History of the euro

Euro came into existence on 1 January 1999, although it has been a goal of the European Union (EU) and its predecessors since the 1960s. After tough negotiations, particularly due to opposition from the United Kingdom, the Maastricht Treaty entered into force in 1993 with the goal of creating economic and monetary union by 1999 for all EU states except the UK.

In 1999 the currency was born virtually and in 2002 notes and coins began to circulate. It rapidly took over from the former national currencies and slowly expanded behind the rest of the EU. In 2009 its latest member joined, Slovakia, and the Lisbon Treaty formalised its political authority, the Euro Group alongside the European Central Bank.

Development

Early ideas

First ideas of an economic and monetary union in Europe were raised well before establishing the European Communities. For example, already in the League of Nations, Gustav Stresemann asked in 1929 for a European currency against the background of an increased economic division due to a number of new nation states in Europe after WWI. At this time memories of the Latin Monetary Union involving principally France, Italy, Belgium and Switzerland and which, for practical purposes, had disintegrated following the First World War, will have figured prominently in the minds of policy makers.

A first attempt to create an economic and monetary union between the members of the European Economic Community goes back to an initiative by the European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation." This was followed up at a meeting of the European Council at The Hague in December 1969. The European Council tasked Pierre Werner, Prime Minister of Luxembourg, with finding a way to reduce currency exchange rate volatility. His report was published in October 1970 and recommended centralisation of the national macroeconomic policies entailing "the total and irreversible fixing of parity rates and the complete liberation of movements of capital." But he did not propose a single currency or central bank.An attempt to limit the fluctuations of European currencies, using a snake in the tunnel, failed.

In 1971, US President Richard Nixon removed the gold backing from the US dollar, causing a collapse in the Bretton Woods system that managed the world's currencies. The widespread currency floats and devaluations set back aspirations for European monetary union.However in March 1979 the European Monetary System (EMS) was created, fixing exchange rates onto the European Currency Unit (ECU), an accounting currency, in order to stabilise exchange rates and counter inflation. It also created the European Monetary Cooperation Fund (EMCF).

In February 1986 the Single European Act formalised political co-operation within the Community including competency in monetary policy. European Council summit in Hannover on 14 June 1988 began to outline monetary co-operation. France, Italy and European Commission backed a fully monetary union with a central bank, which British Prime Minister Margaret Thatcher opposed.

Relaunch

The Hannover European Council asked Commission President Jacques Delors to chair an ad hoc committee of central bank governors to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. This way of working was derived from the Spaak method.

France and the UK were opposed to German reunification, and attempted to influence the Soviet Union to stop it. However, in late 1989 France extracted German commitment to the Monetary Union in return for support for German reunification.

The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions such as the European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy. It laid out monetary union being accomplished in three steps. Beginning the first of these steps, on 1 July 1990, exchange controls were abolished, thus capital movements were completely liberalised in the European Economic Community. Leaders reached agreement on currency union with the Maastricht Treaty, signed on 7 February 1992. It agreed to create a single currency, although without the participation of the United Kingdom, by January 1999.

Gaining approval for the treaty was a challenge. Germany was cautious about giving up its stable currency, i.e. the German Mark, France approved the treaty by a narrow margin and Denmark refused to ratify until they got an opt out from monetary union as the United Kingdom, an opt-out which they maintain as of 2010. On 16 September 1992, known in the UK as Black Wednesday, the British pound sterling was forced to withdraw from the fixed exchange rate system due to a rapid fall in the value of the pound.

Second stage

Delors' second stage began in 1994 with creation of the European Monetary Institute, succeeding the EMCF, under Maastricht. It was created as the forerunner to the European Central Bank. It met for the first time on 12 January under its first President, Alexandre Lamfalussy. After much disagreement, in December 1995 the name euro was adopted for the new currency (replacing the name Ecu used for the previous accounting currency), on the suggestion of then-German finance minister Theo Waigel. They also agreed on the date 1 January 1999 for its launch.

