Show all/Hide all

1.3.1.1.1. What benefits were expected from economic and monetary union (EMU)?

• The disappearance of the costs and uncertainties linked to exchange risk and “competitive devaluations” within the zone (see illustration 1a). Governments, taken individually, could no longer seek to carry out their economic and social policies by dint of changes in the reference interest rate of their currency or in their exchange rates.  They would, therefore, no longer be able to devalue their currency to win market-share at the expense of the other countries or expect to attract capital from abroad by the expectation of a currency revaluation.
• An end to “seigniorage” by Governments.  It would no longer be possible for them to repay their creditors in a currency depreciated by inflation.  They would lose the privilege of printing money to repay their debts (art. 104.1 of the Treaty on the Union).  The euro would make the political authorities manage their finances more healthily, and this would speed up the long-term recovery of European economic capacity.  This advantage is essentially due to the reduction of inflation, which is a by-product of the adoption of the euro.   
• The creation of a large market for capital in Europe.  A reduction in the average cost of capital, as compared with what it would be without the euro, insofar as the ECB manages to make its inflation control policy and the position of the euro on the international markets credible.
• The easier movement of resources into less favoured areas where long-term investments would no longer run the risk of regular devaluations and the authorities and companies of the region would have direct access to the European capital market.
• Full advantage would be taken of the benefits of the single market through the elimination of the last non-tariff barriers to the free movement of people and goods, particularly by encouraging the transparency of prices.
• The strengthening of the position of the European economy in an increasingly globalised economic world.  

       
The price of a bottle of Coca-Cola in the countries of the euro zone
Copyright Promeuro – illustration 1.3.1a

1.3.1.1.2. What were the expected risks of failure of the EMU

Before the launch of the euro, the risks of failure mentioned most often were:

• The absence of political union, with economic and social matters kept under national authority.  The lack of coherence among the national economic cultures, a situation incompatible with a common monetary policy.  In particular, potential incompatibility between greatly differing national inflation rates and a common reference interest rate.
• The risk of a purely local shock affecting an area with weak labour-mobility could cause a disastrous situation there where the government concerned could no longer devalue its currency to compensate the losses or force the ECB to take measures that would undermine the stability of the euro on international markets.
• Keener economic competition due to the fact that the market would be widened to the whole of the continent was seen at the time as risking accentuating the marginalisation of the most vulnerable stratum of society and creating pockets of poverty in isolated regions or those with less able local authorities.  Some observers feared that the euro would aggravate the disparity between the rich countries and the poor ones. The opposite actually happened, demonstrating the beneficial effect of increased competition among countries and regions for the EU as a whole.  
• The monetary policy conducted by an inexperienced central bank*  would risk either weakening the euro and bringing about an interest–rate-rise or forcing a revaluation of the euro, worsening unemployment and resulting in the rejection of the EMU.  Doubts persisted about the capacity of the ECB to keep its independence against the pressure of one large country and protect the collective interests of the partners as a whole.
• The banks, weakened by the high costs of transition and the loss of the traditional income from exchange commission, would no longer be able to bear the effects of exacerbated competition with foreign banks, in particular, which would be better prepared for a market of continental dimensions and less dependent on national protective measures.
• Without a federal European political authority, there was a risk that the monetary objectives of a federalised ECB would prevail over the other aspirations of the people. According to professor Robert Cobbaut*, “there is a danger that logic of the financier will dominate that of the company manager” and “the sickness of our society would be the financial economy becoming uncoupled from the real economy”.  There was, then, a risk of the healthy independence of European monetary power becoming too dominant and harmful
• The other side of this risk was the failure to conform to the new culture of budgetary rigour by the national governments once they have entered into the EMU.  This risk was seen as being all the more real since the people of the various countries had not been fully informed of the socio-political implications of the euro and particularly the necessity of reducing excessive public indebtedness,  a shackle passed on to future generations.. (see “The wreck of the euro?”)      
• Bearing in mind the lack of popular support for the ecu, it was feared that most people would reject the euro, viewing it as too constrictive for a Europe of such diverse cultures.  This diversity is generally seen as a factor contributing to the success of a union: the success of the Muenzverein has been ascribed to Federal Germany’s capacity to develop the synergies among Laender with diverse cultures.  What’s needed in addition is a common spirit, a sense of belonging to one and the same community in order to sustain a shared currency.  If this paragraph finds itself among the risks of the euro and not its chances, it is because polls show that only a minority of Europeans put European citizenship above their own citizenship. (see the chapter on European citizenship).
• The euro could be undermined by nationalist tendencies that would develop as a reaction to the evolution towards more political integration in Europe, since such a development is a natural concomitant to the adoption of the euro. The installation by stages of a European or a supranational State – that the Eurosceptics call “the super-state” could impede the healthy development of the euro.        
• The euro would be permanently rejected by the inhabitants of the countries that formerly had “strong” currencies as a reaction to its persistent weakness.
• These risks were considered by eurosceptics as making the euro out of the question.

