National currencies are vitally important to the way modern economies operate. They allow us to consistently express the value of an item across borders of countries, oceans, and cultures. Wealth can be easily stored or transported as currency.

Currencies are also deeply embedded in our cultures and our psyche. Think about how familiar you are with the price of things. If you are in the United States, you think of everything in "dollars," just like you think about distances in inches and miles.

On January 1, 2002, the euro will become the single currency of 12 member states of the European Union. This will make it the second largest currency in the world (the U.S. Dollar being the largest). It will also be the largest currency event in the history of the world. Twelve national currencies will evaporate and be replaced by the euro.

In this edition of, we'll look at the monumental task of changing 12 countries' entire monetary systems to a new, single system. We'll look at why it was decided and the effects it will have on business around the world.

What Does the Euro Look Like?
The European Commission (EC) was given the task of creating the euro symbol as part of its communications work. There were three things the design had to accomplish:

The EC had more than 30 designs drawn up. They selected 10 from those and let the public vote, which narrowed those 10 down to two. From there they made their final selection. The design that was selected is based on the Greek letter epsilon, and also resembles the "e" as the first letter of the word "Europe." The two parallel lines through the center of the 'c' represent stability.

The euro will be abbreviated as EUR. This was established through the International Organization for Standardization (ISO).

 Bank-note designs
There are seven euro bank notes. Their design was also the result of a contest. Designers were nominated by the national central banks, and the competitors turned out designs for the seven bank notes based on either the theme of "Ages and Styles of Europe" or an abstract modern theme.

Robert Kalina of the Oesterreichische Nationalbank won the competition. His designs were selected at the Dublin European Council in December of 1996. He based his designs on the theme of seven important architectural periods in Europe's cultural history.

The seven bank notes are printed in different sizes and shapes for easier identification. Here is what they look like:

 Coin designs
There are eight euro coins ranging in value from 1 cent to 2 euros. They also vary in size and thickness according to their values to promote easier identification. As with the bank notes, there was a Europe-wide competition for the coin design. Luc Luycx of the Royal Belgium Mint had the winning designs for the side of the coins to be common to all 12 member states.

The design features one of three maps of Europe surrounded by the 12 stars representing the European Union. The opposite side of the coins has designs specific to each country, also surrounded by the 12 stars. Although each country has its own coin design, each coin will be accepted in any member state of the European Union.

Here is what the common side of the coins looks like:

To see each of the member states' designs, click here (then click on the map for the country whose coin you wish to see).

The European central banks have paid for the initial supply of currency to be produced, which amounts to a staggering 50 billion euro coins and 14.5 billion euro bank notes!

Where Did the Idea Come From?
The original seed was planted in 1946 when Winston Churchill suggested the creation of the "United States of Europe." His goals were primarily political, in that he hoped a unified government would bring about peace for a continent that had been torn apart by two world wars.

Then, in 1952, six west-European countries took Churchill's suggestion and created the European Coal and Steel Community (ECSC). These resources were quite strategic to the power of each country, so a requirement of the ECSC was that each country allow their resources to be controlled by an independent authority. Their goal, just as Churchill had intended, was to help prevent military conflict between France and Germany.

In 1957, the Treaty of Rome was signed, declaring the goal of creating a common European market. It was signed by France, Germany, Italy, Belgium, the Netherlands, and Luxembourg.

After many false starts, the process of creating the Euro got its real start in 1989, when the Delors Report was published by Jacques Delors, president of the European Commission. This important report outlined a three-stage transition plan that would create a single European currency.

  • Stage one began on July 1, 1990, and immediately abolished (at least in principle) all restrictions on the movement of capital between the member states. It also began the identification of issues that needed to be dealt with and the development of a working program to implement the upcoming changes.

  • Stage two began on January 1, 1994, and marked the establishment of the European Monetary Institute (EMI). The EMI was responsible for coordinating the monetary policy and strengthening the cooperation of the central banks, as well as making preparations for the establishment of the European System of Central Banks, which included the single monetary policy and single currency.

    In December 1995, the European Heads of State or Government at the European Council meeting in Madrid voted on the name "euro" for the single currency of the European Monetary Union.

