The Adoption of the Single Currency by the Eurozone Countries - Essay Example

Eurozone Europe has embraced on an amazing mission: to establish a single European currency for the whole European Union. Although the Maastricht Treaty committed the European Union to the goal of economic and monetary union (EMU) several years ago, debate over the matter continues to rage (Currie 1997). The euro is a single currency arrangement that came into theoretical operation between 12 members of the European Union in January 1999 (What are the arguments 2002). Two months after the euro was introduced as a cash currency on 1 January 2002, the euro has finally become the only legal tender currency in the 12 European countries (Schifferes 2002). The eurozone is the subset of European Union member states, which have adopted the euro (Eurozone 2005). There are 12 member countries in the eurozone: Austria, Belgium, Finland, France (except pacific territories using CFP franc), Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain (Eurozone 2005). The rapid and smooth transition - and the successful logistical operation involving the transfer of billions of euro notes and coins to banks, retail stores, and vending machines - is a boost for the European Central Bank (ECB), which masterminded the operation (Schifferes 2002). When the 12 member states that currently comprise the eurozone gave up their currencies in favour of the euro, the European Central Bank took on the responsibility of monitoring monetary policy for the eurozone (Eurzone and the single currency 2005). Euro notes and coins is now being use by more than 300 million eurozone citizens. Monaco, San Marino, and Vatican City also use the euro, although they are not officially euro members or members of the European Union (They previously used currencies that were replaced by the euro.) They now mint their own coins, with their own national symbols on the reverse. These countries use the euro by virtue of agreements concluded with European Union member states (Italy in the case of San Marino and Vatican City, France in the case of Monaco), on behalf of the European Community (Eurozone 2005). Likewise, Montenegro and Kosovo, which used to have the German mark as their de facto currency, also adopted the euro without having entered into any legal arrangements with the European Union explicitly permitting them to do so. They use the euro instead of the Serbian dinar, mainly for political reasons (Eurozone 2005).The other 13 countries of the European Union that do not use the euro are: Denmark, Sweden, the United Kingdom, and the ten member states that joined the Union on 1 May 2004; namely Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Denmark and the United Kingdom got special derogations in the original Maastricht Treaty of the European Union. Both countries are not legally required to join the euro unless their governments decide otherwise, by either parliamentary vote or referendum (Eurozone 2005). Surrendering monetary policy to the European Central Bank (ECB) is an act of political will, and current members of the eurozone are still besieged with its economic consequences (Ezoneplus 2004). There are 31 nations, states and territories using the euro, including seven French and five Spanish overseas territories, two Balkan states, Kosovo and Montenegro, and strangely enough Cuba, where the Euro has been designated as the official currency at one of the biggest beach resorts. The rest of Cuba uses the Cuban peso, which is tied to the US dollar (Robinson 2002). Since the adoption of the single currency by the eurozone countries, there are wide variations in the economic performance of the individual states in the eurozone. There was supposed to be increased convergence of the economic cycles of individual eurozone as the euro stabilised. However, this did not come to past (Eurozone and the single currency 2005). Moreover, the eurozone economy is still greatly influenced by the performance of the US economy. Eurozone gross domestic product (GDP) is rising at a faster rate than expected. It went up 0.6% in the first three months of 2001, up from an earlier estimate of 0.5% and slightly above analyst forecasts. However, the picture for the whole year could be more subdued, as the area's biggest economies are affected by a slowdown in the global economy compared to the 0.6% GDP growth in the eurozone economy during the last quarter of 2000 (Eurozone beat forcast 2001). Eurozone growth in the first quarter of 2001 was pushed up by a good performance in the industry sector despite a drop in investment and imports. On a year-on-year basis, GDP was up 2.6%, revised upwards from a first estimate of 2.5%. However, it stood below a 2.9% increase seen in the last quarter of 2000. The 2000 