by £10 billion to comply with the spending rules of the euro".
Most alarmingly, people controlling euro economic policy are not elected officials. Great Britain highly values their ability to vote out those in control of economic policy when it is determined that they are not performing. They feel that adopting the euro erodes more than the economical base; it erodes the political base as well. "In the Eurozone it is openly admitted that the aim of the European Monetary Union (EMU) is political union. A single currency is the first step towards a single state. Inside the euro, economic decisions would be made by unelected officials in Brussels and Frankfurt".
Opinion
Smaller countries with detrimental infrastructures and economic bases are highly motivated to have a single currency. Fundamentally, one of the major advantages of an elective political system is that the people have the control to correct incidents of corruption and poor leadership. By its very nature the architecture of the way people are put into the position to control the euro is missing the correcting mechanism as a part of its structure. Commensurately, how can a major economic power such as Great Britain, Sweden, or Denmark safely adopt such a system without elected officials? Could it be possible that if the wrong person gained power over euro economic policy that the whole system could collapse?Although the arguments presented in this paper do not apply to all three countries that opted out of the euro, they are representative of some of the key issues and concerns they all faced. The major reasons given by Great Britain indicated they were primarily concerned with economic factors, followed closely by the political concern of not having the right to elect the officials that control euro economic policy. The British community wanted to remain in control of their economy so they could quickly respond to changes in their economic environment. Furthermore, they wanted to ensure they did not go through the same economic turmoil as they experienced when the British pound was linked to the Exchange Rate Mechanism. After weighing the pro's and con's Britain, Denmark, and Sweden concluded that the risks associated with adopting the euro far outweighed the proposed benefits. As a result, they chose to continue to use their national currency and still do to this day.
ref: http://www.no-euro.com/whatwebelieve/%20tenreasons.asp
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