  • Stage three began on January 1, 1999, with the establishment of "irrevocably fixed exchange rates" of the currencies of the current 11 member states. At this point, the euro was the official currency of those countries, but could only be used in non-cash transactions such as electronic transfers, credit, etc.

    Greece joined the EMU in January 2001, raising the number of member states to 12.

    For more details on the events occurring between 1957 and 1989, see the euro history section.

    Participating Countries
    There are currently 12 participating member states of the European Union:

    Countries that meet the criteria but did not wish to participate include Great Britain, Denmark and Sweden.

    Participation is not based solely on the desire of that country to be a part of it. First of all, the country has to be a Member of the European Union. Second, it has to meet the requirements that were set up in the Maastricht Treaty, drafted in 1991.

    In addition to the membership requirements of the EU, countries who wished to participate in the euro and be a part of "Euroland" had to pass some economic tests referred to as convergence criteria:

    • The country's annual government budget deficit (the amount of money it owes) cannot exceed 3 percent of gross domestic product (GDP, the total output of the economy).

    • The total outstanding government debt (the cumulative total of each year's budget deficit) cannot exceed 60 percent of GDP.

    • In order to push down inflation rates and encourage more stable prices, the country's rate of inflation must be within 1.5 percent of the three best performing EU countries.

    • The average nominal long-term interest rate must be within 2 percent of the average rate in the three countries with the lowest inflation rates. (Interest rates are measured on the basis of long-term government bonds and/or comparable securities.)

    • The country's exchange rates must stay within "normal" fluctuation margins of the European Exchange Rate Mechanism (ERM) for at least two years.

    While there was much debate over how strictly these requirements must be upheld, it was finally determined that participating countries must show that they are at least "on course" to meet the requirements.

    Meeting the initial requirements, however, is not a one-time thing. The Stability and Growth Pact, which was drafted in 1996, established an agreement stating that fines would be charged to countries who have excessive deficits. Member states cannot run a budget deficit that is greater than 3.0 percent of the GDP. If they do, they will be charged 0.2 percent of their GDP, plus 0.1 percent of the GDP for every percentage point of deficit above 3.0 percent. The Pact does not automatically impose these fines, however. Countries that are in recession, which is defined as a fall by at least 2.0 percent for four fiscal quarters, may automatically be exempt. A fall by any amount from 0.75 to 2.0 percent requires a vote by the EU to impose the fine.

    While the Pact is structured as a stabilizer for the economy, there are still those who argue that it can be damaging to economies in that governments can adopt a loose fiscal stance during times of fast growth, but put the brakes on excessively during slowdowns.

    Setting the Value of the Euro
    The European Central Bank (ECB) was established in 1998. Its job is to make sure that the European System of Central Banks (ESCB) carries out their duties and implements the changeover required by the euro statutes. The General Council of the ECB is responsible for setting the conversion rate for the euro for each participating country. Those rates were established in January 1999, and are "irrevocably fixed." The conversion was based on the existing currency so that the euro is simply an expression of the previous national currency.

    Euro Conversion
    Exchange Rate Mechanism (ERM)
    The ERM links currencies of non-participating countries to the euro as of January 1, 1999, as they stood on the first day of stage three of the changeover. It uses fluctuations of plus or minus 15 percent as the basic rule.

    European Currency Unit (ECU)
    This refers to the basket currency that was made up of the weighted value of each of the 12 member states' national currencies as of the signing of the Maastricht Treaty in February 1992. The ECU was replaced by the euro on January 1, 1999. The initial value of the euro was one-to-one with the ECU.

    The ECB used guidelines established in a
    Joint Communique that was issued on May 2, 1998, by the ministers of the member states who were adopting the euro. In order to not modify the external value of the European Currency Unit (ECU), they used the bilateral rates of the Exchange Rate Mechanism (ERM) to establish the fixed conversion rate for each national currency. The calculation of the exchange rates followed the regular daily concertation procedure, which used the representative exchange rate for each nation's currency against the U.S. dollar as of December 31, 1998.