data do not include Greece, which joined the single currency in January 2001 (Eurozone beat forecast2001). First quarter GDP growth in the 15-nation European Union grew 0.5% quarter on quarter and 2.6% year on year. The data showed private consumption rose 0.4% in the first quarter, up marginally from 0.3% in the last quarter of 2000. The eurozone data came shortly after the Dutch Central Bureau of Statistics said it had revised its forecasts for Dutch GDP growth in the first quarter to 1.6%, its lowest in more than seven years, against a previous estimate of 2% (Eurozone beat forecast 2001). In France and Spain, the low interest rates have increased the prices of the property market, which grow at an average of 16% and 17% respectively. Moreover, credit levels in parts of the European Union are growing because of the low lending rates. Both France and Spain argue that their economies would be better served by the lessening of monetary policy (raising interest rates), whereas the German and Italian economy could each do with a loosening of monetary policy to boost economic growth and reduce the rising levels of unemployment that are blighting both countries (Eurozone and the single currency 2005). The French economy, which is the second biggest in the eurozone, grows by 2.3% in 2001, sharply down from an expansion of 3.4% in 2000 (Eurozone beat forecast 2001). In 1880, France was the leading economic power in mainland Europe. However, It undergone an extended phase of economic down trend. Its share of world Gross Domestic Product fell from 9% in 1880 to only 6% in 1913. In 1939, its industrial machinery was 4 times as old as machinery in the US and 3 times as old as in the UK (Problems in the eurozone 2005). Per capita income did not improve from 1913 to 1939. A law limiting work to 40 hours per week was introduced in 1936. It took a visit from the Germans to wake them up. France will be more likely to experience another extended phase of economic slump (Problems in the eurozone 2005). The euro has subjected the Netherlands to a boom followed by a bust. Unemployment has jumped from 3.3% in 2001 to 6.7% in 2005. The economy has been in a slump after a sharp recession in 2003. The Dutch economy over-heated badly in the late 1990s when the Dutch guilder was linked to other European exchange rates (European monetary union) at a low exchange rate (Problems in the eurozone 2005). This caused a property boom and spiralling wage costs. The Dutch central bank had no appropriate means of stopping the boom under monetary union. For a while, interest rates set by the European Central Bank for the eurozone were barely half the Netherland's 4.5% inflation rate. Then the euro exchange rate fell an that helped the boom to continue (Problems in the eurozone 2005). The result of the upset labour market was that the Netherlands lost 17% in competitiveness against the rest of the euro area from 1997 to 2003. The Dutch government thinning their belts to keep the deficit within the 3%c limit of the European Union's Stability and Growth Pact. Moreover, the Dutch citizens saw France and Germany re-writing the rules of the Stability and Growth Pact to suit themselves once they were in trouble (Problems in eurozone 2005). In Germany, Europe's largest economy, Gross Domestic Product (GDP) grow a mere 1.25% in 2004 (Eurozone beat forecast 2001). Germany joined the euro with a high a high conversion rate for the mark and with a much higher real interest rate than the Bundesbank would have allowed. According to Michael Rottmann in June 2004, the head of foreign exchange strategy at HVB Corporate and Markets in Frankfurt, German growth and inflation required an interest rate of 1% rather than the ECB's 2% (Problems in the eurozone 2005). The German economy is wavering and many observers believe that the euro membership contributed to the problem. Unemployment reached over 4 million in June, 9.8% of the workforce. Moreover, big corporations such as Babcock Borsig have gone bankrupt leaving 22,000 jobs at great danger (Germany economy falters 2005). To make things worst, many economic growth forecasts for Germany keeps falling. Some economists believe the Deutschmark was 20% overvalued when Germany entered the ERM. The country no longer controls important economic levers of power. Its central bank cannot cut interest rates and the government cannot raise government spending because euro zone members have promised to aim for a balanced budget by 2004 (Germany economy falters 2005). Other financial experts believe that the entire German economic model is unravelling. The workplace is burdened by overbearing rules that strangle economic growth. In addition, the high level of support for business from central government, the powerful regional Lander