The introduction of a single currency in Europe forms part of a long process of economic integration. That is nothing new. Monetary history and the currencies of the past provide us with several examples of common currencies and monetary unions. Back in the days when the Dukes of Burgundy ruled the Low Countries, there was a genuine monetary unification. In 1434, Philip the Good created a common currency comprising gold coins (cavaliers) and silver coins (vierlanders) for all his northern counties and duchies (Flanders, Hainaut, Holland and Brabant).
In 1865, at France’s instigation, the Latin Monetary Union was formed. The Union set the exact weight of the gold coins and silver subdivisions of the five member countries: Belgium, France, Italy, Switzerland and Greece (from 1868). Thus, under various names (franc, lira, drachma), a monetary unit existed as a precursor to the ecu or the euro. The Latin Monetary Union was abolished on 1 January 1927.
Just before the Second World War ended, a new international financial system was established. The Bretton Woods agreements (1944) permitted exchange rate fluctuations of 1 per cent. Only the US dollar, the central currency, was convertible to gold. Since the other currencies were not gold convertible they were linked to the dollar. As a result of the agreements, new organisations were set up: the International Monetary Fund (IMF) and the World Bank (WB). In 1957, six countries including Belgium signed the Treaty of Rome which, among other things, established the European Economic Community, aimed at the creation of an extended common market. The next step was the plan to set up an Economic and Monetary Union (EMU). In 1970, the Werner report expected it to be established within ten years, but the project took longer than planned. In 1971 a sizeable obstacle emerged when President Nixon suspended the gold convertibility of the dollar, a move which led to the collapse of the Bretton Woods system. This caused great instability on the foreign exchange markets, casting serious doubt on the parities between European currencies. It was therefore necessary to find an alternative. Under the Basle Agreement of April 1972, the margins for the fluctuation of European currencies were redefined as 2.25 per cent on either side of their central fixed parity. The latter was determined by the bands within which each currency could fluctuate in relation to the US dollar. In 1973 the agreement became general: the European currencies floated freely (without reference to the dollar) within certain limits. This system was called the Snake. According to Paul Turot, the Snake “depicts the way in which the exchange rate fluctuations of a varying number of European Economic Community currencies have to mirror one another.” In 1976, the only participants were the Federal Republic of Germany, Belgium, Luxembourg, the Netherlands, Denmark and Norway. The central banks had to intervene to maintain stable exchange rates between the currencies in the Snake. The oil shocks, the instability of the foreign exchange markets, and the appreciation of the US dollar caused problems for the system, which proved to be too fragile.
The negotiations at the Bremen Conference in 1978 led to “Europe’s return to the global Bretton Woods system which had prevailed in 1958”. The European Monetary System (EMS) then came into force in March 1979. It comprised three elements: the ECU as the system’s monetary unit, an exchange rate mechanism and credit facilities. The European Currency Unit (ECU) became the unit of account. The value of the ECU was “equal to the average of the values of its constituent currencies.”
In 1988, the Delors Committee was given the task of proposing specific stages for progressing towards Economic and Monetary Union (EMU). The final stage consisted in the creation of a single currency. The committee’s proposals formed the basis for negotiations which were to lead to the Treaty on European Union. The Maastricht Treaty establishing the European Union and amending or supplementing the Treaty of Rome outlined the timetable for the final stage of EMU (the single currency). It entered into force in 1993.
In December 1995, the Madrid European Council decided to rename the single currency the “euro”. The old currencies were retained from a purely legal point of view for the transitional period (from January 1999 to 31 December 2001) in the form of national currency units (NCUs). They were non-decimal subdivisions of the euro. During this period, cashless payments could be effected in euro, but not cash payments. The coins and banknotes were placed in circulation on 1 January 2002.
Today, the euro is the common currency of 16 European Union countries. Monaco, San Marino and the Vatican City – which are micro-States – also use the euro under a formal agreement concluded with the European Community. Andorra, Montenegro and Kosovo do the same, but in their case the use of the euro is not governed by a currency agreement. On 13 July 2010 the European Union Council approved Estonia’s application to join the euro area on 1 January 2011. From that date, Estonia will therefore be part of the euro area. The euro and the Estonian kroon will remain in circulation simultaneously for two weeks.
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