    Here are the established values. One euro equals:

    • 40.3399 Belgian franc
    • 340.750 Greek drachma
    • 6.55957 French franc
    • 1936.27 Italian lira
    • 2.20371 Dutch guilder
    • 200.482 Portuguese escudo
    • 1.95583 Deutsche mark
    • 166.386 Spanish peseta
    • 0.787564 Irish punt
    • 40.3399 Luxembourg franc
    • 13.7603 Austrian schilling
    • 5.94573 Finnish markka

    Implementing the Changeover
    On January 1, 1999, the euro was established as the official currency of the 12 participating member states of the European Union. The conversion rates were "irrevocably fixed," and the euro officially "existed." At that point, the euro could be used for non-cash transactions, such as making electronic payments, writing checks, or credit transactions. Although this sounds confusing, in most cases the balances were shown both in the national currency as well as in the converted euro amounts. The currency changed, but because of the established conversion rate, the value remained the same.

    The euro currency is being introduced on January 1, 2002. Some countries have slightly different schedules for the end of circulation of their existing national currency. Here is the schedule for the euro introduction and endings for national currencies:

    As items are purchased with national currency, the change will be given in euros. Exchange of cash can also be done in banks. Automated teller machines (ATMs) begin distributing only euros on January 1, 2002. During the "dual circulation period," until the final deadlines are reached for changeover, both national currencies and the euro will be accepted, but after that point only the euro will be acceptable legal tender. Banks will still be able to exchange old currency for new even after the deadline and probably for up to 10 years.

    Benefits and Drawbacks of a Single Currency
    The euro is fundamentally a tool to enhance political solidarity. This political motivation began when the idea of the European Union and a single currency was first conceived. While it also has the economic effect of unifying the economies of participating countries, it will ultimately do much more for the European Union.

     Advantages of the euro
    Economically, the euro's advantages include:

     Disadvantages and risks of the euro
    While there are many advantages to the euro, there may also be some disadvantages. The cost of transitioning 12 countries' currencies over to a single currency could in itself be considered a disadvantage. Billions will be spent not only producing the new currency, but in changing over accounting systems, software, printed materials, signs, vending machines, parking meters, phone booths, and every other type of machine that accepts currency.

    In addition, there will be hours of training necessary for employees, managers, and even consumers. Every government from national to local will have impact costs of the transition. This enormous task will require many hours of organization, planning, and implementation, which falls on the shoulders of government agencies.

    The chance of economic shock is another risk that comes along with the introduction of a single currency. On a macroeconomic level, fluctuations have in the past been controllable by each country.

    • With their own national currencies, countries could adjust interest rates to encourage investments and large consumer purchases.

      - The euro will make interest-rate adjustments by individual countries impossible, so this form of recovery will be lost. Interest rates for all of Euroland are controlled by the European Central Bank.

    • They could also devalue their currency in an economic downturn by adjusting their exchange rate. This devaluation would encourage foreign purchases of their goods, which would then help bring the economy back to where it needed to be.

      - Since there is no longer an individual national currency, this method of economic recovery is also lost. There is no exchange-rate fluctuation for individual euro countries.

    • A third way they could adjust to economic shocks was through adjustments in government spending such as unemployment and social welfare programs. In times of economic difficulty, when lay-offs increase and more citizens need unemployment benefits and other welfare funding, the government's spending increases to make these payments. This puts money back into the economy and encourages spending, which helps bring the country out of its recession.

      - Because of the Stability and Growth Pact, governments are restricted to keeping their budget deficits within the requirements of the pact. This limits their freedom in spending during economically difficult times, and limits their effectiveness in pulling the country out of a recession.

    In addition to the chance of economic shock within Euroland countries, there is also the chance of political shock. The lack of a single voice to speak for all euro countries could cause problems and tension among participants. There will always be the potential risk that a member country could collapse financially and adversely affect the entire system.

    Effects on Worldwide Business
    The strength and stability of the euro will have a profound effect on European business, as well as the business environment worldwide.

     A strong euro
    A strong euro that trades at higher levels than foreign currencies such as the dollar or yen will strengthen imports for Euroland countries by allowing them to purchase more for less money. This creates a stronger financial environment for industrial manufacturers that rely on imports for parts and supplies.

     A weak euro
    A weak euro that trades at lower levels than foreign currencies will mean that exports from Euroland will be less expensive for foreign buyers. This also means that other foreign manufacturers will have to compete against those low prices. If the euro grows very weak, then there is the chance of inflation -- which would make borrowing expensive and further the problem.

