Europe's New Currency
On January 1, 1999, eleven European countries have replaced their national currencies and introduced a single European currency, the euro. Today (December 2001) the euro is the official currency in 12 countries. Bills and coins of the national currencies will remain in circulation as subdenominations of the euro until January 1, 2002, when they will be exchanged against new euro coins and bills. However, all inter-bank commerce and stock exchange trade is now denominated in the official currency. This information page provides basic information about the new currency and the process through which European monetary union has been achieved.
Time Table of Events
Decision on participating member states by the European Council on a recommendation from the Council of Ministers on the basis of reports and recommendations from the Commission and the European Monetary Institute (EMI). The recommendations will assess the performance of each countries under the Maastricht criteria. Bilateral exchange rates between the participating countries will be announced. Eleven countries have been chosen for the first round of membership. For details, see below.
Inauguration of the European Central Bank (ECB), which will succeed the current European Monetary Institute.
Conversion rates between euro and national currencies are irrevocably fixed [based on the bilateral exchange rates already established in May]. Conversion rates will have six significant digits.
Euro becomes official currency in the eleven participating countries. The definition and execution of the single monetary policy in euro commences. Foreign exchange operations are beginning to be carried out in euro. New public debt is issued in euro; old public debt will be translated into euro. Stocks and bonds will be quoted in euro on all stock exchanges in the member area. National currencies will simply be denominations of the euro, and continue to be used as a matter of convenience only until 2002.
Greece is scheduled to become the twelfth member of the euro group. A locking rate of the Greek Drachma to the Euro has been established on June 19, 2000.
Circulation of euro banknotes and coins is started. "E-day" is the same across EMU member countries. National currencies will be completely replaced by the euro in within six months after the introduction of euro notes and coins.
The legal tender status of national banknotes and coins is canceled. This marks the end of the dual circulation period which started on January 1, 2002.
In a referendum, Sweden votes resoundingly (56.1% against 41.8%) to reject membership in the European single currency.
Beginning today, euro bills and coins will replace the national bills and coins in 12 European countries.
Denmark votes in a referendum, narrowly, not to join the euro.
Greece is admitted to the euro zone. The irrevocable conversion rate between the euro and the Greek drachma will be GDR 340.750 per 1 EUR.
The locking rates have been adopted by the E.U. Commission and have been published in the Official Journal of the European Union (L 359 31.12.1998) See the section Conversion Rates for details.
With the changeover to the euro on January 1, 1999, the practice of quoting exchange rates in price notation (ie, how many euros you have to pay for one foreign currency unit) will be replaced by volume notation (ie, how many foreign currency units you will get for one euro). This brings Europe into line with the practice in other countries, notably the United States.
The eleven countries participating in the "euro" have agreed to irrevocably fix their exchange rates as of today. The table below contains the fixed exchange rates vis-à-vis the partner countries. Note that this does not establish a fixed parity yet towards the new "euro", as the "euro" will be based on the ecu rate on December 31, 1998, and the ecu also contains the currencies of the non-participating European countries. Thus, the final conversion rates will not be available until the end of the year.
|FIXED EXCHANGE RATES BETWEEN "EURO" COUNTRIES|
The European Union has endorsed 11 EU nations that
will launch the single European currency in January 1999.
The 15-nation European Parliament agreed that Germany, France, Italy, Spain, the Netherlands, Belgium, Austria, Portugal, Finland, Ireland and Luxembourg will switch to the newly-created currency called the euro on January 1, 1999. Britain, Sweden, and Denmark have decided not to participate. Greece has not met the Maastricht criteria. However, Greece has subsequently qualified and is joining the euro group as the 12th member on January 1, 2001.
In a compromise deal, Wim Duisenberg will become the first head of the Europen Central Bank (ECB), but he will retire after four years to make way for Jean-Claude Trichet, who is currently head of the French central bank. The regular office period for an ECB governor is eight years. France has been favoring Trichet, while the other European countries have been supporting Duisenberg. Both candidates have impeccable credentials as strong central bank governors pursuing low inflation polices. With either governor, the ECB will pursue the anti-inflationary programme mandated by its constitution.
