Posted: April 1st, 2015

Birth of the Euro: Will It Benefit Europe?

Birth of the Euro: Will It Benefit Europe?

As part of the December 1991 Maastricht Treaty on European Union, the European Economic Commission outlined a plan to achieve the creation of a single European currency starting in 1999. Despite concerns, the new common currency—the euro—came into existence right on schedule in January 1999, with 11 of the 15 European Union countries participating in the monetary union: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal, and Spain. Denmark, Sweden, and the United Kingdom chose not to participate initially, and Greece failed to meet the economic criteria specified by the Maastricht Treaty (such as having a budget deficit less than 3% of GDP and total government debt less than 60% of GDP) but was able to join later.

Starting January 1, 1999, the exchange rates of countries entering the monetary union were fixed permanently to the euro (which became a unit of account), the European Central Bank took over monetary policy from the individual national central banks, and the governments of the member countries began to issue debt in euros. In early 2002, euro notes and coins began to circulate and by June 2002, the old national currencies were phased out completely, so that only euros could be used in the member countries.

Advocates of monetary union point out the advantages that the single currency has in eliminating the transaction costs incurred in exchanging one currency for another. In addition, the use of a single currency may promote further integration of the European economies and enhance competition. Skeptics who think that monetary union may be bad for Europe suggest that because labor will not be very mobile across national boundaries and because fiscal transfers (i.e., tax income from one region being spent on another) from better-performing regions to worse performing regions will not take place as occurs in the United States, a single currency may lead to some regions of Europe being depressed for substantial periods of time while other regions are booming.

Whether the euro will be good for the economies of Europe and increase their GDP is an open question. However, the motive behind monetary union was probably more political than economic. European monetary union may encourage political union, producing a unified Europe that can play a stronger economic and political role on the world stage.

It has been reported that four Gulf Cooperation Council (GCC) countries will announce the introduction of a common currency.

Discuss this issue briefly considering the following points:
1.    Whether the single currency is going to be pegged to US dollar or not
2.    Effect of introducing this currency on inflation of the four countries
3.    Whether oil is going to play a major role in this process or not
4.    Effect of citizens acceptance/ rejection to this currency
5.    Are you with? Or against the GCC single currency (your personal opinion)