EMERGENCE OF EUROZONE
BENEFITS OF EURO
EURO V/S DOLLAR
IMPACT OF EUROZONE CRISIS ON INDIA
Euro, the common currency of European Union, was launched by 11 of the 15 members of the Union, on January 1, 1999. The Maastricht treaty of 1991, which set the stage for the monetary union, laid down certain eligibility criteria for member countries to join European Monetary Union (EMU), such as maintaining budget deficit, public debt, inflation, long term interest rates and exchange rate within defined limits1. The Euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US $ 1.1743). Euro Coins and Banknotes entered circulation on 1 January 20022.
While the Euro dropped subsequently to US $ 0.8252 within 2 years (26/10/2000), it has traded above the US $ 1.5990 on July 15, 20083. Since late 2009, the Euro has been immersed in the European Sovereign Debt Union Crisis which has led to the creation of ‘European Financial Stability Facility’ as well as other reforms aimed at stabilizing the currency. In July 2012, the euro fell below US $1.21 for the first time in two years, following concerns raised over Greek debt and Spain’s troubled banking Sector.4 As of June 2012 with more than Euro 906 billion in circulation, the euro has the highest combined value of bank notes and coins in circulation in the world, having surpassed the US $. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the Euro Zone is the second largest economy in the world.5
The countries whose currencies are in Euro are known as Euro land. In this background, the present term paper will try to explore the emergence, ascent and recent problems being faced by Euro zone. Specifically the objectives of the present study are: To explore the emergence of Euro; to analyse the recent crisis in Euro.
EMERGENCE OF EUROZONE
From early 19th century until post World-War I period which was regarded as the great age of internationalism, most of the major industrializations of the world and their trading patterns operated under a fixed exchange system called Gold Standard. This was the Pre-Bretton Woods period. Post World-War I, gold standard was abandoned by great majority of world- Great Britain suspended gold in 1931- slowly the other countries followed the suit and by 1937 not a single country followed gold standard. The breakdown of gold in 1930s was followed by an era of invertible currencies. But with out-break of World War-II (1939-45), nations began to impose far reaching system of exchange central and monetary agreements became inoperative.6 Since the end of World War-II, the U.S dollar had enjoyed a unique and powerful position, but perhaps no more established in 1944 and named after the New Hampshire town, the Bretton Woods system created on international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction Development, now known as World Bank.7 Though it came on the heels of Great Depression and the beginning of the end of World War-II, the Bretton Woods System addressed global ills that began as early as the World War-I, when governments (including U.S.) began controlling exports and imports to offset wartime blockades. The Bretton Woods System itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold- a decision made to prevent a run on Fort Knox, which contained only a third of the gold Brillion necessary to cover the amount of dollar in foreign hands. Europe had begun discussions in 1969, but of single currency within Bretton Woods. In 1972, member states agreed to peg their currencies to each other within a range of + 2.25% and -2.25% ; called the “Snake in the Tunnel”. Oil shocks in 1973 and 1979 (oil discoveries) , as well as inflation, forced most member states to withdraw, leaving a “ Deutsche Mark” group of Germany, Denmark, and Benelux (customs union in Europe comprising three neighboring countries, Belgium, the Netherlands, and Luxembourg). European currency Unit (ECU), a ‘basket’ of currencies of member states based on a weighted Average of currencies (based upon size of economies) was created. Thus European Monetary System, 19798 was formed in a Commission led by President Roy Jenkins.
The European Currency Unit (ECU) played a central role in the EMS. It served as the unit of account for the exchange rate EMS. It served as the unit of account for the exchange rate mechanism and for the operations in both the intervention and credit mechanism9.
The Maastricht Treaty of 1991, which set the stage for Monetary Union, laid down certain eligibility criteria for member countries to join EMU, such as maintaining Budget Deficit, Public Debt, and Inflation, Long term Interest Rates and Exchange Rates within defined limits. Euro, the common name, was officially adopted in Madrid on 16th December 1995.10 The Euro was introduced to World Financial Markets as an accounting currency on 1st January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US $ 1.1743).
Euro Coins and Banknotes entered circulation on 1st January 2002. The exchange per Euro determined at a time of the Euro launch were about US $ 1.17; British Pound 0.70: Yen 133; and German Mark 1.96. One Euro was equivalent to about rupees 49.
The Euro (code: EUR) is the official currency of the Euro zone, which is officially used by 17 of the 27 member states of European Union i.e. Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia and Spain.11 Outside the Euro zone a total of 23 countries and territories that do not belong to EU have currencies that are directly pegged to the Euro including 14 countries in mainland Africa. It is also the currency used by the Institutions of the European Union. Countries like Andorra, Kosovo, Montenegro and Zimbabwe are the unofficial users of Euro. The Euro is the second largest Reserve Currency as well as the second most traded currency in the World after the United States Dollar.
1 Cherunilum, Francis: ‘International Economics’; p.404-405
2 “Initial Change over (2002)”. European Central Bank, retrieved 5th March 2011
4 “Global Markets Tumble on Spain, Italy worries”. 31st May, 2012
5 “Report for selected country groups and subjects.” www.imf.org/14sept2006
6 Cherunilum, Francis: “International Economics”: p.398-399
9 Cherunilum, Francis: “International Economics”; p.403.
10 “Madrid European Council (12/95): Conclusions”, European Parliament.
11 Rosenberg, Matt (23 may 2012). “Euro Countries: 22 countries use the Euro as their official currency” http://www.geography.about.com/od/lists/a/euro.htm