1.3.1.1.3. What is the importance of internal monetary stability as a performance criterion of a monetary policy?

Of the four criteria measuring the performance of a currency (internal stability, external stability, economic growth and employment; see point 1.6), internal stability, that’s to say the control of inflation, is one of the most important.

Without a stable currency, i.e. one not eroded by significant inflation, the other objectives cannot be maintained for long.  Price stability is necessary for preserving the long-term growth potential of an economy because it encourages investment and maintains the credibility of those running the economy.  Inflation is a sign of dysfunction and a lack of confidence in an economic system.  It is also the basis of the seigniorage* through which governments pursue their lax budgetary policies allowing them to pay off their debts at a lower unit-cost than that at which they acquired the public’s savings.

At an equal growth rate, inflation is also the most iniquitous tax there is because price increases hit firstly the poor, whose income is precarious and mainly spent on consumption.

The importance accorded to this criterion, considered as the priority objective of the ECB in the Treaty on European Union, is therefore justified 

Show all/Hide all

1.3.1.2.1. What has inflation been like since the launch of the euro in 1999?

On the whole, inflation has remained at a satisfactory level compared with what it was before the launch of the euro in 1999.  The average annual rate in the euro zone was 2.4% and 2.5%, respectively, in 2000 and 2001, that’s only 0.5% above the limit set by the ECB (2%).

The rise in inflation in 2000 and 2001 has been put down to several factors:

• The increase in the price of petroleum, always quoted in US$, and the fall of the euro on the currency exchange markets;
• Relatively rapid growth in 2000;
• Prices catching up in the poorer countries of the EU,  which goes a long way to explaining the high rates in Spain, Portugal, Greece and Ireland;
• The harmonisation of VAT rates (particularly in the Netherlands);
• The introduction of the euro in certain sectors, such as tourism.

Generally speaking, inflation has also been low in the countries outside the euro zone, particularly the UK, whose Bank of England has a similar objective to that of the ECB. .  

Illustration  1.3..1.b : The inflation rate  in the euro zone

Illustration  1.3..1.c : The average inflation rate  in the euro zone compared with other zones

1.3.1.2.2. Has the introduction of the euro led to a rise in prices?

Anecdotal evidence suggests that some traders took advantage of the ignorance of the consumer just at that time to raise their prices. Sectors that saw an unusual rise in prices in December 2001 and January 2002 are, for example, catering and hotels or baking.  On the other hand, prices in large stores and hypermarkets and those of electrical household appliances fell.  Taking the euro zone as a whole, the rate of inflation sped up in January 2002 (2.5% for the EU compared with 1.9% in December 2001). The January increase is said to have been 0.34% due to the rise in the price of vegetables, related to the bad weather,  and to the rise in the tax of tobacco.  0.16% of the rise was due to the introduction of the euro as banknotes and coins: some companies sought to cover the investment costs linked to the introduction of the euro by increasing their prices just when the consumers weren’t yet used to the new values.  A similar thing was noticed when decimalisation was introduced in the UK.