With regard to conversions between the different national currency units of the euro, the European Commision announces a reminder to Article 4(4) of Council Regulation (EC) No. 1103/97 of the same day in regard to the offical and only calculation method to be used for conversions: "Monetary amounts to be converted from one national currency unit into another shall first be converted into a monetary amount expressed in the euro unit, which amount may be rounded to not less than three decimals and shall then be converted into the other national currency unit. No alternative method of calculation may be used unless it produces the same results."
The Maastricht Criteria
The Maastricht Treaty stipulates five criteria that countries must meet to become eligible for the single European currency, the euro. These criteria must be achieved over the year before the date of examination. As membership will be determined in early 1998, the criteria thus apply to 1997. They are as follows:
To qualify, a country's inflation rate must not exceed the average inflation rate of the three best performing Member States by more than 1-1/2 percent. (Inflation is measured by means of the consumer price index.)
To qualify, a country must not exceed either of the following two reference values relative to its gross domestic product at market prices:
To qualify, a country must have stayed within the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State.
To qualify, the durability of convergence must be reflected in the long-term interest rate levels. A Member State must have had an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best performing Member States in terms of price stability. (Interest rates are measured on the basis of long term government bonds or comparable securities.)
Some countries indicated that they did not intend to participate immediately in the Euro. These countries are Britain, Denmark, and Sweden. The only country that did not meet the two most important criteria, price stability and interest-rate convergence, is Greece, and thus it did not qualify for membership in 1999. However, by June 2000, Greece has made sufficient progress so that Greece will join the euro by January 1, 2001. The criterion on successful membership in the exchange rate mechanism (ERM) of the EMS did not pose a serious threat for membership. In 1999, only Britain, Greece, and Sweden did not participate in the ERM.
The interpretation of the two fiscal prudence criteria has been a matter of dispute. Some have argued for the strictest literal interpretation. The official wording of the criteria allows for some flexibility; it allows a breach of the reference value for the budget deficit if the figure has declined substantially and is approaching the reference value, or when the difference to the reference value s exceptional and temporary. The public-debt criterion can be exceeded if the ratio is falling and approaching the reference value steadily.
The table below shows the fulfillment of the Maastricht criteria as determined by the European Commission in May 1998.
|Country||Inflation||Government Budgetary Position||Exchange Rates||Long term interest rates|
[% of GDP]
|Debt [% of GDP]||ERM
|Jan. 1998||1997||1997||Change from previous year||March 1998||Jan. 1998|
|Reference Value||2.7||3||60||7.8 (f)|
|Greece||5.2||4.0||108.7||-2.9||1.5||0.7||yes (h)||9.8 (i)|
(a) Percentage change in arithmetic average of the latest 12 monthly harmonized indices of consumer prices (HICP) relative to the arithmetic average of the 12 HICP of the previou period.
(b) Council decisions of 26-Sep-94, 10-Jul-95, 27-Jun-96, and 30-Jun-97.
(c) A negative sign for the government deficit indicates a surplus.
(d) Average maturity 10 years; average of the last twelve months.
(e) Definition adopted: simple arithmetic average of the inflation rates of the three best-performing member countries in terms of price stability plus 1.5 percentage points.
(f) Definition adopted: simple arithmetic average of the 12-month average of interest rates of the three best-performing member countries in terms of price stability plus 2 percentage points.
(g) Commission is recommending abrogation.
(h) since March 1998
(i) Average of available data during the past 12 months.
(j) since November 1996.
(k) since October 1996.
Source: European Commission
Britain has opted out of the EMU; so have Denmark and Sweden. However, the British government under Tony Blair does not seem to be quite as opposed to the idea as its predecessor. It is possible that at the time of the next elections in Britain the British government will try to seek a mandate for EMU membership from the electorate. While conservative politicians in Britain remain sceptical of the euro, sentiment among business people and the ruling Labour party are much more favourable towards the euro. However, this positive sentiment has been cooling in particular in the wake of the negative outcome of the Danish referendum in September 2000.
