The Euro Essay Research Paper To the

The Euro Essay, Research Paper To the extent that Europe grows faster, becomes a more effective economy, they become an important trading partner of the United States…It is conceivable that the euro will rise as a significant currency in the world. And that’s good, not bad. –Alan Greenspan Introduction On January 1, 1999, eleven European nations began to use a common currency, the euro. These nations are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The use of the euro will have an impact on businesses operating or investing in Euroland, a term commonly used for the 11 European nations that have agreed to share the euro as their principal currency (Kelly, 1999). This paper will give an overview of the European

unified monetary system, some pros and cons of the euro, and the effects of the euro on accounting, contracts, industry and international investors. The general focus of this paper is on international member nation companies and international U.S. companies doing business in Euroland.European Monetary Unification System European countries have been working towards the integration of the economic and monetary systems of all European nations and the use of a single European currency. On April 13, 1979, the European Commission (EC) established the European Monetary System (EMS) to stabilize European exchange rates by empowering the EC to coordinate the national financial policies of its members. The System Exchange Rate Mechanism (SERM) established fluctuation limits of 2.25

percent, except 6 percent for Italy until 1990, for the inflation rates of EMS members. When a member nation s fluctuation rate exceeded 75 percent of the SERM limit, the country was required to take measures to correct the rates (Watson, 1997:20-42). In 1983, France made a significant choice to limit their inflation rate, rather than spend money to make domestic expansions. This action greatly increased the credibility of and excitement for the EMS. Over the next two years, EMS members made only one inflation rate adjustment. The EMS was viewed as an intermediate step towards European Monetary Unification (EMU). On July 1, 1987, the Single European Act (SEA) was enacted by majority vote and signed by 12 nations. The SEA amended the European Economic Community (EEC) Treaty as

follows: the Community shall adopt measures with the aim of establishing . . . free movement of goods, persons, services and capital. In 1988, as a result of the positive reaction to the SEA, European government heads directed the EEC towards monetary unification and developed a plan to remove all economic barriers between European nations by July 1990. Member nations believed that the full benefits of the SEA would not be realized until currency exchange rates were fixed and all European countries used a single currency (Watson, 1997:44-50). The Maastricht Treaty, signed on February 7, 1992, established three stages for European Monetary Unification. The first stage of capital liberation was already in process when the treaty was signed. The second stage, which began on January

1, 1994, involved the secure convergence of members economic policies in accordance with EC set guidelines, price stabilization and reviewing EC members for readiness for EMU. The main convergence criteria laid down by the Maastricht Treaty are as follows: an inflation rate not more than 1.5 percent above the average rate of the three member nations with the lowest inflation; a public budget deficit not exceeding 3 percent of gross domestic product; public debt of not more than 60 percent; a long-term interest rate no more than 2 percentage points higher than the average rate of the three member nations with the lowest inflation; and no serious currency devaluations. The final stage, which began on January 1, 1999, launches the euro and transfers all responsibility for member