The History Of The Euro Essay Research

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The History Of The Euro Essay, Research Paper Michael Younan The History of the Euro Recently members of the European Community have proposed the “Euro” as the name of a united currency. The idea for a common currency is not a new one. For years European banks have been using ECUs as the basis for the European Monetary System and it will now be exchangeable equally for new Euros. ECU stands for European Currency Unit, and is defined in terms of pieces of European currencies, making it a composite currency of all European countries. Since its creation, it has commonly used as a currency of denomination for eurobonds and bank certificates of deposit. In March 1979 the European Monetary System was launched, and the goal toward a united currency was started. The system was

based on the average behavior of the participating countries of the European Community. All European economies were examined, and observed to measure their effect of the monetary system. Average inflation was good but too much departure from that average would produce problems in the system. If the community average were 5 percent inflation, but the country’s inflation with either 0 percent or 10 percent inflation, it would cause strains in the system. All this economic coordination took place through a country’s exchange rate. A country was on track just as long as its exchange rate with respect to the ECU did not depart too much from a fixed value the ECU central rate. The Maastricht Treaty proposed additional criteria other than exchange rates, which was finally approved

in May 1993 despite a holdout from some countries in the European Community. The Treaty set out three stages of further transition to monetary union in Europe The first stage was to have been completed by January 1994, and involved the elimination of all restrictions on the movement of capital between Member States, and between Member States and third countries. However, that goal was not met completely (Santer, Jacques). After January 1994, the second stage began with the creation of the European Monetary Institute or EMI in Frankfurt, Germany. The EMI was the beginning of the proposed European Central Bank. The EMI was created to hold the gold and foreign exchange reserves, and oversee the operation of the European Monetary System, and to promote the use of the ECU and the

transition from ECUs to Euros. Its future responsibilities are to implement a common European monetary policy, conduct foreign exchange operations, and hold reserves of member countries. While it’s working to achieve those goals, the EMI is also supposed to monitor some other economic convergence criteria among member countries, which included exchange rates, inflation, government debt, and interest rates. To be allowed to joined the new monetary union, as stated by the EMI in 1999 countries needed to have the following criteria by end 1997: ? “price stability” or A rate of inflation of the consumer price index not more than 1.5- percent points about the three member countries with the lowest inflation rates. ? Have kept its currency within the normal margins around its

fixed value in terms of the ECU and to have not devalued against any other member country for two years. ? Long-term interest rates not more than 2 percent above the three member countries with the lowest rates of inflation. ? A government deficit that is not “excessive”, or a government deficit that doesn’t exceed 3 percent of yearly gross domestic product, and the value of outstanding government debt doesn’t exceed 60 percent of yearly gross domestic product. However, meeting the criteria has led to considerable activity in the area of government statistics fudging. How much fudging is allowed is up to the EMI and the European Commission to decide, and investigate. A good example of this statistical changing is the case of France. They counted a current pension fund