In February 2002 inflation in the euro zone fell back to 2.1% without having any significant effect on the annual rates of inflation in the euro zone.  The countries that saw the highest inflation were the Netherlands (4.9%), Greece (4.8%) and Portugal (3.7%).  The lowest inflation was experienced in the U.K. (1.6%), Austria (2.1%) and Luxembourg (2.1%),  but this last country has seen high imported inflation between 2003 and 2007 (see table 1.3.1.b)

These “instant” price increases have been progressively offset by the elimination of the costs linked to currency exchange, by increased competition among suppliers and by the checks of the independent ECB. Nevertheless, many people continue to consider that prices have increased steeply with the introduction of the euro.

Illustration by the Commission concerning the anecdotal and real perception of inflation
www.finances.gouv.fr/fonds_documentaire/Prevision/dpae/pdf2003-118-20.pdf
europa.eu/scadplus/leg/fr/lvb/125058.htm

1.3.1.2.3. Are the differences between inflation rates of various countries compatible with the euro?

Some of the inflation experienced since the launch of the euro is natural and arises from the accelerated growth in the less advanced economies (Balassa-Samuelson effect), tax harmonisations and adjustments to the arbitrary rates at which national currencies were converted to the euro.  These effects are transitory and unimportant if all they do is make up for previous distortions, such as systematically lower incomes in the less advanced countries of the EU.

On the other hand, another part of the inflation is linked to economic policy and specific national snags.  A country whose inflation remains systematically above the average of the euro zone will lose its long-term competitiveness vis-à-vis other players in the same market.  In the past, such problems were corrected by successive devaluations, which are excluded with the euro. It is, then, important that any excessive price increase should be temporary.  Only Ireland and Spain, two poor countries experiencing rapid growth, have had inflation rates systematically above those of the other member-states of the euro zone.  Since their economic growth has been rapid, it is possible to come to the conclusion that this phenomenon is not affecting their competitiveness (yet).  Anyway, these differences are minimal compared to the situation before the euro, and the trend in the indices shows the rates converging towards a level around 2%, the threshold allowed by the ECB   

1.3.1.2.4. Is the ECB capable of containing inflation?

The ECB held out against the injunctions of Ministers of the Economy and Finance and operators asking it to lower its interest rate during the period of slowing down in economic growth  in the eurozone in 2001. Unlike the Federal Reserve (FED)  in the United States, the ECB has kept a much more stable rate since its creation.

Some observers have felt that the objective of inflation not exceeding 2% was harsh and that the ECB should relax its monetary policy to boost the European economy in cases of crisis.  They feel that the restrictive policy of the ECB is modelled on that of the Bundesbank, whose head office is also in Frankfurt.  During the 1990s, the Bundesbank was criticised for having maintained high interest rates on the DM with the aim of attracting capital into Germany in order to finance the development of the Eastern part of the country.  With the DM being the reference currency in Europe, these high rates meant that all the satellite currencies also became dearer.
Others remind us that the priority aim is still the maintenance of the intrinsic value of the euro and that the economic difficulties must be resolved by the competent authorities,  that is to say the national governments,  which have first responsibility for this task.  They fear that the ECB is a scapegoat for those wishing to strengthen the authority of national governments in the European economic zone.

Investigators have shown that the policy of the ECB was no harsher than that of the American Federal Reserve (FED), bearing in mind the trend in the growth-rates in the respective economic zones and that keeping European rates higher than those of the FED in 2001 was justified.

Analysis of the data of these first years of existence proves that the ECB  has known how to contain inflation  in a context involving the globalisation of the world economy and the import of goods and services at competitive prices from developing countries, as well as the unfavourable economic situation from which Europe suffered between 2001 and 2005.  The convergence of the inflation-rates of the new member countries, those of the member countries of the euro zone and other member-countries of the Union which have obtained an “opt-out” clause from the euro suggests that the euro is stabilising the European monetary zone.  Nevertheless, the capacity of the ECB to contain inflation in a lasting way during periods of accelerated economic growth remains to be proved.

Analysts have suggested that the power of the central banks to contain inflation was, perhaps, less than they would have us believe, and it was mainly globalisation that lowered prices.  This theory presupposes that inflation could take off again when the poor exporting countries have higher incomes and can no longer offer their products at low prices. 

Show all/Hide all

1.3.1.3.1. What is a “weak” or a “strong “currency

To answer that question it is necessary to know what the strength or the weakness is being measured against and the difference with a “stable” currency.

