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Introduces the euro, explains a few basic facts about euro adoption across the EU, and sets up the historical overview.
Hello and welcome to EU History Explained.In this series, we try to make sense of today’s European Union by looking at its history.Today we are going to talk about something that many of us carry in our pockets, euros.Before we begin, a few interesting facts.Although the euro is a common policy of the EU, not all Member States are part of it – it is an example of what we call ‘differentiated integration’.However, all EU Member States are legally bound to adopt the euro one day, except for one, Denmark, that has obtained a formal opt-out.Finally, the euro has the same name in all EU languages, written in the three different EU alphabets.But let’s now start with some history!
Covers the early push for European monetary cooperation, the Werner Plan, the collapse of Bretton Woods, and the first attempts to stabilize exchange rates.
Although we’ve been using the euro only for the past 20 years, the history of the European common currency actually starts much earlier than that.Already the Treaty of Rome outlined measures to promote coordination in economic and monetary matters.However, until the mid-1960s, the need for European monetary cooperation is not very pressing, because the stability of the international monetary system is ensured by the so-called Bretton Woods arrangement.This arrangement is based on fixed exchange rates between the US dollar and Western currencies: the dollar is tied to gold, and the other currencies are tied to the dollar.Only when the Bretton Woods system begins to show some cracks do the Europeans realise the urgency for monetary cooperation among themselves.At the Hague Summit in 1969, the Member States entrust Luxembourg’s Prime Minister and Minister of Finance Pierre Werner with the task to lay down a plan for the creation of an economic and monetary union as a solution to
the growing instability of the Bretton Woods system.The plan elaborated by Werner envisions the gradual replacement of national currencies with a common European currency.This rests on a number of conditions.First, the Member States should strengthen the coordination of their budgetary and fiscal policies.Secondly, all restrictions to the movement of capital should be removed.And finally, the exchange rates between the European currencies should be fixed irrevocably.The gradual approach of the plan and the emphasis on economic coordination reflect an ongoing debate among the members of the community.Some of them, so called ‘economists’, like Germany and the Netherlands see economic convergence as a necessary precondition for monetary integration.Others, so-called ‘monetarists’, like France, Belgium and Luxembourg believe that monetary integration will naturally push the Member States’ economies towards greater uniformity.A few months later, in 1971 the US administration announces the end of the Bretton Woods system.
As a response, in an attempt to restore some stability in the international monetary system, in 1972 the Member States come up with the so-called ‘currency snake’.The currencies of the Member States are allowed to fluctuate against each other within a margin limited to 2.25%: in other words, the Member States’ currencies are now pegged to one another.Only a year later, the oil crisis and the uncoordinated responses of the Member States lead some countries to depreciate their currencies, and to the failure of the ‘currency snake’.These years are also marked by a severe economic crisis throughout Europe, and by a high volatility of exchange rates due to the US refusal to keep the value of the dollar stable.This volatility is not good for the functioning of the internal market, and this is why the now nine members of the Community soon decide to relaunch their cooperation in monetary matters.
Explains the disagreements between Member States, the creation of the European Monetary System, and its key tools: the ECU and exchange rate mechanism.
In this phase, however, not all Member States see eye to eye: while France is in favour of deepening monetary cooperation, Germany fears that inflation, which is rampant in the other countries, might spread to its economy.These disagreements are overcome thanks to a gradual convergence between the German Chancellor Helmut Schmidt and the French President Valéry Giscard d’Estaing, who in 1978 propose the creation of a new European Monetary System.The European Monetary System is based on two key elements.First, a virtual currency called ECU – European Currency Unit, that replaces the dollar as the pivot of the system.It is virtual because no coins or banknotes are issued.Second, an Exchange Rate Mechanism based on ‘fixed but adjustable’ exchange rates: this means that the Member States agree on a central exchange rate and on a fluctuation band around this central rate, within which currencies are allowed to fluctuate;
however, the central rate can be readjusted periodically upon unanimous agreement.Some years later, the Member States confirm their objective to establish a fully-fledged monetary union.Building on the conditions identified by the Werner report, in 1989 a committee led by the President of the European Commission Jacques Delors proposes the implementation of the Economic and Monetary Union in three stages.Stage one envisions closer coordination of the Member States’ economic policies, increased monetary cooperation, and the introduction of free movement of capital.Stage two foresees the gradual transfer of sovereignty over monetary matters to the Community institutions, the establishment of a European System of Central Banks, and the narrowing of fluctuation bands.Finally, stage three sees a full handover of competence over monetary matters to the Community institutions, the fixation of exchange rates between national currencies, and their eventual replacement with a European currency.But Germany is still quite reluctant to give up control over its strong currency.
Describes how the fall of the Berlin Wall changed the political context, leading to the Maastricht Treaty, the three-stage plan, and the criteria for joining monetary union.
The situation changes with the fall of the Berlin Wall in 1989: according to some, in this new context Germany’s consent for the launch of the monetary union becomes a bargaining chip for Germany to win its European partners’ supportfor the country’s reunification.Stage one therefore starts in 1990.At the same time, an intergovernmental conference is convened to discuss the Treaty revisions that are necessary to move to stage two.At the conference, old dividing lines re-emerge: Germany and the Netherlands believe that member states should fulfil strict criteria on economic convergence before stage three can begin, while France and Belgium are convinced that once the monetary union is completed,then economic convergence will follow swiftly.These discussions lead to the signature in 1992 of the Maastricht Treaty, that establishes a European Union with a common monetary policy.A compromise is found between the opposing views: it is decided that stage three – the introduction of the common currency – will begin automatically on 1 January 1999, but at the same time convergence criteria that the Member States
have to fulfil in order to participate in stage thre are also defined.The UK, that does not agree to moving to stage three, negotiates an opt out that allows the country to remain outside of the monetary union.The Maastricht convergence criteria set out a number of requirements that Member States have to meet in order to participate in the monetary union.These requirements include: a stable currency, sound and sustainable public finances, durable convergence, and price stability.
Covers the setbacks of the early 1990s, the creation of the European Monetary Institute, the launch of stage three, and the euro’s introduction in cash and across the EU.
Just when progress towards the monetary union seems irreversible, a massive crisis puts the whole project at risk.The crisis begins in 1992, when a referendum in Denmark rejects the Maastricht Treaty, putting the monetary union in question.This is followed by a wave of speculations against the weaker currencies – the Italian lira and the British pound – forcing both currencies to leave the European Monetary System, and forcing the remaining countries to widen the fluctuation bandsto 15% above and below the central rate, de facto making the system a flexible rate system.Despite these setbacks, the plans for the monetary union go forward: Denmark is granted an opt-out from the monetary union, and stage two begins in 1994, when the European Monetary Institute is created as a precursor to today’s European CentralBank.In 1998, 11 countries are deemed eligible to join the monetary union on the basis of the convergence criteria.
Besides these, the UK and Denmark have obtained opt-outs, while Greece and Sweden don’t fulfil the conditions to join.Stage three finally begins in 1999, when the euro is formally introduced as a virtual single currency, and the exchange rates between national currencies are fixed irrevocably.On 1 January 2002, euro coins and banknotes officially start to circulate.Since then, new Member States have joined, and today the euro is used in 19 out of the 27 countries of the European Union, and by more than 300 million Europeans.Thank you for watching, and don’t forget to like, comment and subscribe to our channel.And check out the other episodes of EU History Explained!