governments, the banks and insurance companies, which has been a cornerstone of the German economic model, will not survive into the new century (Germany economy falters 2005). In the 1950s and 1960s, the German economy achieved productivity (average economic output per worker) of 4% or 5% each year. Employment also expanded as guest workers joined the workforce, so economic growth was 6% or 7% each year. Going forward productivity growth is unlikely to exceed 1% each year and the workforce is likely to fall. With these indicators, Germany can only expect economic slump the coming years (Germany economy falters 2005). On the other hand, a run of positive economic indicators in several European Union countries and a predicted pick up in activity in the eurozone has given rise to reasonable optimism about the European economy, even as evidence of inflation emerges across the continent. France "seems to have set the tone last week" by announcing economic growth of 0.7 percent in the third quarter compared with the previous quarters (Euro zone economy strenghtens 2005). Latest data from Spain showed that the Spanish economy had expanded by 0.8 percent in the third quarter compared with the previous period and by 3.5 percent compared with the third quarter of 2004. In Greece, data showed that growth had reached 3.7 percent during the third quarter on a yearly basis (Eurozone economy strengthens 2005). Other economic indicators add to the story: consumer confidence in the eurozone has registered three consecutive months of improvement, while unemployment has fallen since March. The net fall of the euro against the dollar has also helped European exporters, whose products are more competitively priced on international markets therefore (Eurozone economy strengthens 2005). Taken together, the data has prompted hopes that the eurozone might record its highest growth rate in nearly two years for the third quarter. European Union (EU) economic affairs commissioner Joaquin Almunia said he expects EU economic growth to "accelerate" in the second half of 2005, leading to a "sound recovery" in the bloc in 2006 (Eurozone economy strengthens 2005)." The Frankfurt-based bank encounters contradictory pressures on interest rates with calls for both a rise and a cut. Weak economies across Europe could benefit from cheaper lending rates however; the bank remains concerned at inflationary pressures. The main measure of inflation in the eurozone reached 2.5%, above the European Central Bank's target of 2% because of rising oil prices (Eurozone rates stay 2005). Moreover, the rising commodity prices have also slowed growth in the 12 nations using the euro. Brussels recently downgraded its economic forecasts for the eurozone, projecting growth of 1.2% this year as opposed to 1.6% previously. The eurozone economies grew by 2.1% in 2004. (Eurozone rates stay 2005). The European Central Bank often encountered problems in trying to develop a monetary policy that will work well with all eurozone countries, which its individual needs. This might be seen as clear support for the opponents of the UK joining the single currency; they have long pointed out that any steps to join the euro would lead to the UK surrendering its independence to pursue a monetary policy that satisfies its own needs rather than that of the EU as a whole (Eurozone and the single currency 2005). The success of the single European currency can not be evaluated solely on the public acceptance of the euro currency, but rather it will greatly depends on the European Central Bank policies and management of the economies in the eurozone, which is now facing its first real threat of recession since national currencies were first tied together in monetary union on 1 January 1999 (Schifferes 2002). Some financial experts argue that the European Central Bank(ECB) has not cut interest rates fast enough or far enough to prevent Germany, the eurozone's largest economy, falling into a sharp downturn - mainly because other eurozone countries were growing faster, or facing an inflationary threat (Schifferes 2002). Still, more critics argue that the rules agreed by eurozone countries to limit their budget deficits to no more than 3% of GDP are too restrictive, with more spending required to boost the revival of the economy slowdown. The European Central Bank has predicted a humble recovery by the second half of 2002, but rising unemployment - and the pain of unfinished structural reforms - could well unseat left-wing governments in France and Germany in the future (Schifferes 2002). In the first week of March 2005, the European Central Bank announced its decision on interest rates for the eurozone area. Rates were held at 2% for the 22nd consecutive month. UK rates are currently at 4.75% and there is