A currency is said to be “weak” when it depreciates below “parity of purchasing power” (PPP)..  It offers commercial advantages through the fall in its exchange rate as against the currencies of other countries, but leads to higher inflation through the increases in the prices of imported products .  A currency is said to be “strong” when it appreciates against others. It weakens the competitiveness of companies against foreign rivals and is thus sustainable only by countries whose competitive qualities are keen or increased.  It is usually accompanied by stability of prices (low inflation). It is a currency that keeps its purchasing power or its intrinsic value at home.  Because of this it is sought by savers.  So a country with a “strong” currency attracts capital despite the low rates that it offers.

With only a few exceptions, the strength of a currency is a function of the economic power that it represents, the rigour of the monetary and economic management of the country concerned, the synergy among the various sectors of society and the confidence that the political powers that be inspire.

The evolution of the rate of exchange of the ecu/euro with the USD
Copyright Promeuro – illustration 1.3.1.d   

As far as the euro is concerned, the power of a unified European economy and the rigour of the monetary policy endow it with a strength greater than all Europe’s national currencies, both past and present.  On the other hand, the absence of common economic governance and the fact that several of the countries concerned still have deficit-oriented budgetary policies have long left room for doubt about the enduring credibility of the euro. For some people that doubt persists.

In a competitive international monetary system, where currencies are not necessarily aligned in terms of their PPP, you can’t have “strong” currencies without “weak” ones, so you get dominant and dependent currencies, which is not to be desired.  It is worth noting that the Treaty on European Union asks that the euro should be not “strong” but “stable” within the framework of “a market economy open to free competition1”.  This presupposes, on the one hand, effective control of inflation and, on the other, an even balance of payments current account.

The stability of the euro is difficult to determine in an international monetary system characterised by persistent imbalances, particularly in the current balance of the USA and the under-valuing of the Chinese currency which has been the case in the years from 2005 to 2007.

We shouldn’t forget that it was never the aim of the European authorities to substitute the euro for the US$ and it is the market that sets the exchange rates of currencies.  The value of the first European units of account was equal to or near that of the US dollar Today, if the euro were to become an “anti-dollar”, it would risk curbing European economic expansion.       
   
 To sum up, for it to be stable over the long term, the value of the euro on international markets must reflect that of the European economy as against its main competitors on the world market. The level of education, the capacity for work, the ingenuity and the sense of solidarity of the Europeans, as well as their capacity to stimulate synergies among the various sectors of society, will determine gains in productivity and the strength of their economy.  So they’re the ones who will make the “stability” of their common currency.  In a democracy you get the currency you deserve.
       
“To have a single currency, we must be worth it.”
Jean-Claude Juncker”, Prime Minister of the Grand Duchy of Luxembourg, “Echo de la Bourse – ‘The Echo of the Stock Exchange’ ”  - 9 October 1995

1.3.1.3.2. How has the euro fared on the international currency markets?

When the euro was launched, few aspects received as much attention as its initial fall against the US$ on the currency markets.  The euro, which was at 1.18 US$ per euro on the first of January 1999, fell to 0.82 US$ in June 2001, then to fluctuate between 0.86 and 0.99 US$ per euro in the first half of 2002.  This fall of around 30% had comforted those commentators who saw in the euro a weak currency and were dubious about its credibility.

On the other hand, since 2001 the US$ has fallen against the euro, which has restarted on an upward cycle, exceeding 1.30 US$ in 2007.  While historically the US$ and the euro used to fluctuate around parity, in 2007 it is noticeable how  the US$/euro exchange rate is stabilising between 1.25 and 1.35 but this should not necessarily be taken as an indicator of the future rate.  In this situation it is difficult to make a distinction between the part played by productivity increases stemming from European unification and that played by the poor management of the US$, particularly in relation to the American war-effort in the Middle East.

