How the Euro Came to Be – a Short History
The euro may be considered a relatively new currency having only been born on 1st January 1999, however just to reach that milestone took more than forty years, in what proved to be an arduous journey.
From A Common Market
The European Union (EU) was founded in 1957 just 12 years after the end of the Second World War and set out to build what it described as a ‘common market’.
However it became apparent very early on that if the EU was to achieve its economic goals each of the member countries would need to adopt a common currency.
In March 1979 The European Monetary System was created and at the same time exchange rates were linked to the European Currency Unit (ECU), an accounting currency introduced with a view to stabilising exchange rates.
The next step in paving the way for a single currency took place in July 1990 when as part of the Delors report, exchange controls were abolished. This meant that capital movements in the European Economic Community were no longer restricted.
The Maastricht Treaty
This was followed by leaders committing their countries to Economic Monetary Union (EMU) by signing the Maastricht Treaty on 7th February 1992, although Prime Minister John Major obtained agreement for UK to opt out of EMU. This treaty stated that a single currency would be created by January 1999.
Sterling had joined the Exchange Rate Mechanism (ERM) in 1990 but had struggled to remain within its defined floating parameters. Matters came to a head on 16th September 1992, now more commonly known as Black Wednesday, when the British pound was forced to suspend its membership of the ERM due to a rapid fall in the value of the pound sterling on a day that had seen the then Chancellor, Norman Lamont, hike UK interest rates to 15%.
In December 1995 European leaders agreed that the new common European currency would be known as the euro and replaced the existing ECU as an accounting currency.
The 11 initial Eurozone participants were selected in May 1988 in readiness for the launch of the euro on 1st January 1999.
Each of these 11 member states had to meet strict financial criteria including a debt ratio of less than 60% GDP, a budget deficit of less than 3% of GDP and low inflation and interest rates close to the EU average.
Greece would have been the 12th Eurozone member at launch
Greece would have been the 12th Eurozone member at launch however it was excluded at this time as the weakness of its economy meant it fell short of the required benchmarks.
The Original Lineup
The first day of 1999 saw the euro finally become the single currency adopted by 11 member states some 42 years after the EU was founded.
The original lineup was as follows – Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
Greece eventually switched from the drachma and joined the Eurozone on 1st January 2001 but even then investors were concerned with the strength of its underlying economy – and many are now no doubt rueing the day this decision was made as the Greek crisis continues to unfold before our eyes.
There are now nineteen Eurozone member states with Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015) joining the original 11 and Greece.
Initially the euro was only used for electronic or virtual payments but work was already well underway for the next step when it would actually become real money you could hold in your hand.
Euro Banknote and Coin Designs
The designs for the new banknotes and coins had been agreed in the mid to late nineties with production starting at the mints and printers some three and a half years before the physical currency was due to be launched.
Euro banknotes and coins eventually came into being on 1st January 2002 with 7.4 billion notes and 38.2 billion coins been produced in readiness for this momentous date in European monetary history.
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Denominations of the notes range from €5 to €500 and, unlike euro coins, the design is identical across the whole of the Eurozone, although they are issued and printed in various member states.
Each note has a distinctive colour and size with a common theme of European architecture in various artistic eras.
Some 11 years later it was estimated that the number of notes had more than doubled with approximately 15.5 billion euro banknotes in circulation.
Today there are seven different denominations of the euro banknotes — €5, €10, €20, €50, €100, €200 and €500 — all made of pure cotton fibre which improves their durability.
Euro Highs and Lows
Following the financial crash in 2008 the pound fell to its lowest point against the euro since the introduction of the single currency – it hit 1.022 on 30th December 2008 which meant that many tourists were getting less than 1 euro to the pound for the first time.
At the other end of the scale the strongest the pound has been against the Euro to date was 1.751 on 3rd May 2000.
£500 would have got you just 511 euro compared with 876 euro eight and a half years earlier.
Looking at these two extremes from a consumer’s perspective £500 would have got you just 511 euro at 1.022 compared with 876 euro at the peak of 1.751 some eight and a half years earlier.
In September 2014 European Central bank interest rate was cut to a record low of 0.05% – a long and steady slide from the 4.25% high seen in 2008 in the aftermath of the banking crisis.
On 9th March 2015 the European Central Bank (ECB) began a 1 trillion euro quantitative easing (QE) programme in an effort to stimulate the Eurozone economy.
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Mario Draghi, ECB President said the bank would purchase 60 billion euros of bonds each month until September 2016 or until inflation was close to the bank’s target of 2 per cent.
Whilst initial signs have been positive, including the highest business activity for four years, economists agree that there is a long way to go.
The QE programme is designed to keep interest rates low to encourage borrowing and spending but fears of a possible Greek exit from the EU following its ‘no’ vote on 5th July spells a further prolonged period of financial uncertainty for the Eurozone.
The Greek saga continues to unfold adding further uncertainty to the Euro.
We’ll keep you posted . . .
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