Europe Holds Its Breath Over THE EURO

USA Today (Society for the Advancement of Education), Nov, 1999 by Olufemi A. Babarinde

On Jan. 1, 1999, 11 of the 15 members of the European Union (EU) inaugurated a single European currency, known as the euro. The launch of the new currency could be characterized as the most dramatic, daring, and far-reaching development in Europe since the end of the Cold War and the reunification of Germany. That event is dramatic largely because it amounts to the largest transfer of sovereignty by members of the EU to date. It is equally daring because it is an adventure into uncharted waters by so many countries at the same time, trying to march to the same tune. The launch of the euro implies innumerable far-reaching implications, which touch virtually every facet of society within Europe and beyond. Furthermore, the inauguration of the euro vindicates the stage-by-stage strategy that was enunciated by Jean Monnet and Robert Schuman, the progenitors of European integration, almost four decades earlier.

At any rate, barely six months into the arrival of the new currency, speculations abounded, particularly in the U.S. media, about its viability and credibility. The europhoria that initially greeted the European single currency is lately being replaced by euro-phobia in the international financial market. Since its debut at $1.17 and reaching a high of $1.188 three days later, the euro slowly weakened by roughly 12% against major currencies. This is hardly the script written by EU leaders in the run-up to and at the launching of the single currency. At first glance, one would conclude that the euro is hardly moving in the direction of a currency that is predicted to rival the dollar as the currency for international commerce. A recent budget deficit concession to Italy, one of the participating countries, does not help the situation either.

Is the aspiration of creating a single currency for Europe nothing more than a romantic experiment and an ill-conceived idea from the start and thus doomed to fail? Is the euro dream turning into a terrible nightmare for its architects and practitioners? One could easily make a persuasive case for any and all of those observations. However, it is too early to judge the efficacy of a currency that was only recently launched and that is not expected to make its debut in the physical form for another two years. It is, therefore, plausible that the euro is merely experiencing normal growing pains, especially of a new (international) currency. Once the causes of the slide are identified and remedied, the euro should appreciate against major currencies, including the dollar.

The Treaty on European Union (TEU), otherwise known as the Maastricht Treaty, which was agreed to in December, 1991, came into force on Nov. 1, 1993. The treaty, among others, codified the three-stage transition to an economic and monetary union (EMU). Stage one commenced on July 1, 1990, to complete the liberalization of the movement of capital within the EU. Stage two began Jan. 1, 1994, with the inauguration of the European Monetary Institute (EMI) as the forerunner of the European Central Bank. The third and final stage of EMU--to fix irrevocably the exchange-rate parities of participating currencies--was to begin earlier, but finally got under way on Jan. 1, 1999. Actualization of the final stage meant the eventual replacement of national currencies by a single European currency and hence the transfer of sovereignty over monetary policy from the national to the EU levels.

The Euro Zone, or Euroland, as it is widely referred to and interchangeably employed, is comprised of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Together, they enjoy a combined population of roughly 300,000,000 consumers and account for an estimated 20% of world trade and world gross domestic product. In essence, therefore, this formidable economic market is embarking on an unprecedented initiative (at least with regard to the number of participating states) and is worthy of attention. The bold move that was begun in early 1999 portends a deepening of integration in Europe as 11 EU member states move gradually, yet inexorably, towards the final stage of integration. The non-participation of four of the EU countries is because they have not applied for participation for a variety of reasons. For its part, Greece has not applied simply because it has not yet fulfilled the criteria for membership. Denmark, Sweden, and Great Britain have qualified, but have not yet deemed it appropriate to join the Euro Zone at this point.

The Frankfurt-based European Central Bank (ECB) manages the euro and ancillary monetary policies, such as money supply, interest rates, etc. of the Euro Zone. With regard to decision-making, the TEU created an independent European System of Central Banks (ESCB), comprised of the ECB and the national central banks of all 15 EU countries. In addition to overseeing the smooth operation of payment systems in the EU, the ESCB is responsible for managing the official foreign reserves and the foreign exchange operations of the Euro Zone countries. The primary responsibility for executing the ECB's decisions falls on the shoulders of national central banks. In the fall of 1998, the ECB identified the pursuit of price stability as its primary task, which it defined as less than two percent annual inflation within Euroland.