1.3.1.3.3. Should the Europeans worry about the value of the euro on international markets?

The initial fall of the euro against the US$ was welcomed by European exporters since it made them more competitive on the world market.  They adopted a similar attitude to that often seen in the USA, where people are indifferent to the international situation of the US$.  In the United States such an attitude is often conveyed by expressions like:  “The problem of the US$ is your problem” and “A dollar is a dollar”, meaning that it is up to others to adapt to the value of the dollar, and not vice versa.  Since only a small part of European trade is exports outside the euro zone, businessmen within this zone could indeed consider that the position of the euro against other international currencies is only of secondary interest.  Such a selfish attitude, tantamount to a “fortress Europe” mentality, contrasts with the European tradition of openness and solidarity in one’s international responsibilities.  One should therefore seek to minimise the fluctuations of the euro against the main international currencies.

1.3.1.3.4. When can it be said that the euro is over- or undervalued?

In 2001 and at the beginning of 2002 the euro was no doubt under-valued particularly because of the balanced or even positive current account of the zone as compared to the permanent deficits* of that of the United States.  However, the fall of the euro against the US$ at the time of its launch was probably less dramatic than it appeared at first sight. Firstly, the exchange-rate of 1.18 US$ to the euro on the 1st of January 1999 was not a good benchmark;  an analysis of the sequence of the units of account which preceded the euro shows that parity with the US$ was a better benchmark  

What is more, an analysis of the variations in the relationship of the ECU, reflecting as it did the position of all the national currencies of the EU together, against the US$, shows that in the past these variations were much more wide-ranging than with the euro (from 0.74 US$ per ECU on average throughout 1985  to 1.32 US$ per ECU). . When the euro was launched, the ECU was in a pronounced downward phase against the dollar.  The euro only followed the trend set by all the European currencies prior to its launch.

Overall, the initial fall of the euro against the US$ was the continuation of previous trends.  You could even say that the creation of the euro encouraged its fall against the US$, because:

• The American economy was growing more rapidly than in Europe;  international capital was, therefore, attracted to the United States in the hope of higher yields;
• The creation of a large capital market in Europe allowed the multinationals to borrow higher amounts at lower costs in order to invest in or acquire companies in the United States for US$ which they bought more cheaply than in the past;
• Short-term interest rates were higher in the United States up to 2001;
• The euro deprived European investors of the monetary diversification with which the national currencies provided them;  to diversify their assets in Europe with the US$ was a logical  course of action..

Nevertheless, these conditions no longer applied in 2002,  so there was no longer any  explanation for the lasting weakness of the euro other than persisting  uncertainty over the political and economic management  the euro zone.  The subsequent rise of the exchange-rate of the euro against the US$ was, therefore, expected. All the same, it is quite surprising not to see the US$ not falling more quickly, firstly because of the amount of the USA’s trade imbalance and growing external debt, and, secondly, because  the ratio between the short-term interest rates of the two currencies would seem to favour the rise of the dollar against the euro, as it always did in the past.

The trend in the short-term interest rates of the euro against other currencies
Copyright Promeuro – illustration 1.3.1.e

1.3.1.3.5. Should the ECB manage the exchange rate of the euro?

The media regularly echo the words of political authorities expressing the wish that
the ECB should intervene to prevent the rise of euro on the international markets,  given that this rise handicaps exporters and more particularly the European aeronautical industry, which is suffering competition from the American constructers with their costs and sale prices expressed in US$

Robert Mundell*, winner of the Nobel prize for economics in 1999 and father of the theory of monetary zones, recommended that the important international currencies – the US$,  the euro and the yen - should be managed in concert by their central banks.  Others feel that, in a floating exchange rate system, the exchange rate of a currency is the result of market forces and that it is better not to interfere. The important fact is that the necessary interventions would probably not be commensurate and create important liquidities to be dealt with.       

As far as the euro is concerned, the management of the exchange rate remains the responsibility of the members of the euro Group but, since they cannot take a decision without referring to their EU colleagues in ECOFIN, where opinions are still divided, it is hard to see how the external stability of the euro could be managed other than through budgetary policy.  The ECB is statutorily bound to set the reference interest rate of the euro with internal price stability in mind and will tend to favour rates that will maintain the euro at a level sufficient to reduce the impact of prices of imported goods and services  (particularly the prices of oil expressed in US$) on euro zone inflation.  

At the outset, it had been hoped that the US$/euro rate of exchange would fluctuate within margins narrower than those experienced between the US$ and the ecu, say +/- 15 eurocents around parity.  The way exchange rates have behaved since 2002 have dashed these hopes.