Denmark originally turned down the Maastricht treaty in a referendum. Yet another referendum was held on September 28, 2000 to decide on joining the Euro. Danish voters narrowly defeated the referendum (53.1 to 46.9 percent) in a motion that reflected growing uneasiness about european integration as well as the weakness of the euro relative to the US dollar at the time of the referendum. Observers expect that Denmark will not hold another referendum for at least another five years.
Sweden has been closely watching the outcome of the referendum in Denmark. It now appears likely that a referendum is going to be postponed. Thus it appears unlikely that Sweden would be ready to join "Euroland" in time for "E-day".
The irrevocable conversion rates of the participating currencies have been fixed through a unanimous vote of the European Council. The external value of the euro corresponds to the external value of the ECU, which means that the conversion rate between them is one to one (1 [official] ecu = 1 euro).
In order to avoid speculation, the bilateral market rates (ie, cross rates) were taken as the basis for the conversion. Thus the conversion rates protect the external value of the participating currencies. Furthermore, to avoid misuse of rounding in carrying out conversions, conversion rates have six significant digits. The rates shown in the table below are the official conversion rates announced on December 31, 1998. In carrying out the conversion, only the official conversion rate will be used, but not its reciprocal value. That is, to change local currency into euro, divide by the conversion rate. The locking rate for the Greek Drachma was established on June 19, 2000, in preparation for Greece's entry into the Euro zone on January 1, 2001.
|Euro Conversion Rates|
|Country||Currency||1 euro =|
Legal Tender Status and Redemption after E-Day
On January 1, 2002 ("E-Day") bills and coins of twelve national currencies will finally be exchanged for Euro bills and coins. National bills and coins will cease to be legal tender at specific dates shown in the table below. Banks will continue to exchange bills after that date, and the national central banks (now branches of the ECB) will continue to redeem bills for an even longer period. The arrangements vary by country as shown below:
|Country||Currency||End-date of legal tender||Exchange at banks after legal tender||Redemption after legal tender|
|Belgium||Franc||28/2/2002, midnight||31/12/2002||Notes: indefinitely
Coins: end 2004
|Germany||Mark||31/12/2001, midnight||at least until 28/2/2002||indefinitely|
|Greece||Drachma||28/2/2002||yes, but period to be defined||Notes: until 1/3/2012
Coins: until 1/3/2004
|France||Franc||17/2/2002, midnight||30/6/2002||Notes: until 17/2/2012
Coins: until 17/2/2005
|Ireland||Pound||9/2/2002, midnight||yes, but not specified yet||indefinitely|
|Italy||Lira||28/2/2002||voluntary after 28/2/2002||Notes and Coins: until 30/12/2012|
Coins: end 2004
|Netherlands||Guilder||28/1/2002, midnight||31/12/2002 (banks may charge for the exchange as from 1/4/2002)||Notes until 1/1/2032
Coins until 1/1/2007
|Austria||Schilling||28/2/2002||voluntary after 28/2/2002||indefinitely|
|Portugal||Escudo||28/2/2002||30/6/2002||Notes: until 30/12/2022
Coins: until 30/12/2002
|Finland||Markka||28/2/2002||voluntary||Notes and Coins: until 29/1/2012|
The Euro Symbol
The dollar, the pound, and the yen all have symbols to denote their currency. A new symbol has been created for the euro: a stylized e, with two dashes instead of one in the middle. It is usually displayed in yellow colour on a blue background: . It is shown in the top left corner of this page. A PostScript version as well as an enlarged GIF version are available from PACIFIC.
Microsoft is gearing up to include the new euro symbol in its software, in particular, Word 97. For more information, see their page with download instructions for typography patch on the euro symbol. The symbol is already in Windows 98 and Windows NT 5. Corel's WordPerfect version 8 already has the euro symbol in its set of typographic symbols.
Adobe has developed the character for free and shares the results with the public. For more information, see their web page on free downloadable Euro symbol fonts for more details.
