History Of Bouncing Euro Essay Research Paper

History Of Bouncing Euro Essay, Research Paper

Brief History and Implementation Schedule

On January 1, 1999, eleven European countries replaced their national currencies and introduced a single European currency, the Euro. Some feel the euro is simply the ECU (European Currency Unit) renamed since the ECU’s were exchanged one-for-one for new euros. Bills and coins for the national currencies will remain in circulation as sub-denominations of the euro until January 1, 2002, (”E-day”) when they will be exchanged against new euro coins and bills. Within six months, national currencies will be completely replaced with the euro notes and coins. However, all inter-bank commerce and stock exchange trade is now denominated in the official currency.

There has been some discussion about when “E-day” should take place. Many merchants feel that January 1st is too close to the holiday season (a high cash-circulation time of the year). The merchant’s feel it will add to the confusion of the consumers and would like the date move to February or March of 2002.

On November 8th, 2000, European Union finance ministers agreed to eliminate the currencies of the 11 member nations four months ahead of schedule, leaving banks, businesses and consumers just two months to change over to Europe’s common currency.

Now, German marks, French francs and other old currencies will meet their demise

March 1, 2002 — two months after the introduction of euro cash. The changeover had been set for July 1, 2002. The move aims to minimize confusion during the transition.

Pros and Cons of a Single European Currency

There were many arguments for and against a single European currency. Some of the arguments in favor of a single European currency include:

Transaction Costs. Eliminating converting from one currency to another will benefit businesses as well as tourist.

No Exchange Rate Uncertainty. A single currency eliminates the risk of unforeseen exchange rate revaluations or devaluations.

Transparency and Competition. The direct comparability of prices and wages will increase competition across Europe, leading to lower prices for consumers and improved investment opportunities for businesses.

Strength. The new Euro will be among the strongest currencies in the world, along with the US Dollar and the Japanese Yen. It will soon become the second most important reserve currency after the US Dollar.

Capital Market. The large Euro zone will integrate the national financial markets, leading to higher efficiency in the allocation of capital in Europe.

Some of the arguments against the use of a single European currency include:

Cost of Introduction. Businesses will have to convert all prices and wages into the new currency. This will mean modifications to applications that include accounting, payroll, price list, etc.

Fiscal Policy Spillovers. Individual countries that increase their debt will raise interest rates in all other countries.

No Competitive Devaluation. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports.

With these and other pros and cons explained in detail, the eleven members still decided that it was in their best interest to implement a single European currency.

Participating Countries

The eleven participating countries are Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal, and Finland. On May 3rd, 1998, these eleven member countries irrevocably agreed to fix their exchange rates based on the ECU rate as of December 31, 1998. See Appendix A for a chart of the agreed upon exchange rates.

The European union is made up of fifteen countries. In addition to the eleven participating countries Britain, Sweden, and Denmark decided not to participate. Greece did not meet the Maastricht criteria at the time but has subsequently qualified and will be joining the Euro group as the 12th member on January 1, 2001.

The Government of Great Britain would like its citizens to consider converting to the euro. They know, however, that if they would place a referendum on the ballot at this time, they would not be successful. Some of the banks in Great Britain are supporting web sites that are trying to convince the people that the euro is bad for their country. I feel Great Britain has decided to take a wait and see attitude. If the euro turns out to be successful, then they will jump on board.

Leaders and Membership Criteria

In a compromise deal, Wim Duisenberg became the first head of the European Central Bank (ECB), but will retire after four years to make way for Jean-Claude Trichet, who is currently head of the French central bank. The regular office period for the ECB governor is eight years. The French were favoring Trichet, while the other European countries were supporting Duisenberg. Both have impeccable credentials as string central bank governors.

A country must meet the five criteria of the Maastricht Treaty to become eligible to join the euro member nations. The criteria are:

Price Stability. A country’s inflation rate must not exceed the average inflation rate of the three best performing member states by more than 1 + percent.

Fiscal Prudence. A country must not exce

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