Key Notes

The Euro

I. Background: What is the euro and what does the EU intend to achieve with the common currency?

Since 1 January 1999 Europe has had a new currency: the euro. Since that time there has been no separate national currency in eleven Member States (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain). In the course of the year 2000 it was agreed that Greece would also participate in monetary union with effect from 1 January 2001.

Monetary policy is no longer set solely by the national banks of these countries. They have been replaced by the European System of Central Banks (ESCB) made up of the national central banks and the European Central Bank (ECB) based in Frankfurt, whose first president was the Dutchman Wim Duisenberg. His successor is Jean-Claude Trichet, the former governor of the French national bank. He, along with the five other members of the ECB Executive Board and the heads of the euro countries’ central banks, sets the common monetary policy.

Following a three-year transitional period euro notes and coins were introduced with effect from 1 January 2002. Within two months the entire cash stocks of the euro-zone were converted, thus enabling the greatest logistical operation of the post-war period to be successfully completed.

Over 70% of the trade of the Member States of the European Union is carried out within the EU. It is expected that this percentage will increase further. The euro allows the European economy to benefit from a currency unaffected by inflation. It enables businesses to calculate costs with a high degree of certainty. The euro also leads to increased prosperity by eliminating the costs of converting currency. As a result of the introduction of euro notes and coins, transaction costs in cross-border trade have fallen. The introduction of the euro has also made it possible to reduce interest rates to a historical low and to ease the public debt burden on future generations. Finally, the euro has dramatically reduced worldwide currency speculation. When external shocks occurred, such as wars and the bursting of the dot-com bubble, there would have been repeated growth-retarding, speculative attacks on individual European currencies had it not been for the introduction of the euro.

The euro is both an economic project and a political symbol. Economically, the common currency turns the internal market into the home market. Life is made easier for business and consumers, costs are reduced, and a contribution is made to overcoming the problem of unemployment. Politically, the euro embodies, in a manner visible to all, European integration, that is to say the journey of a continent towards unity in diversity, the overcoming of armed conflicts, and a switch to joint, peaceful, and prosperity-promoting objectives.

The introduction of a common currency requires a renunciation of sovereignty on the part of the Member States. Decisions on monetary policy are no longer taken by nation states but transferred to a common institution, the European System of Central Banks (ESCB) and its most important component, the European Central Bank (ECB). The ECB acts independently and primarily seeks to ensure price stability. As a result, confidence is created in the currency, forward planning is made easier, and the level of prosperity is raised. Finally, a stable currency is an essential precondition for secure pensions.

However, the prudent policy of the European Central Bank is not sufficient to guarantee price stability. Large and persistent budget deficits in the Member States can have the effect of accelerating inflation, against which the Central Bank is powerless to act. In the case of an international currency such as the euro there is the added difficulty that the governments of the participating countries set different priorities in terms of their finance policy. This can result in an asymmetrical level of interest rates in the Member States, which hinders the implementation of monetary policy and ultimately leads to lower growth in the euro-zone.

The historical division of responsibilities between the Member States and the European institutions has led to an unusual situation in which monetary policy is decided solely at a supranational level whilst economic and finance policy is decided largely at national level. In planning terms, implementing monetary policy would be easier if there were a European economic government. Whether such a government should be set up is a controversial issue. However, it is certain that there will be no such government in the foreseeable future.

In the absence of a European economic government, the Amsterdam European Council in June 1997 adopted the Stability and Growth Pact, which lays down fixed limits on Member States’ borrowing. It clarifies the provisions that had been laid down previously in the Maastricht Treaty. The Member States of the EU, including those which do not yet use the euro, undertake to achieve a budget surplus or at least a balanced budget each year. An early warning system is intended to help identify those countries which might exceed the 3% maximum permitted limit for net public borrowing and to allow them to make adjustments in good time. If the necessary changes are not made, a coercive system takes effect under which fines can be imposed in the worst cases. The Stability Pact ensures that the Maastricht convergence criteria, which are a prerequisite for participation in the euro, are still complied with after the introduction of the common currency.

In principle efforts are made to achieve a budget surplus in order to give Member States the margin of manoeuvre necessary to be able to act counter-cyclically during economic recessions without being restricted by the 3% limit. This implies that during periods of recovery budgets are readjusted and, where necessary, structural reforms are carried out. The Pact also provides for the suspension of the sanctions during particularly deep economic recessions. If national income shrinks by at least 2% in one year, all the procedures are automatically suspended. If it falls by between 0.75% and 2%, it is within Council’s discretion as to whether or not the procedure is introduced.

The apparent asymmetry between the Pact’s stability and growth requirement has repeatedly given rise to confusion. The Pact is an instrument for attaining a currency unaffected by inflation, which itself constitutes an essential basis for economic growth. Moreover, as a result of the Pact budget, deficits burdening the economy are cut back, the interest-rate burden on countries is reduced and, by seeking to achieve annual budget surpluses, the necessary reserves are built up to allow action to be taken in times of recession. To date the great majority of the fifteen Member States have been able successfully to comply with the terms of the Pact and, as in the case of Portugal, change course resolutely and courageously where divergences have occurred. It is interesting to note that those countries which have made the greatest efforts to comply with the Pact have also had the best results economically.


II. What has the EPP-ED Group achieved?

From the outset the EPP-ED Group advocated and vigorously supported the introduction of the euro. The central bank’s commitment to the principal objective of price stability and the establishment of its independence from political instructions are the most important pillars of the European currency and were both included in the EU Treaty with the active involvement of the EPP-ED Group and the governments close to it. The EPP-ED Group had a decisive influence on the legislation required during the intensive preparation period for the euro. The decisive interventions by the EPP-ED Group in the European Parliament prevented the Left in the House from achieving a majority for its position, which essentially would have placed objectives on monetary policy which it could not meet and would ultimately have resulted in a weakening of the currency. The EPP-ED Group lent particular support to the Stability Pact, which was attacked on many sides. Without the Group’s clear commitment to the Pact it would have been abolished or reduced beyond all recognition by the left in the very first years of monetary union, and that would have spelt the end of monetary union in the medium term.


III. Our aims in the next parliamentary term

The EPP-ED will maintain its present course. The aim of the EPP-ED Group is to include in the euro-zone all those Member States which satisfy the Maastricht convergence criteria. This applies in particular to the ten new members of the European Union. However, the Group also respects the wish of those countries which, under the opt-out clause, prefer not to participate in monetary union at present.


Adviser: Christian Scheinert