On 17 June 1997 the European Council decided in Amsterdam to adopt the Stability and Growth Pact, designed to ensure budgetary discipline after creation of the euro, and a new exchange rate mechanism (ERM II) was set up to provide stability above the euro and the national currencies of countries that hadn't yet entered the eurozone. Then, on 3 May 1998, at the European Council in Brussels, the 11 initial countries that would participate in the third stage from 1 January 1999 were selected. In order to participate in the new currency, member states had to meet strict criteria such as a budget deficit of less than 3% of their GDP, a debt ratio of less than 60% of GDP, low inflation, and interest rates close to the EU average. Greece failed to meet the criteria and was excluded from participating on 1 January 1999.

On 1 June 1998 the European Central Bank succeeded the European Monetary Institute. However it wouldn't take on its full powers until the euro was created on 1 January 1999. The bank's first President was Wim Duisenberg, former head of the EMI and the Dutch central bank.The conversion rates between the 11 participating national currencies and the euro were then established. The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998, so that one ECU would equal one euro. These rates were set by Council Regulation 2866/98 (EC), of 31 December 1998. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro.

Creation

Launch

Eurozone (1999/2002)

The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new notes and coins were introduced on 1 January 2002. Beginning on 1 January 1999, all bonds and other forms of government debt by Eurozone nations were denominated in euros.

On the first day of trading, 5 January, since its launch, the euro climbed to 1.19 USD. It was rapidly taken up and dealers were surprised by the speed at which it replaced the national currencies. Trading in the Deutsche Mark was expected to continue in parallel but vanished as soon as the markets opened. However, by the end of 1999 the euro had dropped to parity with the dollar leading to emergency action from the G7 to support the euro in 2001.

Later in 2000, Denmark held a referendum on whether to abandon their opt-out from the euro. The referendum failed and also set back plans for a referendum in the UK as a result. However, Greece succeeded in getting clearance to join the euro on 1 January 2001, in time for the physical launch in 2002, by faking its deficit figures. The procedure used to fix the irrevocable conversion rate of 340.750 between the Greek drachma and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced as a virtual currency, the conversion rate for the Greek drachma was fixed several months beforehand, in Council Regulation 1478/2000 (EC), of 19 June 2000.

Minting

The designs for the new coins and notes were announced between 1996 and 1998, and production began at the various mints and printers early in 1999. The task was large, and would require the full three years. In all, 7.4 billion notes and 38.2 billion coins would be available for issuance to consumers and businesses on 1 January 2002. In 7 nations, the new coins, struck in the run-up to 1 January 2002, would bear a 2002 date. In Belgium, Finland, France, the Netherlands, and Spain, the new coins would bear the date of striking, so those 5 countries would be the only ones to strike euro coins dated 1999, 2000, and 2001. Small numbers of coins from Monaco, Vatican City, and San Marino were also struck. These immediately became popular collector's items, commanding premiums well above face value. New issues continue to do so to this day.

Meanwhile, a parallel task was to educate the European public about the new coins. Posters were issued showing the designs, which were used on items ranging from playing cards to T shirts. As a final step, on 15 December 2001, banks began exchanging "euro starter kits", plastic pouches with a selection of the new coins in each country (generally, between 10 and 20 euros worth—though Finland's contained one of each coin, totalling €3.88). They would not be usable in commerce until 1 January, when notes would be made available as well. Larger starter kits, containing a roll of each denomination, were available as well in some nations.

Retailers and government agencies had a considerable task as well. For items to be sold to the public, dual pricing was commonly utilised. Postage stamps for governments (as well as stamps issued by the United Nations Postal Administration for the UN offices in Vienna) often bore denominations both in the legacy currency and euros, assuring continued utility beyond 2001. Banks bore a huge task, not only in preparation for the change of the notes and coins, but also in the back office. Beginning in 1999, all deposits and loans were technically in euros, but deposits and withdrawals continued in the legacy currency. Statements would bear balances in both currencies beginning no later than 1 July 2001, and earlier if required by the customer's needs.