The New Coins and Bills
One euro corresponds to 100 cents or euro-cents. (Each nation may call the sub-unit "cent" whatever they wish; so presumably there will be an euro-pfennig in Germany and an euro-centimes in France.) There will be eight different coins and seven different banknotes.
|1 Euro Cent||Diam. 16.25 mm||Front||Back|
|2 Euro Cent||Diam. 18.75 mm||Front||Back|
|5 Euro Cent||Diam. 21.75 mm||Front||Back|
|10 Euro Cent||Diam. 19.75 mm||Front||Back|
|20 Euro Cent||Diam. 22.25 mm||Front||Back|
|50 Euro Cent||Diam. 24.25 mm||Front||Back|
|1 Euro||Diam. 23.25 mm||Front||Back|
|2 Euro||Diam. 25.75 mm||Front||Back|
|5 Euro||120mm x 62mm||Front||Back|
|10 Euro||127mm x 67mm||Front||Back|
|20 Euro||133mm x 72mm||Front||Back|
|50 Euro||140mm x 77mm||Front||Back|
|100 Euro||147mm x 82mm||Front||Back|
|200 Euro||153mm x 82mm||Front||Back|
|500 Euro||160mm x 82mm||Front||Back|
Geert Desmet has compiled much more accurate descriptions of the new coins and bills. Visit his EURO-page: coins and EURO-page: bills for more information.
With the creation of the single European currency, there will be a need for a new interbank reference index for the euro zone countries. Euribor (European interbank offering rate) will replace the national monetary indexes for the countries of the euro zone, beginning in 1999. The European Banking Federation will be responsible for the calculation and dissemination of this index. Also note that there will be an euro-Libor.
Pros and Cons for and against the Euro
In the table below a number of arguments for and against a single European currency have been compiled. For the success or failure of the single European currency much depends on the size of the effects described below. Do the gains from reduced transaction costs, the disappearance of exchange rate instability, and greater price transparency outweight the losses from the cost of introducing the new currency and possible macroeconomic adjustment costs? Judge for yourself:
|Arguments for a single European currency||Arguments against a single European currency|
An important aspect in the debate about the pros and cons is what part of Europe would constitute an "optimum currency area" (OCA). There are several criteria which determine this; the two most important are synchronicity of the business cycles and high bilateral trade intensities. The concept of OCAs was originally proposed by R.A. Mundell in an 1961 paper in the American Economic Review. According to Mundell, an OCA is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely. In an OCA, policymakers balance the savings in transaction costs from the creation of a single money against the consequences of diminished policy autonomy from the loss of the exchange rate and monetary policy as instruments of responding to economic shocks. That loss will be more costly when economic shocks are more region-specific (ie, more "asynchronous" or more "asymmetric"). Countries qualify for membership in an OCA if its benefits outweigh its costs.
A very rough way to assess the synchronicity of the business cycle is to look at the correlation coefficients for the (seasonally-adjusted) quarterly changes in Gross Domestic Product (GDP) for pairs of countries. Using data from the IMF's International Financial Statistics for the period 1980-I through 1996-IV for Austria, France, Germany, Great Britain, the Netherlands, Spain, and Sweden, I find that an optimal currency area would include France, Spain, Italy, and Germany with correlations ranging between 0.59 (France/Spain) to 0.31 (Germany/Spain). The Dutch business cycle is closest to Germany (0.38) and France (0.33), but more distant to Italy and Spain (both 0.23). Great Britain is not far behind by being close to Spain (0.40), France(0.34), Italy (0.29) and Germany (0.16). Both the Netherlands and Britain would be suitable extensions of the optimum currency area. In the case of Britain, this result somewhat contradicts the claim that Britain is not well integrated into the continental-European business cycle. In this sample, the countries which are indeed not well integrated into a common European business cycle are Sweden and Austria which became members of the E.U. only during the last round of expansion. Incomplete data for Finland suggests that this country is very close to Sweden (0.62) as well as Austria.
A working paper by the Centre D'Etudes Prospectives et D'Informations Internationales on Symmetry and asymmetry of supply and demand shocks in the European Union and another working paper by the International Monetary Fund on Optimum Currency Area by Luca A. Riccia provide excellent starting points to further explore this issue. [The last link is to a PDF file, 41 pages.] A collection of economic research papers published by Barry Eichengreen over the last few years appears in the book "European Monetary Unification - Theory, Practice, and Analysis", published by MIT Press in 1997.
