The thought of creating a single European currency first appeared in the end of 1960s, when the European countries found themselves in the middle of world currency crisis. The most important reason for this crisis is the effects of the weak United States economy because of the Vietnam War. Therefore, the crisis was caused to consider a single money for European countries which would act as a substitute and also rival to the United States dollar. Then the thought for a single European currency became prevalent in 1972 by the European community. However, it took many years to make up the thought for a common European currency. In 1991, Maastricht Treaty laid the groundwork for monetary union. At Maastricht Treaty, the participants committed to founding single European money by 1999. The Maastricht Treaty, which was started to apply in 1993, determines criteria that member countries had to meet in order to develop a monetary union. Moreover, the criteria that had to meet by the member countries were about inflation levels, government deficits, debt, exchange rate stability, and long-term interest rates of the countries.
Euro is a currency, which is planned to come into force on 1 January 1999 and take the place of the currencies of each countries of the European Union. All the countries of the European Union expect Britain and Denmark decided that EU should have a single currency when they signed the treaty of Maastricht. All the countries of EU will join the currency unity if they have met certain conditions, which are determined in the Maastricht Treaty until the year 1997. Convergence criteria form the most important part of the conditions that must be met in order to join the usage of the new single currency. These conditions mostly related to inflation, public expenditure, and government borrowing in each of the countries. According to the conditions, the inflation of the country must be low, the public debt of a country shouldn’t be more than 60 percent of the country’s Gross Domestic Product, and the Government borrowing deficit of the countries must not be more than 3 percent of that country’s Gross Domestic Product. The president of European countries met in Brussels on May of 1998 and they decided which countries could enter single European Currency. In this meeting the countries which could not met to certain conditions weren’t accepted to the single European currency. For instance, Greece couldn’t provide adaptation criteria. Denmark, Sweden and Britain didn’t join to single European currency with their own desires. Thus, at the end of the gathering in Brussels, they decided that the Euro would be the official currency in the 11 country on 1 January 1999. They will leave their national currencies and start to use Euro for all business relations. These 11 countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
To set monetary policy of Europe will not be easy. European Monetary Institute, which is based in the Frankfurt, will become the new European Central Bank. E.C.B started to work and it will be responsible of 11 participating countries monetary policy. The monetary policy of the bank is defined from now. The European Central Bank will protect the Euros value by setting interest rates and the price of money. The most important objective of the European Central Bank is development without unreasonable inflation. The E.C.B will have six members and a president who will be appointed by the Euro countries jointly in executive committee for an 8-year term. Executive committee and central bank governors of the 11 countries will make monetary policy decisions together. Moreover, they will meet 10 times per a year to set interest rates normally. The E.C.B will not really be independent. It will resemble Germanys Bundesbank that is a model central bank for freedom from political effects. France suggested a council of Euro finance ministers who will meet informally to give advise about monetary policy. Thus, there may be more effect of politicians on the monetary decisions. On the other hand, other countries suggested that E.C.B explain its decision to members of the European Parliament of the 11 countries that will meet 2 times annually. Thus, politicians will not be able directly to determine interest rates to the bankers. The national banks of 11 countries will continue to maintain the all-European banking system. Also, the most important role of the national banks will to use the decisions of the European Central Bank.
According to supporters of the Euro, It will revitalize the 11 country’s economies, lead to lower prices for consumers and make Europe a industrial force to rival with the economies of the United States and Japan. It will bring more competition to the European market because of the price transparency. On the other hand, according to opponents of the Euro, the fiscal policy conditions that have to be met to become an Euro member will not unravel wide variations in economic trends of the participating countries. Businesses will face two important problems with the usage of Euro. The most important one will be the obligatory changes in the prices of the products. When the usage of the Euro will start, the prices will whether round up or down in order to convert to Euro. This may cause some problems. If a company rounds up its product prices, it will have a too much profit than before. However, if it rounds down the prices, it will cut profit margins. Secondly, companies will also have to harmonize prices across the 11 countries because there will price differences between Euro members. Also, when all prices are in Euro, these differences will be too obvious to ignore. In some regions, prices will increase and in other they will decrease. Additionally, differences in Value Added Taxes, income distribution and productivity rates will be important issues to solve for the monetary union members with the usage of single currency. Today, individual European Union members set value-added tax and duties in products such as fuel, tobacco, and alcohol. However, there are no plans to force the harmonizing of demand and luxury taxes.
If the Euro accepted quickly and widely in the world market, it could become a successful global reserve currency like dollar. Moreover, in order to be global reserve currency, it must be used by other countries in trade and investment accounting and central banks of other countries must also use it. Today European Unions share in international trade is 17 percent and the US share is 12 percent, but the dollar accounts for 61 percent of global reserves. Dollar will be probably dominant for a time period while the Euros usage become widespread, but the Euro may soon challenge will challenge dollar in markets.
Written and researched by Burak Bensin.
Special Thanks to Nurettin Gürel.
BIBLIOGRAPHY
Dr. A. Yavuz Ege. Euronun Dis Ticaretimiz Üzerindeki Muhtemel Etkileri. Iktisat Isletme ve Finans, June, 1998:pp.7-11
Patronlar Ates Altinda, Hürriyet Bussiness Week November 22, 1998:pp.68-69
Euro Geliyor, Power Ekonomi Dergisi November, 1998:pp.54-74
Avrupa Para Birligi
SON GÜNLERDE
Written and researched by Burak Bensin.
Special Thanks to Nurettin Gürel.
