A Short History of the Euro | EU History Explained Episode 3

Overview of the Euro

• Common Policy of the EU: The euro, while a central element of EU policy, is not adopted by all Member States; this exemplifies "differentiated integration."

• Legal Obligations: All EU Member States must eventually adopt the euro, except Denmark, which has a formal opt-out.

• Name Consistency: The euro retains the same name across all EU languages and is represented in three EU alphabets.

Historical Background

• Foundational Treaties: Initial measures promoting economic and monetary coordination appeared in the Treaty of Rome; however, urgency for cooperation did not arise until the mid-1960s.

• Bretton Woods Arrangement: The Bretton Woods system, with fixed exchange rates between currencies tied to the US dollar, initially stabilized international monetary systems.

• Need for Cooperation: Cracks in the Bretton Woods system prompted EU nations to seek coordinated monetary strategies.

The Hague Summit of 1969

• Pierre Werner's Role: Luxembourg’s Prime Minister was tasked with creating a plan for economic and monetary union due to the failing stability of Bretton Woods.

• Conditions for a Common Currency:

  • Strengthened coordination of budgetary and fiscal policies.

  • Removal of capital movement restrictions.

  • Fixed and irrevocable exchange rates among European currencies.

• Diverging Economic Views:

  • Economists (Germany, Netherlands): Economic convergence essential for monetary integration.

  • Monetarists (France, Belgium, Luxembourg): Monetary union will drive economic uniformity.

Currency Snake Initiative (1972)

• End of Bretton Woods: The US announced the system's end, leading to the 'currency snake,' where currencies fluctuated within a 2.25% margin.

• Oil Crisis Impact: Uncoordinated responses to the oil crisis and currency depreciation led to the collapse of the currency snake.

European Monetary System (1978)

• Disagreement Among Nations: France calling for deeper cooperation, while Germany worried about inflation.

• Schmidt-Giscard Compromise: Introduction of the European Currency Unit (ECU) and an Exchange Rate Mechanism with fixed but adjustable rates became the foundation of monetary cooperation.

Maastricht Treaty (1992)

• Establishment of EU: The final push towards a monetary union with the signing of the Maastricht Treaty.

• Compromise Achieved:

  • Stage three of monetary union set for January 1, 1999.

  • Convergence criteria established, including stable currency and sustainable public finances.

• UK Opt-Out: The UK negotiated to remain outside the monetary union, differing from other Member States.

Challenges and Setbacks (1992-1994)

• Danish Referendum: A 'no' vote on the Maastricht Treaty raised doubts about the monetary union's viability.

• Market Speculation: Speculative pressures on weaker currencies like the Italian lira and British pound forced them out of the European Monetary System, leading to a flexible fluctuation system.

Progression Towards the Euro

• Stage Two Initiation (1994): The European Monetary Institute created—a precursor to the European Central Bank.

• Eligibility for Monetary Union: By 1998, 11 countries met the convergence criteria; the UK and Denmark opted out while Greece and Sweden did not qualify.

Launch of the Euro

• Introduction of Euro: Officially introduced as a virtual currency on January 1, 1999; final step facilitated by fixing exchange rates among national currencies.

• Currency Circulation: Euro coins and banknotes entered circulation on January 1, 2002.

• Current Usage: As of today, the euro is utilized by 19 out of the 27 EU Member States and over 300 million Europeans.