New banknotes and coins for Europe.

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January 2002 – new banknotes and coins for Europet

Our new currency has been years in the making.

The Treaty of Rome (1957) 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".

The Single European Act (1986) and the Treaty on European Union (1992) have built on this, introducing Economic and Monetary Union (EMU) and laying the foundations for our single currency.

The third stage of EMU began on 1 January 1999, when the exchange rates of the participating currencies were irrevocably set. Euro area Member States began implementing a common monetary policy, the euro was introduced as a legal currency and the 11 currencies of the participating Member States became subdivisions of the euro. Greece joined on 1 January 2001 and so 12 Member States introduced the new euro banknotes and coins at the beginning of this year.

The successful development of the euro is central to the realisation of a Europe in which people, services, capital and goods can move freely.

This is history in the making. It is the largest monetary changeover the world has ever seen – join us in celebrating and finding out more about our new currency.

Our new single currency originates in the Treaties. All the Treaties were prepared and signed by members of the European Council, which comprises the Heads of State or Government of each of the Member States of the European Union (EU), and then ratified by each country according to national legislative procedures.

The elected governments of Member States together created and developed the euro. In Madrid in December 1995, the European Council adopted the name “euro”.

The European Central Bank (ECB) was established on 1 June 1998. It is based in Frankfurt am Main, Germany, and aims to maintain price stability and to conduct a single monetary policy across the euro area.

This is done through its own activities and through working with the national central banks. Together, the ECB and the euro area national central banks are known as the Eurosystem.

European Central Bank website (
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Friday, November 21, 1997 Published at 13:02 GMT 



Special Report

Pros and cons

The United Kingdom will not join the single European currency with the first wave of countries on 1 January 1999. The Chancellor of the Exchequer, Gordon Brown, said in October that, although the government supported the principle of the single currency, Britain would not be ready to join at least until the second wave of countries join in 2002. He added that the UK should, however, begin to prepare for monetary union.

There are many possible advantages and disadvantages that the government had to consider:

Advantages: 

1. A single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. Because the Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This will unleash a greater potential for growth.

2. Consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. It was estimated that a traveller visiting all twelve member states of the (then) EC would lose 40% of the value of his money in transaction charges alone. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly.

3. Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. Businesses, involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved. It is estimated that the currency cost of exports to small companies is 10 times the cost to the multi-nationals, who offset sales against purchases and can command the best rates.

4. A single currency should result in lower interest rates as all European countries would be locking into German monetary credibility. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euro's international credibility. This should lead to more investment, more jobs and lower mortgages.

Disadvantages: 

1. Fifteen separate countries with widely differing economic performances and different languages have never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.

2. If governments were obliged through a stability pact to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.

3. All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.

4. Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.

5. The one off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the changes necessary. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.

Benefits and Drawbacks of a Single Currency
The euro is fundamentally a tool to enhance
political solidarity. This political motivation began when the idea of the European Union and a single currency was first conceived. While it also has the economic effect of unifying the economies of participating countries, it will ultimately do much more for the European Union.

Advantages of the euro
Economically, the euro's advantages include:

