Ten years ago, Europe launched its grand experiment with a shared currency — and watched it plunge in value before recovering.
As the anniversary approaches of the Jan. 1, 1999, arrival of the euro, economists say the new currency is finally fulfilling its promise as a way to lower borrowing costs, ease trade and tourism, boost growth and strengthen the European community.
And doing it amid a global financial crisis that, for the moment, underlines the safety in numbers that comes from joining one, big currency.
“After 10 years it has truly created a zone of security and stability,” French Finance Minister Christine Lagarde said in the middle of this month. “From all these points of view, the euro has in fact proven wrong the forecasts some made against the euro 10 years ago.”
When it was launched for non-cash purposes in 1999, just 11 countries were on board — Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Notes and coins were added on Jan. 1, 2002, and the original 11 have been joined by Cyprus, Greece, Malta and Slovenia, with Slovakia slated to join on Thursday, bringing the total to 16. Now, some people in longtime holdouts such as Sweden and even strongly euro-skeptic Britain are beginning to reconsider the question.
Smaller countries such as Iceland, which has stayed out of the EU, and EU member Hungary, which hasn’t yet met the requirements to join the euro, have seen their currencies sink in value and been forced to ask the IMF for bailouts.
Otmar Issing, a former board member of the European Central Bank, said the euro’s appeal has been its ability to provide a sense of stability and shelter from the storm of global crises. The bank, created specifically to oversee the euro, has taken a strong anti-inflationary stance that mirrors that of its chief predecessor, Germany’s Bundesbank central bank.
“The euro is a stable currency, inflation expectations were under control right from the start,” Issing said.
“Not surprisingly, quite a few observers — with probably the majority of economists to the fore — were more than skeptical as to the outcome of this experiment,” he said.
The chief complaints from governments during the euro’s first 10 years have arisen from the bank’s one-size-fits-all interest rate policy — which can’t give rate cuts to individual countries if their economy dips while others rise. But the credit crisis has swept over the global economy because heavy bank losses on securities backed by US mortgages to people with shaky credit has hit everyone at pretty much the same time.
That has helped people forget the euro’s early plunge, from around US$1.18 at launch to only US$0.82 by October 2000. The European Central Bank joined with the Federal Reserve and other central banks in intervening in currency markets to prop it up.
Howard Archer, an economist with IHS Global Insight in London, said: “Obviously in the early days, the euro was weaker and there was some worry about its values.”
But since then, the euro has soared in strength and value, rising to as high as US$1.6038 against the dollar this year. It is down to around US$1.40, but has risen strongly against the pound.
Randall Filer, a visiting professor of economics at Charles University in Prague and Hunter College in New York, said the requirement to cut government debt before joining gave political leaders the backbone to make economic reforms but place the blame on EU requirements.