The Euro: Economic and Monetary Union [print sheet]
Last updated: 14/08/08

The Euro is the currency used in the 15 member states of the EU that have signed up to full Economic and Monetary Union. People in all of these countries use the same coins and notes and business amongst companies in Eurozone states takes place in the single currency. For most people the most noticeable benefit is that money does not have to be changed when travelling within the Eurozone. The Euro economy relies on all members cooperating with one another, and obeying the rules of the Stability and Growth Pact (SGP). There has been scepticism about the ability of the Euro to remain a stable currency serving the interests of all its members. Politicians and economists have shown concern that the different structures of member states' economies might cause the monetary union to come apart at the seams.

The idea of having one currency for the European Community was first put forward in the 1970 Werner Report and developed as the European Monetary System (EMS). In 1989, member states set the process of Economic and Monetary Union in motion. The Maastricht Treaty (1992) made EMU part of EU law and set out a plan for the single currency to be established by 1999. Countries had to meet certain rules. They agreed to keep their exchange rates within bands called the Exchange Rate Mechanism (ERM), and government borrowing and spending had to be kept under control, with low inflation and low interest rates. Finally in 1998, 11 of the member states agreed to fix their exchange rates together and handed over the power to set interest rates to the European Central Bank (ECB). Three member states - Britain, Sweden and Denmark - stayed out of this final stage of EMU. Greece joined in 2001. On 1 January 2002, the new Euro notes and coins were launched.

Since it was set up, the markets have been cautious about the Euro, especially as many members have failed to stay within the SGP rules. The currency had begun performing better, although inflation has risen significantly in 2008 due to high food and energy prices. Of the new member states that joined the EU in 2004, Slovenia, Cyprus and Malta have adopted the Euro thus far.

The idea behind the single currency is that getting rid of national currencies would make the operation of a single market easier. This requires the EU to become what economists call an 'optimal currency area', which effectively operates as one economy. It is the role of the ECB to manage this. Euro notes look the same wherever you are in the Eurozone - they come in denominations of 5, 10, 20, 50, 100, 200 and 500 Euros. The coins have different national images on the reverse side. Coins and notes issued in any Eurozone country can be used in any other. The currency was supposed to be regulated by the SGP, but these rules have not been strictly enforced.

• The Euro is also the official currency in Monaco, San Marino, the Vatican City, Guadeloupe, French Guyana, Martinique, Réunion and Madeira.
• About 20% of world foreign exchange reserves are held in Euros.

For

• The Euro makes trade and travel between Eurozone countries cheaper and easier.
• The Euro creates greater economic stability in the countries that use it because it takes control of monetary policy out of the hands of politicians and gives it to the ECB. This encourages confidence among investors.
• The Euro is a symbol of European identity and a vital part of the process of political integration.

Against

• The Eurozone is not an optimal currency area; the economies that make it up are too different to make the Euro work properly. This could result in more severe unemployment during recessions and more inflation during booms.
• EMU can't work because so many members fail to meet the SGP rules. This will eventually create uncontrollable splits.
• A national currency is a symbol of identity: adopting the Euro means symbolically and practically giving up sovereignty.
• The Euro is primarily a political not economic project.

‘'[the Euro is] a tool to help us master globalisation and help us resist irrational shifts in the market'. - Dominique Strauss-Kahn, French finance minister, 1997-1999

'The single currency is the greatest abandonment of sovereignty since the foundation of the European Community… the decision is of an essentially political nature'. - Felipe González, Spanish Prime Minister, 1998