This year marks the 20th anniversary since the euro was introduced back in January 1999. This is certainly an important milestone and one that is worth reflecting upon.
Although arguments for a common European currency had been floated for quite some time, it was only through the Maastricht Treaty, signed in 1992, that member states agreed the provisions needed to implement the Economic and Monetary Union and also the criteria that each member state must meet to adopt the single currency.
In 1999, the euro currency was virtually born and it took three years for it to be circulated. Initially, only 11 countries formed part of the eurozone but, since then, an additional eight countries have adopted the currency to bring the total to 19 countries and 340 million Europeans, making it one of the most important currencies in the world.
The introduction of a single currency was considered to be an important step to enhance economic integration in Europe, a step that was preceded by the creation of the single market with its four freedoms, as well as support commerce while imposing policy discipline.
It is important to recall some of the main benefits for citizens and business that were brought about by the advent of the euro.
The euro certainly made it easier to live, study and work in another euro area country. It made travelling within the euro area less costly by eliminating the need to change money or pay exchange fees. The euro allowed consumers in the euro area to compare prices directly and pay across borders. The single currency also ensured price transparency by enabling direct comparison of prices, thus yielding benefits for both consumers and businesses.
The euro also helped to reduce businesses’ concerns about exchange rates by eliminating exchange-rate fluctuations for member states in the eurozone, thus facilitating trade. This also removed foreign exchange risk and uncertainty and provided an ease of mind to all businesses.
Indeed, the euro helped to promote trade within Europe and beyond as businesses around the world trading with Europe came to accept prices quoted in euro. Indeed, the proportion of international payments made in euro is approximately equal to those in US dollars, with the euro being the second most important currency for borrowing, lending and central bank reserves.
The euro has contributed to the deepening of many financial markets by lowering the hurdles to cross border transactions even though progress has been rather uneven across markets.
Indeed, a pan-European interbank deposit market and a corporate bond market have emerged while asset managers adopted a pan-European perspective in pursuing opportunities towards better risk and return trade-offs. On the other hand, market segments that relied on structures characterised by strong national specificities have not experienced the same transformation such as in the case of the collateral money market and equity trading platforms. As stated above, the introduction of the euro brought enhanced focus on policy discipline. In that regard, the establishment of the European Central Bank contributed to maintain price stability in the eurozone. Price stability is essential for two key Union objectives: economic growth and job creation. The stability of the euro also made it easier and cheaper for Europeans to borrow money, thus affecting the cost of mortgages as well as supporting European businesses in financing investment.
The euro is stronger than ever before but in no way should we get carried away
The participation requirements of the euro pushed many interested EU member states to get their economies in shape and improve their economic performance. Under the requirements of the Stability and Growth Pact, member states are also expected to pursue sound fiscal policies and coordinate their policies or potentially face fines in cases where excessive deficit is not corrected.
So far, the discussion has been on the pros of the euro but the European sovereign debt crisis of 2010, which, one must say, hit the EU very hard, was a wake-up call to all. Indeed, a number of political decisions were adopted to contain the crisis, preserve the integrity of the euro and avoid the worse possible outcomes. Important initiatives were adopted to regulate the financial sector and improve economic governance, improve member states’ public finances, pursue structural reforms and encourage investment and enhance financial sector resilience.
Other areas were also improved and revamped accordingly, such as the EU’s crisis response toolkit – the European Stability Mechanism. The actions undertaken by the ECB following the crisis demonstrated its commitment to do ‘whatever it takes’ to defend the euro.
Today, one can say that such efforts have clearly paid off. Europe’s economy is now entering its sixth year of uninterrupted growth, with record levels of employment. The euro is stronger than ever before but in no way should we get carried away.
External risks are mounting and, at the same time, important reforms remain incomplete, especially on the structural front. While the agreement on a backstop for the Single Resolution Fund was an important achievement, certainly further progress is also required in weakening the sovereign-banking sector nexus, particularly with regard to discussions on the common deposit insurance scheme.
Progress is also required with respect to the Capital Markets Union, leading to truly integrated financial and capital markets that allow companies to raise financing across borders more easily and support investment. Work is also under way on the development of a voluntary budgetary instrument for convergence and competitiveness for the euro area and ERM II member states which will be part of the EU budget.
Thus, while the euro has endured some important challenges over the past 20 years, further work is required to ensure it is indeed a shield amid storms as this common currency of ours continues to enjoy the trust of most Maltese people and Europeans alike.
Aaron Farrugia is Parliamentary Secretary for EU Funds and Social Dialogue.
This is a Times of Malta print opinion piece