widespread anticipation that they could rise to over 5% by the end of 2005. The UK has a much tighter monetary policy stance than the eurozone at this moment in time reflecting the different economic conditions that exist in the UK and the rest of Europe (Eurozone and the single currency 2005). To suggest this, however, gives the impression that the whole of the rest of Europe is in the same economic position and this is not the case. The European Central Bank (ECB) has issued a forecast of economic growth for 2005 of 1.6%, largely on the back of disappointing forecast growth rates from Germany and Italy. The economic position in other parts of the eurozone is not quite so depressing (Eurozone and the single currency 2005). However, some financial experts argue that the European Central Bank should not fine-tune interest rates for individual eurozone members, despite their differing labour costs, tax regimes, capital markets and industry structures. For critics, the eurozone is not an 'optimum currency area', because it is heterogeneous in national economic priorities and responses - making it less flexible to crises (Ezoneplus 2004). Acceding countries' relatively low productivity, low incomes, underdeveloped financial institutions and heavy dependence on flighty foreign capital imply increased risks, but responses are limited by EU social policies. Critically, the European Union as a whole shares these higher risks as economic failure in one Member State will have cost impacts across the continent (Ezoneplus 2004). For many proponents of economic and monetary union (EMU), the most important economic advantage is the prospect that the independent European Central Bank (ECB) will deliver durably low inflation for the EMU area. For Germany, which has enjoyed low inflation for decades, the European Central Bank can scarcely offer more on this front than the status quo (Currie 1997). These reservations probably apply also to those countries, such as Austria, France and the Netherlands, that have attached their currency to the D-mark and hence adopted the Bundesbank as their de facto central bank. For them, however, the creation of the European Central Bank offers a voice in the conduct of monetary policy, which they currently lack (Currie 1997). The disinflation benefits will advantageous for economic and monetary union (EMU) countries that have not experienced stable low inflation hitherto. These include Ireland and the UK (were it to join) together with Italy, Portugal and Spain. Low inflation implies low interest rates, as the premiums for inflation and exchange-rate risk would be eliminated from interest rates (Currie 1997). Despite the problems encountered by the eurozone countries with respect to the implementation of single currency, the euro does not only provided convenience for the citizens but also provided convenience for companies that do business in the European Union. This convenience eventually further promotes improved trade. Gone are extra profits and losses made by currency fluctuations at cross-border transactions, with the margins previously captured by intermediaries staying within the business. The savings made from reduced transaction costs in the United Kingdom alone are predicted to measure 1 billion annually (Starkell 2002). Moreover, the fusion of the capital markets all over major European countries creates remarkable efficiencies. The enlarged liquidity and variety of financial services obtainable across the eurozone invites international business investors. Furthermore, the threat to financial institutions is considerably reduced because it absorbs the variations in the economies that cancel each other out in the shorter term. Simplification and efficiency have been a driving force of economic and innovative progress throughout modern history (Starkell 2002). The organisation and implementation of eurozone enlargement and the role of the European Central Bank are significant factors in achieving the aims of the euro. The indication in the currency markets proved that euro is the way forward despite that there has been a lot "fragmentation", with countries either refusing outright or generally taking a 'wait and see' attitude to adopting the euro (Robinson 2002). Reference List Currie, David. 1997, THE PROS AND CONS OF EMU, Economist Intelligence Unit, UK. Eurozone. (2005), Wikipedia, Wikimedia, available from: [18 Nov. 2005]. Eurozone economy beats forecasts, (13 July, 2001), BBC news uk edition,BBC, available from:< http://news.bbc.co.uk/ 1/hi/business/1437581.stm> [18 Nov. 2005]. Eurozone rates stay put once more, (3 November 2005), BBC news uk edition, BBC, available from:< http://news.bbc. co.uk/1/hi/business/4403126.stm> [18 Nov. 2005]. 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