Show all/Hide all

1.3.1.4.1. Is it possible to measure the impact of the euro on economic growth?

In 1999 the launching of the euro eliminated one of the last non-tariff barriers to the full development of the single market: the exchange risk among currencies of the member countries of the EMU. The scriptural euro* enabled both traders and consumers to manage their accounts and compare prices more easily for a significant portion of the payments, which were made by bank transfer, cheque or credit card.  An analysis of buying habits in the areas along the border between the United States and Canada shows that the inconvenience involved in currency exchange has the same dissuasive effect as if the buyers had to travel over 60 miles to get to the shop. The introduction of the euro was meant to give a large boost to the European economy.  This was called  “the euro effect”.

Seven years is not much time for a monetary policy intended to guarantee lasting growth to have an effect on the two components, “economic growth” and “employment”, especially since the euro wasn’t used much in trade during the transitional period from 1999 to 2002. Small and medium-sized companies, in particular, operated in national currencies.  In April 1999, less than 20% of companies had their accounts in euros, Austria, Finland, France and Luxembourg being the most advanced in this respect, with 30%.  Up to the end of 2001 few companies used the euro in their internal operations - paying wages, for instance.  This drawback was accentuated by the refusal of people to use the euro (less than 5% had voluntarily converted their accounts into euros before the automatic change-over by the banks in November 2001) and by the persistence of high charges on cross-border payments in euros.

1.3.1.4.2. How has the euro zone performed economically between 2002 and 2007?

In 2000 the Gross Domestic Product (GDP) of the zone grew at an annual rate of 3.4%, a significant rise, as against the 2.7% in 1999.  Subsequently, the growth of the euro zone fell back to under 2% in 2001, and to below 1% in 2002 and 2003, because of the world economic crisis.  These rates are below what is considered as the norm for industrialised countries: 2.5% to 3%. It would seem, then, that there has been no “euro effect” beyond 2000.

The economic performance of the euro zone has doubtless been strongly influenced by that of Germany, its largest economy, which was suffering from low growth in East Germany, insufficient structural adjustments* before its entry into the EMU and a conversion rate on entry into the euro zone that was, perhaps, too high considering its level of economic competitiveness at the time.

On the other hand, we can see, particularly because of “catching up”, or “rattrapage” (as it is called in French),  that the growth of poor countries like Ireland, Spain, Portugal and Greece has exceeded 3% for several years in succession.  So the euro is not a cause of aggravation of the economic disparity between poor and rich countries of the euro zone.  The per capita income in Ireland exceeds the average of the Union and that of large countries like the UK and France             

Trend in the GDP (variation %) of euro zone countries from 1961 to 2008
Promeuro – illustration 1.3.1. f & g

1.3.1.4.3. What is the significance of the low growth-rates in the euro zone, as compared to the other world economic powers?

Over the period 1994-2005 the annual growth of the GDP of the euro zone was systematically lower than that of other countries of the Union, and of other large world economic blocks.

These rates are deceptive: in a period of rapid growth, they remained lower than those of countries outside the euro zone:  in 2000 and 2001, the growth of the United Kingdom was 3% and 2.3%, respectively; in Denmark it was 2.9% and 1.3% and in Sweden it was 0.7 and 3.2%.

In the United States growth was nearly 4% in four successive years (1996-2000); it then fell  to 0.8% in 2001, but rose again right away. Even when Europe was said to be experiencing exceptional growth, that of the euro zone remained below that of the United States and, of course, India’s and China’s.  Europe has “under-developed”, compared to the United States; the average income of the Europeans in the euro zone, as against that in the United States, has fallen back to the level of the sixties in relative terms.

The restrictions imposed by the observance of the convergence criteria had been accepted by a population looking forward to accelerated economic growth, once the euro had “come in”.  They have been disappointed in this expectation, which probably explains a lot of the widespread scepticism towards Europe.  Quite evidently, the euro is not the last obstacle to the realisation of a single market.      

 The situation improved in 2006 and 2007 but, on the one hand, the performance of the euro remains inferior to that of the EU and, on the other, this development is too recent for us to be able to draw any long–term conclusions from it. One can expect that the progressive opening up of markets, the increased international role of the euro and its progressive adoption by new member countries with more rapid growth rates will enable that of the euro zone to be raised.

