Steps Toward Monetary Unification

Maintaining borders can be expensive. Customs formalities among the 15 member countries of the EU once cost those nations some 12 billion euros a year. Not surprisingly, the new situation at Europe’s borders has spurred economic growth. When you think of the 370 million inhabitants of the EU moving freely from country to country within a single common market, it is clear that the economic potential is outstanding. What made such progress possible?

Back in February 1992, government leaders took a big step on the road toward unity by signing the Treaty on European Union, or the Maastricht Treaty. That treaty laid the basis for establishing a unified market within Europe, a central bank, and a single currency. Yet, another important step needed to follow: the removal of exchange rate fluctuations. After all, tomorrow’s exchange rate can throw a whole new light on today’s transaction.

This obstacle on the road to unity was removed by setting up the Economic and Monetary Union (EMU) and introducing the euro as a common currency. Exchange costs have now disappeared, and businesses no longer have to protect themselves against exchange rate risks. The result is lower business expenses and more international trade. In turn, this may lead to more jobs and increased spending power—which would benefit everyone.

The founding of the European Central Bank in 1998 marked another important step toward adopting a single currency. This independent bank, located in the German city of Frankfurt, holds monetary sovereignty over the participating governments. It strives to keep inflation low in what is termed the euro zone, consisting of 11 participating countries,a and to stabilize exchange rate fluctuations between the euro, the dollar, and the yen.

New Members Knocking on the EU Door

In the short term, advocates of a single currency hope that the EU countries not yet in the EMU will overcome their obstacles before the year 2002, when euro coins and notes are supposed to replace today’s European currencies. If Britain, Denmark, and Sweden shed their reluctance, even the people in those lands may see their pounds, kroner, and kronor replaced by the euro.

Meanwhile, six other European countries are knocking on the EU door. They are Cyprus, the Czech Republic, Estonia, Hungary, Poland, and Slovenia. Five more countries are awaiting their turn, namely, Bulgaria, Latvia, Lithuania, Romania, and Slovakia. Their entrance will not come cheap. Estimates are that between the years 2000 and 2006, the EU will have to provide 80 billion euros to help the ten newcomers from Eastern Europe.

However, the funds that the newcomers will have to raise in order to meet EU entrance requirements are many times more than the amount they will receive in EU aid. For example, Hungary will have to spend 12 billion euros on developing its roads and railways. The Czech Republic will need to spend more than 3.4 billion euros on water treatment alone, and Poland must spend 3 billion euros to reduce sulfur emissions. Even so, the applicants feel that the benefits outweigh the costs. For one thing, their trade with EU countries will increase. Yet, the applicants may have to wait in line for a while. According to present public opinion, new member nations should be accepted only after the EU has straightened out its own financial matters.

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Here Comes the Euro!

Although present national coins and bank notes of European Union members will not disappear until 2002, noncash transactions are already taking place in euros. This monetary transition has been a huge undertaking for banks. However, exchange rates between the national currencies of member countries and the euro are now fixed. Stock exchanges also show prices in euros. Many shops and businesses now price their products in both euros and the local currency.

Such commerce calls for drastic adjustments—especially for many older people, who will no longer be able to use their familiar deutsche mark, franc, or lira. Even cash registers and automatic teller machines need to be modified. To make the transition as smooth as possible, official information campaigns have been organized to inform people about the arrival and use of the euro.

Whatever the remaining obstacles, the euro is coming. In fact, coining and printing of the euro has already begun. And it is quite a task. Even in a small country like the Netherlands, with some 15 million inhabitants, coining and printing presses will be running for three years straight to produce 2.8 billion coins and 380 million bank notes by January 1, 2002. If all these new bank notes were put in a pile, they would make a stack about 12 miles [20 km] high!