The European Central Bank (ECB)
The European Central Bank (ECB) (with seat in Frankfurt will come) into life when the euro becomes Europe's official currency on January 1, 1999. The ECB in conjunction with the National Central Banks (NCB) in the member countries will form the European System of Central Banks (ESCB). The ECB will succeed the current European Monetary Institute (EMI), whose seat is in Frankfurt. The EMI is directed by a council consisting of the governors of the NCB and a president that is appointed by accord of the European governments. Article 105 of the Maastricht Treaty defines that "... the primary objective of the ESCB shall be to maintain price stability" and that "without prejudice to the objective of price stabilty, the ESCB shall support the general economic policies in the Community...". Furthermore, "the ESCB shall act in accordance with the principle of an open market economy with free competition [and] favouring an efficient allocation of resources." The ECB has the exclusive right in the E.U. to authorize the issue of banknotes and coins; however, the NCB will handle the technical aspects. Article 107 of the Maastricht Treaty maintains the ECB's independence: ECB executives are required not to seek or take instructions from any other institution or government body, European or national, and the European governments are required not to seek to influence the decision-making bodies of the ECB.
The ESCB is governed by the two decision-making bodies of the ECB; these are the Governing Council and the Executive Board. The Governing Council of the ECB comprises the members of the Executive Board of the ECB and the governors of the NCBs. The Executive Board comprises the president, vice-president, and four other members, and are appointed by professional merit and monetary/banking experience by common accord of the governments of the member states, by recommendation from the European Council and in consultation with the European Parliament and the ECB's Governing Council. Their term is eight years.
The Government Council decides by simple majority or in some cases by qualified majority. Qualified majority requires a 2/3 vote weighted according to the NCBs' shares in the ECB capital; the executive board members have zero weight. The weights are determined half-and-half by the member state's population share and the member state's GDP share; the weights are adjusted every five years.
In addition, a Monetary Committee with advisory status is set up to review the monetary and financial situation of the member states and review other matters of monetary integration. When the euro becomes official currency, the Monetary Committe will be replaced by an Economica and Financial Commeittee with an expanded role. Each member state can appoint no more than two committee members.
The constitution of the ECB (as well as the statute of the EMI) is contained in an annex to the Maastricht Treaty.
An often asked question is "how can one calculate pseudo exchange rates for the euro for the time before its introduction in 1999?" One method is to use the ecu rates as a substitute for the pre-1999 euro rates. This is convenient because the euro was linked 1:1 to the ecu. However, three countries are part of the ecu basket (Britain, Denmark, and Greece) that are not part of the euro-11 group, and two other countries (Finland and Austria) are part of the euro-11 group but not part of the ecu basket of currencies. A superior but more demanding method is to calculate a weighted average of the euro-11 constituent currencies for the pre-1999 period. Technically, this is achieved by using the following equation:
where xe,j is the exchange rate of the euro e with respect to currency j, xi,j is the exchange rate of one of the eleven constitutent currencies i of the euro with respect to currency j, and wi is a weight. Finally, ze,j is a scaling factor that normalizes the exchange rate so it matches the actual euro exchange rate on the date of its introduction. For example, when combining exchanges rates DEM/USD, FRF/USD, ITL/USD, and so on, a correction factor of zEUR,USD=-2.3586193 must be used. The weights in the table below are based on the size of international trade with a group of 13 countries outside the euro-11 zone. Note that in the table below the Belgian and Luxembourg Franc are aggregated, and that Greek Drachma (the 12th country to join the euro group) is not part of the calculation.
|Weights of 11 constituent currencies of the Euro|
Based on the same information on the external trade of the euro-11 countries, the importance of trade with the group of 13 countries outside the euro-11 zone is shown in the table below:
|Percentage shares of external trade of euro-11 group|
Pseudo EUR/USD rates for the six-year period 1993-1998 are available from Prof. Antweiler upon request against payment of a small administration fee (CAD 30, USD 20 or EUR 20).
Technical Aspects of the Changeover
Bookmarks and Directories