Growth of the per capita GDP in the EU (from1995 to 2008)
Copyright Promeuro – Illustration 1.3.1.h

 
Growth of the per capita GDP in the EU (from1995 to 2007)  compared to the other large powers
Copyright Promeuro – Illustration 1.3.1.i

Show all/Hide all

1.3.1.5.1. What has been the employment-situation in the euro zone since 1999?

Unemployment was particularly high in the euro zone prior to January 1999. It was over 10% due to the twofold effect of the economic crisis in Europe during the second half of the 1990s and the application of deflationary policies imposed through the observance of the convergence criteria.  It remained above 8% until 2005.  Estimates made at the end of 2006 predicted a fall in unemployment to 7.4% in 2008.  Within the euro zone, the reduction in unemployment has been particularly spectacular in Spain, Finland and Ireland. Unemployment in Portugal, which had fallen significantly up to 2001, was back up at its initial level of more than 7% in 2006.

Nevertheless, the average level within the zone remains above that of countries outside the euro zone.  So, one cannot say that the euro has significantly lowered unemployment. Unemployment is also higher in the EU than in the USA and Japan.

1.3.1.5.2. Does the single currency harm employment?

It is difficult to identify any role of the euro in the persistence of excessive levels of unemployment in the EMU zone because the economies of the EU are too integrated.  However,  the relocation of works outside the national boundaries,  closures of firms arising from increased international competition and the budgetary restrictions no longer allowing the deficits to be financed of state enterprises which traditionally provide artificial jobs: all these lead the public at large to blame Europe for this situation.

Stability of the euro and the jobs market
Video aid .

The disappearance of currency exchange operations among member states of the EMU and the resultant increased competition could effectively lead to job-losses at first, but this effect is deemed marginal. Moreover, the single currency does not do away with structural rigidities, particularly those linked to the persistent interventions of national governments and those inherent in a protected job market, which explains a lot of the high unemployment on the continent of Europe.  However, the elimination of exchange risks, as well as the greater stability of the euro and of the international monetary system, favour an upturn in economic activity in Europe and the creation of jobs, a trend which would be reinforced by better-coordinated economic policies and an end to the period of institutional uncertainly arising from the non-ratification of the Constitutional Treaty.   

Unemployment in the euro zone from 1990 to 2008
Copyright Promeuro – Illustration 1.3.1.j

Unemployment in the euro in the large groups of countries from 1990 to 2008
Copyright Promeuro – Illustration 1.3.1.k

“A currency (…)  is also (…)  the most  powerful tool of economic policy, which in large measure determines all economic and social evolution . And, in this role, a currency can be, like Aesop’s tongue, the best or the worst of things.”
F. Bilger*   “Are the Maastricht criteria realistic?” (1995)

1.3.1.5.3. What sort of overall balance-sheet can one draw up?

Taking things as a whole, we can conclude that the euro appears to have had a salutary effect on the two criteria of stability: inflation seems to be under control and the euro has had evident beneficial effects in terms of the stability of the international monetary system.  The efficient coordination of the ECB with the world’s big central banks after the catastrophe of 9/11 in the United States is an illustration of it.  If the exchange-rate of the euro with the US$  has not stayed within the limits +/-15%1 around parity, that is due much more to American foreign policy than the way European monetary and budgetary policy has been conducted.

In terms of economic growth and employment, the performance of the euro zone has long been disappointing and has improved only as from 2006, although it remains inferior to that of the other former countries of the EU.  Here we are talking about things that are not directly the responsibility of the European monetary authorities, but rather of national governments.  As long as the legal, financial and administrative frameworks have not been made to fit the economic requirements of the Single Market, particularly where the small and medium-sized companies are concerned, that Market will remain a hope rather than a reality and the euro will not be able to give its full potential.

Obviously, the euro is not the end but merely a stage, albeit a very important one, in the building of Europe.    

“The euro tells us a lot about what is still lacking in the European Structure2”
Pierre Werner, at the General Meeting of PROMEURO in June 1999.