With the looming Brexit and whatever after-effects this has on other country’s futures with the EU, the Euro has some interesting times ahead. Any drastic membership changes to the EU will test the currency, we are already witnessing this with the unpredictability emanating from the British Isles causing issues. We thought we’d take a look back at how we got here in the first place.
The Latin Monetary Union
The Euro is by no means the first attempt to create a currency union between European states. Way back in 1865 the Latin Monetary Union was founded by France, Italy, Belgium, and Switzerland.
The creation of the LMU involved a number of nation states agreeing to standardised gold and silver coin sizes. Future members included Finland, Greece and Spain.
It had its own tumultuous history which saw Greece having to leave in 1908 due to economic untruthfulness, and countries attempting to export inflation to each other by running budget deficits. It was not considered a success and effectively ended with the outbreak of World War I. It was formally closed in 1925.
Suggestions, Proposals, and Other Ideas
There have been other attempts to make monetary unions in Europe before the Euro came into force. For example, Belgium and Luxembourg formed their own mini-union which began on 22 December 1922. A fixed parity was set between the Belgian and Luxembourg Franc and this lasted throughout the 20th century until it was superseded by the Euro.
Even before that there was the Scandinavian Monetary Union. Beginning in 1873 it saw Denmark, Sweden and Norway (who joined in 1875) all set their currencies to gold at the same level as each other. It survived for some time, but eventually saw its end as the Great War began.
The short-lived but ever optimistic League of Nations also pushed for a European currency. Post-World War I Europe was a difficult place, with new and old states jostling for power and attempting to recover from the extensive destruction. It was during this time that Gustav Stresemann, the German Foreign Minister, raised the idea of a single currency to the League in 1929.
A European Community
We have to jump forward to 1969 before the European Economic Community set out on a serious path to form a monetary union. Many countries felt the need for better economic co-ordination between states and a single currency was seen as a way to do it. Steps were laid out in the Delors Report of 1989. With the aim of implementing a single currency, the first steps involved removing exchange controls, which was done on the 1st July 1990.
Then came the famous Maastricht Treaty which not only formally established the European Union, but laid the foundations for the Euro itself. This was signed by all 12 members of the European Communities and came into force on the 1st November 1993. With the exception of the UK, a single European currency was expected by January 1st 1999 thanks to this treaty.
On 1st January 2002 the Euro started being used by participating European countries.
Laying the Groundwork
Now it was time for the European countries to prepare for a single currency and ensure its success. The European Monetary Co-operation Fund was replaced with the European Monetary Institute (EMI) in 1994, and was eventually replaced by the European Central Bank. The Institute was responsible for the name ‘Euro’, which was decided in December 1995.
By 1997 the European Council was putting single currency preparations into full swing. A new exchange rate mechanism was created to ensure stability once the Euro was in use, while there was the Stability and Growth Pact that aimed to keep everyone in line post the adoption of the single currency.
Progress was being made and it was now time to see who would actually be included. To be eligible to join the Euro a country had to meet the following criteria:
- Budget deficit of less than 3%
- Low inflation
- EU average interest rates
- Debt ratio less than 60% of GDP
There was also other criteria to be met. You can find a detailed list here.
Greece did not meet the criteria, so with the United Kingdom and Denmark opting-out, nine states were legally obliged to adopt the Euro:
Come 1998 and the deadline for preparations was fast approaching. The European Central Bank replaced the EMI in June, while the process of setting conversion rates began. These were formally set on the 31st December 1998 and that was that. The following day the Euro would be introduced.
The Euro Begins
On the 1st January 1999 the countries who were involved saw their currency exchange rates fixed to each other in preparation for when the currency would be produced, though no physical forms of the currency were introduced at this time. This finally happened in full on 1 January 2002 and the Euro was quickly taken up by the inhabitants of participating countries, the rest is history with no country having left the monetary union since. Although of course, Greece came very close.
Since then the Euro has become the norm across many parts of Europe. No more French Francs, German Marks, or Greek Drachma; just the Euro. The currency has had its ups and downs, but has not failed. It is now an established world currency and deemed, for the most part, a success.
Europe has come a long way since the Latin Monetary Union. The future is - as always - unclear, but the Euro has proved itself to be able to survive both economic and political turmoil. What will happen next is hard to say, but it’s likely to be an interesting time for the European Union and its currency.