Beginning on 1 December 2001, coins and notes were distributed from secure storage, first to large retailers, and then to smaller ones. It was widely expected that there would be massive problems on and after 1 January. Such a changeover, across twelve populous countries, had never been attempted before.

Change of currency

As midnight struck to usher in 2002, a celebration took place outside European Central Bank offices in Frankfurt. A huge illuminated mock-up of a euro coin was displayed in front of the building.

When the celebration began, the new coins and notes had already been valid for one hour in Greece and Finland. In fact, they had been valid for three hours on the French island of Réunion in the Indian Ocean. The first official purchase using euro coins and notes took place there, for one kilogram of lychees. The coming of midnight in Frankfurt at the ECB offices, though, symbolised the transition.

In Finland, the Central Bank had opened for an hour at midnight to allow citizens to exchange currency, while a huge euro pyramid had decorated Syntagma Square in Athens, as the euro was welcomed to continental Europe. Other countries noted the coming of the euro as well—Paris's Pont Neuf was decorated in EU colours, while in the northern German town of Gifhorn a sombre, symbolic funeral for the Deutsche Mark took place.

Except for Germany, the plan for introduction of the new currency was basically the same. Banks would accept the exchange of legacy currencies, begin to dispense euros from ATMs, and only euros would be available as withdrawals were made, beginning on 1 January. Merchants would accept legacy currency, but give change only in euros. In Germany, the Deutsche Mark would no longer be a legal tender on 1 January, but would have to be exchanged at the banks.

Despite the massive amounts of euros available, chaos was feared. In France, these fears were accentuated by a threatened postal workers' strike. The strike, however, was settled. Similarly, workers at the French bank BNP Paribas threatened to disrupt the introduction of euro currency with a strike. That was also settled.

Preceding national currencies of the Eurozone v • d • e

Currency Code Rate Fixed on Yielded

Austrian schilling ATS 13.7603 31 December 1998 2002

Belgian franc BEF 40.3399 31 December 1998 2002

Dutch guilder NLG 2.20371 31 December 1998 2002

Finnish markka FIM 5.94573 31 December 1998 2002

French franc FRF 6.55957 31 December 1998 2002

German mark DEM 1.95583 31 December 1998 2002

Irish pound IEP 0.787564 31 December 1998 2002

Italian lira ITL 1,936.27 31 December 1998 2002

Luxembourgian franc LUF 40.3399 31 December 1998 2002

Monegasque franc MCF 6.55957 31 December 1998 2002

Portuguese escudo PTE 200.482 31 December 1998 2002

Sammarinese lira SML 1,936.27 31 December 1998 2002

Spanish peseta ESP 166.386 31 December 1998 2002

Vatican lira VAL 1,936.27 31 December 1998 2002

Greek drachma GRD 340.75 19 June 2000 2002

Slovenian tolar SIT 239.64 11 July 2006 2007

Cypriot pound CYP 0.585274 10 July 2007 2008

Maltese lira MTL 0.4293 10 July 2007 2008

Slovak koruna SKK 30.126 8 July 2008 2009

Estonian kroon EEK 15.6466 13 July 2010 2011

In practice, the roll-out was smooth, with few problems. By 2 January, all ATMs in 7 countries and at least 90 percent in 4 others were issuing euros rather than legacy currency, with Italy, the worst offender, having 85% of ATMs dispensing euros. The unexpected tendency of consumers to spend their legacy currency, rather than exchange it at banks, led to temporary shortages of euro small change, with some consumers being given change in legacy currency.

Some businesses did take advantage of the currency exchange to raise prices. According to a study by the Deutsche Bundesbank, there was a price rise, but consumers refused to buy as much. A coffee bar in Italy that took advantage of the transition to raise coffee prices by a third was ordered to pay compensation to customers.