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From Europe to the Euro
Erica Edwards
Center for European Studies
University of North Carolina at Chapel Hill
Plan of Attack
• Stewart and Colbert on the Euro
• Quiz – The Nuts of Bolts of the Euro
• National preferences and international
institutions – negotiating the Maastricht
Treaty and EMU
• Transitioning to the Euro
• Q&A
Nuts and Bolts of the Euro
A quiz
1. What was the start date of Economic
and Monetary Union?
a) Jan 1980
The first major monetary policy initiative (1970
Werner Plan) called for EMU by Jan 1980, but
adverse economic conditions doomed the initiative.
b) Jan 1999
Correct. EMU officially started on Jan 1,
1999. Conversion rates were irrevocably
fixed and legislation related to introduction
of the euro came into force.
c) Jan 2002
Circulation of euro banknotes began.
2. How many countries are currently
in the euro area?
a) 27
Number of current EU member states.
b) 11
Number of countries that originally joined
in 1999.
c) 16
Correct. As of 2009, 16 EU member
states are part of the euro area
1999
Belgium, Ireland, Spain, France,
Luxembourg, the Netherlands, Austria,
Portugal, Finland
2001
Greece
2007
Slovenia
2008
Cyprus, Malta
2009
Slovakia
•
The “Outs”
• Britain, Denmark, Sweden,
and most of Eastern Europe
remain outside of euro
• To join would need popular support and low
budget deficits
• Britain and Sweden unlikely to join unless
economy tanks
• Eastern European countries
perhaps more likely to join as they
meet criteria
3. What were the set of rules set out for
entry into the European Monetary Union?
a) Copenhagen Criteria
The political, economic, and legislative requirements
that countries must meet to join the EU.
b) Stability and Growth Pact
Pact enacted in 1997 to ensure that fiscal discipline
would be maintained and enforced in the EMU.
c) Convergence Criteria
Correct. The 1992 Maastricht Treaty set out
5 criteria that countries needed to meet
prior to joining the EMU.
The So-Called “Maastricht Criteria”
Inflation rates: No more than 1.5 percentage points higher than the
average of the 3 best performing (lowest inflation) member states
of the EU.
Government finance:
• Annual government deficit: Ratio of the annual government
deficit to GDP must not exceed 3% at the end of the preceding
fiscal year.
• Government debt: Ratio of gross government debt to GDP must
not exceed 60% at the end of the preceding fiscal year.
Exchange rate: Applicant countries should have joined the exchangerate mechanism (ERM II) under the European Monetary System
(EMS) for 2 consecutive years and should not have devalued its
currency during the period.
Long-term interest rates: The nominal long-term interest rate must
not be more than 2 percentage points higher than in the 3 lowest
inflation member states.
4. Who sets interest rates in the EMU?
a) The European Council
Determines membership in the eurozone.
b) Member States
Manage national fiscal policies within EU limits.
.
c) The European Central Bank
Correct. ECB controls interest rates for
euro. Independent of political
authorities; goal is low inflation.
d) The European Parliament
Not important here.
The European Central Bank
• Established under the
Amsterdam Treaty (1998)
• Modeled after the German
Bundesbank
• Headquartered in Frankfurt
• Current president Jean-Claude Trichet
• The primary objective of the ECB is to
maintain price stability within the
Eurozone, or in other words to keep
inflation low!!
5. What is the current dollar-euro
exchange rate?
a) 86 cents
January 2002
b) $1.59
July 2008 .
c) $1.27
Correct.
National preferences &
international institutions
Negotiating the Maastricht Treaty
Why would governments agree to
abandon their national currencies,
and thus their ability to implement an
autonomous monetary policy, in favor
of a single currency?
Answer: the benefits outweighed the
costs
Benefits of Monetary Union
Benefits of a single currency include:
• Promote trade and investment
• Eliminates competitive devaluations
• Tied Germany to west after
unification
• Insulates EU from rest of world
• Locks in objectives of low inflation
and smaller budget deficits
Costs of Monetary Union
Countries joining monetary union must:
• Agree to share authority over interest
rates, the single most important tool
of economic policy
• Give up ability to devalue currency
• Agree to EU limits on overall fiscal
policy stance (i.e. limit budget
deficits)
A Single Currency - Competing Models
Technocratic
• Priority of monetary
integration should be to
maintain low inflation.
• Authority over monetary
policy should be invested
in a political independent
central bank directed to
keep inflation low.
• EU should have strict
rules limiting size of
budget deficits.
Politicized
• Priority of monetary
integration should be to
promote growth and
employment.
• Governments need to
coordinate all tools of
economic policy –
fiscal, monetary,
exchange rate – to
achieve these goals.
And the winner is….
Outcomes of negotiations for the Maastricht
Treaty favored the technocratic German view:
• Politically independent ECB tasked with
keeping inflation low
• Convergence criteria
• Only Britain and Denmark allowed not to
participate (French victory)
• Deadline for creation of single currency
(small victory for the French)
Why did Maastricht So Closely Match
German Preferences?
Two possible explanations:
• Idea Diffusion
• Domestic Politics & Bargaining Power
Transition to Monetary Union
Rough Seas or Smooth Sailing?
The backlash begins…
• 1992/93 marks end of public’s “permissive
consensus”
• European project finally starts to hit home for
citizens (i.e. touches their daily lives)
 react by objecting to technocratic, elitedriven nature of integration process
• Ratification problems:
– the Danish “no”
– the French “petit oui”
– German constitutional woes
Joining the Euro
• As late as 1995, only 3 countries had met
the convergence criteria:
Ireland, Luxembourg, Finland
• In 1998 decided that all countries wanting
to join passed muster…with the exception
of Greece.
How did countries like Italy, Belgium,
France, Germany meet the most
important fiscal criteria?
• Cheating
• Large-scale privatization to increase
income
• Italy introduced a “euro tax”
• Fear of exclusion from euro to gain
domestic political support for cuts
• Pro-European government in Italy with
supports that wanted to reduce deficits
• France ran a deficit of 3.07% of GDP and
dared anyone to keep them out!
Designing the Euro Sign
“Inspiration
for the € symbol itself came from the Greek
epsilon (Є)– a reference to the cradle of European
civilization – and the first letter of the word Europe, crossed
by two parallel lines to ‘certify’ the stability of the euro.”
– European Commission
Designing the Currency
Designing the Currency