Civitas
+44 (0)20 7799 6677

The Euro

PDF: The Euro

Introduction
The euro, currently used by 19 EU member states, is the official currency of the eurozone. People in these countries use the same coins and notes, and business amongst companies takes place in the same currency. For many people, the most noticeable benefit is that money does not have to be changed when travelling within the eurozone.

There has been scepticism about the ability of the euro to remain a stable currency that serves the interests of all its members. Politicians and economists have expressed concern that the different structures of member states’ economies might put excess strain on the euro.

History
In 1989, member states started the process of Economic and Monetary Union (EMU), a set of policies aimed at bringing all the member state economies to a similar standard. The Maastricht Treaty (1992) made EMU part of EU law and set out a plan for the single currency to be established by 1999.  To be a part of EMU, countries had to meet certain rules: control their exchange rates, achieve low inflation and interest rates, and keep government borrowing and spending under control.

In 1998, 11 member states handed over the power to set interest rates to the European Central Bank (ECB). Three member states stayed out of this final stage of EMU: Britain, Sweden and Denmark. The euro was launched on 1 January 1999, with euro notes and coins introduced in 2002.

All new EU member states have to join the euro, except Denmark and the UK, which have negotiated an ‘opt-out’ clause. Greece joined the eurozone in 2001. Of the new member states that joined the EU in 2004, Slovenia adopted the euro in 2007, Cyprus and Malta followed in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and Lithuania in 2015.

The euro struggled after the global economic downturn in 2008. Eurozone members with weaker economies struggled to repay their debts, which damaged confidence in the euro. The situation worsened in 2010 when Greece suffered a financial crisis. Despite initial reluctance, eurozone countries gave €80 billion worth of loans to Greece. In return Greece had to cut its public spending and allow EU auditors to assess its finances. After concerns that other weak eurozone economies would face similar crises, a European Financial Stability Facility (EFSF) was created to provide loans to struggling eurozone states.

In March 2012 the size of the rescue fund was increased from €500 billion to €800 billion. Ireland received a €17.7 billion loan over 2011 and 2012 and Portugal received €26 billion. In 2013 the EFSF was replaced by the European Stability Mechanism (ESM). In 2015, a third Greek bailout was agreed, worth €85 billion, after Greece failed to meet the deadline for a crucial loan repayment to the European Central Bank.

How does the euro work?
The euro can be used in any member state that has signed up to full EMU. The euro economy relies on all members obeying the rules of the Stability and Growth Pact (SGP). The SGP is a set of rules designed to ensure that member states pursue sound public finances and coordinate their spending and tax policies. It is the role of the European Central Bank to maintain stable prices by keeping inflation under control for all eurozone countries.

The euro supposedly offers many advantages. The previous need to exchange currencies meant extra costs in cross-border sales. Because it is easier to compare prices, cross-border trade and investment should increase. The euro may also give the EU more power, as it is the second biggest international currency after the US dollar.