     What affects the strength of the euro?
    In simple terms, the euro's strength is affected by supply and demand. When investors invest in a fund in a specific currency, that is essentially a vote of confidence in that issuer. But how do investors make their decisions about where to invest?

    There are several factors that affect where investors place their money, including the overall stability factor. Is there a political or budgetary problem within the country (or, in the case of the euro, several countries)? Indicators like unemployment levels and overall inflation rates are considered.

    The exchange rates are also considered. Trade among the countries that make up Euroland will probably increase in relation to trade with the rest of the world, simply because it will be so much easier than it was before. However, both imports from and exports to non-Euroland countries will probably increase less rapidly. When a country imports more than it exports, it runs a deficit in its current account, which isn't attractive to investors because it doesn't indicate long-term stability. Current account surpluses, which result from higher exports than imports, are viewed an indicator of a strong currency.

    Interest rates also have an affect on investors. High interest rates mean high returns, but they may also mean inflation. There is a fine line between these two, and investors have to balance the risks accordingly.

     How does the strength of the euro affect worldwide business?
    The euro could have detrimental affects on the U.S. dollar. Euroland now has the second strongest economy in the world, and the highest level of world trade. This could establish the euro as a new reserve currency, and could cause a shift in demand from dollar-denominated markets to euro-denominated markets.

    Another factor that affects the balance of the business world is the fact that growing countries that are trading with Euroland countries will begin invoicing in euros. This will have the effect of strengthening these key trade areas as euro trading zones.

    A third factor that may strengthen the affects of the euro and impact worldwide business is the new freedom for expansion that Euroland manufacturers and other business firms now have. This growth opportunity will allow them to use economies of scale to their advantage and create highly competitive markets that didn't exist prior to the introduction of the euro.

    While the euro may not help some of the problems within the Euroland countries themselves (such as unemployment), it will bring about an opportunity for growth that has not been possible in the past. It is anticipated by most that the euro will promote expansion and growth that will make European stocks as attractive to investors as American and Japanese stocks.

    More Euro History
    The Treaty of Rome was ratified in 1958, establishing the European Economic Community (EEC). The goal of the EEC was to reduce trade barriers, streamline economic policies, coordinate transportation and agriculture policies, remove measures restricting free competition, and promote the mobility of labor and capital among member nations. It was very successful, but just as with the ECSC, it served more of a peacemaking role between the European nations than an economic role.

    At this time, the monetary exchange rate between countries was controlled by the Bretton Woods system, which connected currencies to the U.S. dollar, allowing for only a one point fluctuation around designated values. This was referred to as the "pegged rate" and was based partly on the gold backing of the dollar. This system worked well for 20 years, helping to stabilize exchange rates and restore economic growth in the postwar period. By 1960, however, the system began to fail, and exchange-rate agreements became the prevalent topic among European political and economic leaders.

    By December 1969, Luxembourg's Prime Minister, Pierre Werner, was asked to write an EC (European Community) report covering the need for a complete monetary union among the European economies. "The Werner Report" came out in 1970 and specifically brought up the idea of a single European currency as part of a cooperative monetary effort. The report was the first to use the term Economic and Monetary Union.

    Although this plan seemed promising, it lost momentum when President Nixon's 1971 policy of "benign neglect" ended U.S. backing (by its gold reserves) of the predefined exchange rates against the dollar, collapsing the Bretton Woods system. Other foreign central banks were not willing to support the dollar, which would have provided the equivalent of deposit insurance.

    So where did that leave the European countries when it came to the stability of their currencies? It brought about the development in 1979 of the European Monetary System (EMS), which locked exchange rates among the participating countries into predefined trading zones. This was known as the Exchange Rate Mechanism (EMS). This move, in itself, stabilized the economy by creating predictable trading zones.

    The next move toward a unified European economy came with the 1987 Single European Act. This act called for the systematic removal of barriers and restrictions that hampered trade between European countries. As a result, border checks, tariffs, customs, labor restrictions and other barriers to free trade were dismantled.

    For more information on the euro and related topics, check out the links on the next page!

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