  • Elimination of exchange-rate fluctuations - Any time either a consumer or a business made a commitment to buy something in a different country in the future (at future prices), they stood the chance of paying much more (or less) than they had planned. The euro will eliminate the fluctuations of currency values across certain borders.
  • Price transparency - Being able to easily tell if a price in one country is better than the price in another will also be a big benefit, both for consumers and businesses. Price equalization will begin to appear across borders of countries. Businesses will have to be more competitive. Pricing will still vary, but consumers will be able to spot a good deal -- or a bad one.
  • Transaction costs - This will be particularly helpful for tourists and others who cross several borders during the course of a trip. They had to exchange their money as they entered each new country. The costs of all of these exchanges added up significantly. With the euro, no exchanges will be necessary within the Euroland countries.
  • Increased trade across borders - The price transparency, elimination of exchange-rate fluctuations, and the elimination of exchange-transaction costs will all contribute to an increase in trade across borders of all of the Euroland countries.
  • Increased cross-border employment - Not only will business be conducted across borders more easily, but people will be more easily employable across borders. With a single currency, it will be less cumbersome for people to cross into the next country to work, because their salary will be paid in the same currency they use in their own country.
  • Simplified billing - Billing for services, products, or other types of payments will be simplified with the euro.
  • Expanding markets for business - Business will be able to expand more easily into neighboring countries. Rather than having to set up separate accounting systems, banks, etc. for transactions in countries other than their native one, the euro will make it simple to operate from a single central accounting office and use a single bank.
  • Financial market stability - On a larger scale, the financial and  can list every financial instrument in euros rather than in each nation's denomination. This will have further ramifications in that it will promote trade with less restriction internationally, as well as strengthen the European financial markets. Banks will be able to offer financial products (loans, CDs, etc.) to countries throughout Euroland.
  • Macroeconomic stability - Because of the European Central Bank (ECB), introduction of the euro will also help lower (and control) inflation among the EU countries.
  • Lower interest rate - Because of the decrease exchange-rate risk, the euro will encourage lower interest rates. In the past, additional interest was charged to cover the risk of the exchange-rate fluctuation. This risk is gone with the introduction of the euro.
  • Structural reform for European economies - The participation requirements of the euro pushed many EU member states who wanted to participate to get their economies in shape and improve their economic growth. With the requirements of the Stability and Growth Pact, they will also have to maintain that control in the future, or face fines.

Disadvantages and risks of the euro
While there are many advantages to the euro, there may also be some disadvantages. The
cost of transitioning 12 countries' currencies over to a single currency could in itself be considered a disadvantage. Billions will be spent not only producing the new currency, but in changing over accounting systems, software, printed materials, signs, vending machines, parking meters, phone booths, and every other type of machine that accepts currency.

In addition, there will be hours of training necessary for employees, managers, and even consumers. Every government from national to local will have impact costs of the transition. This enormous task will require many hours of organization, planning, and implementation, which falls on the shoulders of government agencies.

The chance of economic shock is another risk that comes along with the introduction of a single currency. On a macroeconomic level, fluctuations have in the past been controllable by each country.

  • With their own national currencies, countries could adjust interest rates to encourage investments and large consumer purchases.

- The euro will make interest-rate adjustments by individual countries impossible, so this form of recovery will be lost. Interest rates for all of Euroland are controlled by the European Central Bank.

  • They could also devalue their currency in an economic downturn by adjusting their exchange rate. This devaluation would encourage foreign purchases of their goods, which would then help bring the economy back to where it needed to be.

- Since there is no longer an individual national currency, this method of economic recovery is also lost. There is no exchange-rate fluctuation for individual euro countries.

  • A third way they could adjust to economic shocks was through adjustments in government spending such as unemployment and social welfare programs. In times of economic difficulty, when lay-offs increase and more citizens need unemployment benefits and other welfare funding, the government's spending increases to make these payments. This puts money back into the economy and encourages spending, which helps bring the country out of its recession.

- Because of the Stability and Growth Pact, governments are restricted to keeping their budget deficits within the requirements of the pact. This limits their freedom in spending during economically difficult times, and limits their effectiveness in pulling the country out of a recession.

In addition to the chance of economic shock within Euroland countries, there is also the chance of political shock. The lack of a single voice to speak for all euro countries could cause problems and tension among participants. There will always be the potential risk that a member country could collapse financially and adversely affect the entire system.

Effects on Worldwide Business
The strength and stability of the euro will have a profound effect on European business, as well as the business environment worldwide.

A strong euro
A strong euro that trades at higher levels than foreign currencies such as the dollar or yen will strengthen imports for Euroland countries by allowing them to purchase more for less money. This creates a stronger financial environment for industrial manufacturers that rely on imports for parts and supplies.

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A weak euro
A weak euro that trades at lower levels than foreign currencies will mean that exports from Euroland will be less expensive for foreign buyers. This also means that other foreign manufacturers will have to compete against those low prices. If the euro grows
very weak, then there is the chance of inflation -- which would make borrowing expensive and further the problem.

What affects the strength of the euro?
In simple terms, the euro's strength is affected by
supply and demand. When investors invest in a fund in a specific currency, that is essentially a vote of confidence in ...

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