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ENLARGEMENT: THE NEW FACE OF THE EU
Economic Growth and the Euro
What is the Euro?
The Maastricht Treaty gave green light to Economic and Monetary Union (EMU), a process
intended to slowly harmonise the economic and monetary policies of the EU Member States
with the view of creating a common space of economic growth and stability. In brief, the
introduction of the Euro is intended to be part of a process to:

Enable the completion of the single market and the desire to facilitate trade between the
EU countries by eliminating uncertainties about exchange rates and cutting out
currency exchange costs.
 To reach increased integration between the economies of the EU countries, fostering a
better economic environment leading to a strong growth rate and a higher level of
employment.
The introduction of the Euro goes along with other important developments:
-
The creation of the European Central Bank, which manages European Monetary
policy on behalf of the participating Member States
A tight economic discipline was imposed on Member States, which are expected to
pursue sound macroeconomic management of their internal affairs.
Even if it was not visible until later, the Euro was born on New Year’s Day 1999. On that day
11 of the 15 EU Member States locked their currencies irrevocably to the Euro. Three years
later, during the first months of the year 2002, they eventually substituted their existing
currencies for the Euro. Greece joined the Euro by January 1st 2001, and also took part in the
introduction of notes and coins in January 2002.
Which countries participate in the Euro?
There are twelve Member States of the European Union that have adopted the single currency
creating the so called Euroland: Belgium, Germany, Greece, Spain, France, Ireland, Italy,
Luxembourg, The Netherlands, Austria, Portugal and Finland.
Which are the conditions to become a Member of the Euro Area?
The Maastricht Treaty established both a timetable and a set of conditions that all those
Member States wanting to adopt the Euro should fulfil. Those conditions are represented by a
series of economic indicators, including inflation, public deficit, etc. The reason for this is that
the achievement of these conditions ensures not only stable economic conditions but also a
degree of convergence between participating Member States thus enabling EMU to function
properly.
These conditions are broadly known as the convergence criteria and involve the following
measures:
-
The annual government deficit must not exceed 3% of GDP
-
Total outstanding government debt must not exceed 60% of GDP.
Rate of inflation cannot exceed 1.5% of the three best performing EU countries.
Average nominal long term interest rate cannot be more than 2% of the average rate in
the three countries with the lowest inflation rates.
Exchange rate stability, meaning that for at least 2 years the country concerned has
kept within the 'normal' fluctuation margins of the European Exchange Rate
Mechanism (ERM)
Before the Euro eventually replaces the national currency there is a transition period. During
this, Member States will still use their national currencies, which will have been linked to the
euro according to their fixed conversion rate.
Euro and enlargement
Even if the new Member States are going to become part of EMU as soon as they join, they
will not adopt the euro at the same time. Instead, the accession countries must continue the
process of structural, administrative and economic reform in order to have solid market
structures that allow the adoption of the price and fiscal stability objectives of EMU. Only this
will allow them to fulfil the convergence criteria on a permanent basis.
When will the new members adopt the euro?
The new Member States have drawn up Pre-Accession Economic Programmes. These
programmes have enabled the European Commission to ensure that their economic policies
are compatible with EMU membership. All the countries interested in eventually adopting the
euro must first meet the five convergence criteria, which are prerequisites for becoming part
of the euro area. On the top of that, because of the way the criteria on exchange rate stability
is worded, new Member States cannot adopt the euro until 2006 at the earliest. However,
there is no fixed timetable, and they may choose to wait for a while longer if they think their
economies are not yet ready.
The adoption of the common currency by a country, following accession, will only occur if
the following conditions take place. This involves three stages:
-
The current, pre-accession stage, during which the applicant country must demonstrate
clear and irreversible progress towards a functioning market economy.
-
An intermediary phase between accession and the adoption of the euro, in which the
new Member State participates fully in the Single Market and demonstrates progress
towards achieving the conditions necessary to adopt the euro.
-
Participation in the euro area provided the new member fulfils all the criteria that
apply to current members for the adoption of the single currency (the convergence
criteria described above)
It should be stressed that, so far, several accession countries have made good progress
towards these goals, at the same time strengthening their economic reforms.
The EU is also ensuring that the "sequencing" towards economic and monetary integration is
right, by encouraging and monitoring progress towards the fulfilment of the so called
Copenhagen economic criteria1. One of the conditions of these criteria requires candidate
countries to be functioning market economies, able to cope with competitive pressures and
market forces within the EU by the time of accession.
How does the Euro affect SMEs?
The euro brings about more choice and business opportunities for SMEs through the
following circumstances:
-
Exchange rate risk disappears in most of the European Union’s largest markets. In the
past, smaller companies have not had the same access as larger companies to financial
instruments to hedge against currency movements.
-
Competition increases in the banking industry and, therefore, lowers interest rates.
These new conditions should enable SMEs to finance their operations at a much more
favourable cost than before.
-
Treating the euro area as one domestic market. SMEs will have the possibility of
selling their products and services across a far wider area (economies of scale) to more
potential customers. In the process, SMEs will be encouraged to incorporate
innovation and new technical solutions into their business strategies, to the benefit of
the entire European economy.
-
Lastly and most importantly, transparency becomes a crucial issue. Facilitating cross
border transactions, making travelling easier, or being able to compare prices in
different markets that use the same currency contribute to enhance the business
environment and support the development of the internal market.
For more information:
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European Commission: http://www.europa.eu.int/comm/enlargement/index.htm
European Parliament: http://www.europarl.eu.int/enlargement/default_en.htm
Economic and Social Committee:
http://www.ces.eu.int/sections/enlargement/index_en.htm
Euro in motion – practical guide. Eurocommerce. 2001
FLASH EUROBAROMETRE 105 “SMEs and the euro” – July and August 2001European Commission
EURO PAPERS 41: Communication from the Commission on practical aspects of the
euro. State of play and tasks ahead. European Commission
Eastward enlargement of the Eurozone - Office of the European Integration Committee
and National Bank of Poland. Warsaw 2003
One Currency for all the Europes? Relative Advantage and Political Economy Problems
of EMU Enlargement - Rainer Schweickert, Kiel Institute of World Economics
Ezoneplus: www.ezoneplus.org – website specialized in the enlargement of the eurozone
1
The existence of a functioning market economy as well as the capacity to cope with competitive pressure and market
forces within the Union; Copenhagen European Council.