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Europe

Europe - The euro

Explanation

The euro is the single currency of 12 European countries. It was planned for many years, and finally began on January 1st 1999. On January 1st 2002 euro notes replaced the national currencies. The UK has decided not to join the single currency for the time being.

The origins of the single currency lie in the Maastricht Treaty of 1993. This snappy name came about because it was signed at a conference in Maastricht! The Maastricht Treaty set out the progress towards a single currency, giving deadlines and a variety of conditions that needed to be fulfilled for countries to join in. The leaders of the EU countries were well aware that a single currency would only work if the economies taking part were reasonably close together in terms of the stage they were at in the business cycle. To try to achieve this, they set out a series of convergence criteria. These set out conditions for inflation, public borrowing, levels of public debt, exchange rates and interest rates. It was hoped that if countries were close together on these, that was a good indication of macro-economic convergence. Early in 1999 it was judged that 11 countries had met these criteria, and those countries went on to join the euro. The UK had met the criteria, but the decision was made politically not to join. It was fairly clear that the UK trade cycle was not in the same position as other European countries at the time, so it may have been difficult anyway.

From the outset of the euro, the conversion rates for all the member currencies were irrevocably fixed. They were:

• 1 euro = 40.3399 Belgian francs
• 1 euro = 1.95583 Deutsche Mark
• 1 euro = 340.750 Greek drachmas
• 1 euro = 166.386 Spanish pesetas
• 1 euro = 6.55957 French francs
• 1 euro = 0.787564 Irish pounds
• 1 euro = 1,936.27 Italian lire
• 1 euro = 40.3399 Luxembourg francs
• 1 euro = 2.20371 Dutch guilders
• 1 euro = 13.7603 Austrian schillings
• 1 euro = 200.482 Portuguese escudos
• 1 euro = 5.94573 Finnish markkas

Having a single currency also means having a single monetary policy. Interest rates therefore now have to be set for the whole euro area. This is done by the European Central Bank. There is more detail available on the work of the European Central Bank elsewhere.

For some of the arguments for and against the UK joining the single currency, why not have a look at the theory section or for stories relating to the euro why not do a search in the In The News section.