Many people would agree that Europe is a continent in which regions identify with each other even if they are not part of the same country. For that reason, as well as others, in 1957 the Treaty of Rome "declared a common European market as a European objective with the aim of increasing economic prosperity and contributing to 'an ever closer union among the peoples of Europe'" (www.euro.ecb.int). Later, in 1986 and then in 1992, the Single European Act and the Treaty of European Union tried to build on the previous treaty to create a system in Europe in which one currency could eventually be used all over the land under the heading of the Economic and Monetary Union. (www.euro.ecb.int) However, the question remains, why would the leaders of various European nations want to create one currency when the rights of national sovereignty have always been an issue for countries all over the world. Why, in 1998 did they create the European Central Bank, and why in "The third stage of EMU... on 1 January 1999, when the exchange rates of the participating currencies were irrevocably set" (www.euro.ecb.int) did eleven, and later twelve, countries link themselves economically in a way that has never been done before?
The answer lies in history. "The need to link separate distinct political communities in order to achieve common objectives is an ancient one" (Woodard). One such example is the Greek independent city states that were linked by a league that dealt with economic issues. The same type of league linking towns in Italy can be found in medieval times. (Woodard) Later, "The United States made the key breakthrough. The states originally formed a loose relationship with weak central government (the Confederation). They replaced this system with a new constitution in 1789 creating the modern United States and defining federalism in its current sense" (Woodard). In doing so, it began a global discussion of the use of federalism to hold regions, and in particular colonies, together.
In September of 1946, Winston Churchill made a speech at Zurich University in which he called for a "'United States of Europe'" (www.euro.ecb.int); clearly, this was not a new idea. Churchill thought that by uniting Europe, they would be able to put an end to Europe's decline economically in markets that the United States was quickly taking over. He stated, "'The mass of Europe, once united, once federalised or partly federalised, once continentally self-conscious, would constitute an organism beyond compare ... We see nothing but good and hope in a richer, freer, more contented European commonalty'" (Woodard). His hope was that, by unifying Europe, the creation of prosperity, justice, and peace would occur. (Woodard) Furthermore, if countries were linked economically by one currency, it would be extraordinarily difficult to go to war against each other. Other reasons for the creation of the a single currency were that it would eliminate "the transaction costs incurred in exchanging one currency for another. In addition, the use of a single currency may promite further integration of the European economies and enhance competition" (Mishkin 53).
It was following the Second World War that the European Union was actually founded, and it continues to expand even today. Eleven of the members of the European Union then joined together to create the electronic euro in January of 1999, though the creation of the euro took much planning and did not happen overnight. The idea for the euro was, in fact, already twenty years old by then. During those preceeding twenty years, the countries in the European Community signed the Maastricht Treaty in May of 1993. "The Treaty set out three stages of further transition to monetary union between participant countries of the European Community" (www.aci.net). It also "outlined a plan to achieve the creation of a single European currency starting in 1999" (Mishkin 53). In addition, in 1994, the European Community created the European Monetary Institute, which later became the European Central Bank. The bank facilitated the usage of the euro by conducting foreign exchange operations, as well as administering monetary policy for all the nations using the euro. (53) The eleven members that first adopted the euro were Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Austria, Finland, and Ireland. Recently, Greece has joined to make the total number of countries operating with the euro to twelve. In addition, the euro became legal tender on January 1, 2002. (news.bbc.co.uk)
The question then became, has it been successful? To answer that question, it is important to know what would make it successful in the first place. To achieve success, it would have to challenge the US dollar's position as "the key reserve currency in international financial transactions" (Mishkin 489). Also, it would have to integrate European financial markets such that they would rival the US's. (489) However, in order for the euro to perform both of these functions, "the European Union must function as a cohesive political entity that is able to exert its influnce on the world stage" (489). "The launch of the euro has been a stunning technical success. European consumers have adapted swiftly. Barely a whimper has been heard about the demise of the D-Mark, French franc and 10 other legacy currencies" (specials.ft.com). However, in terms of creating a currency that would rival the US dollar as the most important reserve currency, the euro has not exactly done so. (specials.ft.com)
"The single currency has certainly delivered a competitive shock, triggering consolidation in areas such as banking and financial services. But economic growth remains sluggish, markedly in Germany. The currency has been endemically weak, especially against the dollar" (specials.ft.com). Clearly, the introduction of the euro into financial markets has been mixed. With the euro becoming legal tender just a few months ago, it is difficult to say whether it will be as successful as the European leaders, as well as the European community as a whole, hopes. While it has not beaten out the US dollar in the role of being the key reserve currency, it has done other things. For example, along with the European Union, a certain degree of peace and prosperity has been realized in Europe amongst the member nations. That was Churchill's goal. Only time will tell if the the union of twelve European nations under one currency will continue to aid economically in preserving this goal.
news.bbc.co.uk [November 21, 2002] specials.ft.com [November 21, 2002]
Mishkin, Frederic S. The economics of Money, Banking, and Financial Markets. New York: Addison Wesley, 2003.
Woodard, Stephen.from Ventotene, Federalism and Politics, The Ventotene Papers of the Altiero Spinelli Institute for Federalist Studies, Ventotene, 1995.
www.euro.ecb.int [November 18, 2002]