Why is the single currency so important? Essay

The introduction of the single European currency on 1st January 1999 represented, without doubt, a revolution in the way economic matters of Europe are managed. The economies of Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal and Finland are now to a large extent harmonized under the one common currency, the Euro. Never before has such a project been undertaken uniting currencies and cultures alike.

As deepening and widening of the European Union (EU) continues at a rapid pace, how does the single currency fit into the aims and goals of the European Council, and more importantly the aspirations of European citizens? Why is the success Euro crucial to the EU’s long term stability and longevity? What political opposition exists towards the importance of the Euro as a driving force for further political integration? It is these questions that this essay seeks to address, providing political and economic reasoning in support of my arguments.

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Economically speaking, the introduction of the Euro was primarily designed to create a more stable European economy. Indeed, it was set out clearly in the Maastricht Treaty of 1992 as the underpinnings of all the European Commission’s financial objectives for the single currency1. As Temperton describes2, these wishes were directly related the economic decline during the 1970’s and 80’s, where economies weakened across Europe, which were largely related to fluctuating oil prices worldwide.

Many economists use the term ‘eurosclerosis’ to describe this slump in economic growth during the last twenty years. As a result of this, the importance of stability lies within its ability to drag the diverse currency base of Europe towards greater economic prosperity and to prevent a reoccurrence of eurosclerosis. Eichengreen and Wyplosz3 describe how the economic principal of creating stability and, as a result instilling confidence into businesses across Europe can provide the strong financial outlook the EU needs for long term growth. This process is cyclical, as more confidence is generated the greater the long term stability and success the Euro has.

If the goal of economic stability is achieved then Europe has the capacity to become a world economic super power. This would have the effect of elevating the participating European states to a position on the international stage that could not be achieved alone. The key to economic stability comes from the fact that European Monitory Union creates the world’s largest internal market. According to figures presented by Temperton, the EU holds almost one-quarter of the world Gross Domestic Product (GDP). This is in stark contrast to only holding one-twentieth of the world’s population, thus creating an extremely powerful economic force within a relatively small population base.

The importance of this element of monetary union cannot be overlooked and must clearly be a powerful proposition to current EU member states, their politicians and future included states alike. This driving force is designed to create the confidence businesses need to flourish, expanding the EU’s economy further, opening up new markets. Furthermore, according to Scobile 4, the simple fact that exchange charges no longer exist inside the internal market remove obstacles for interstate trade in the ‘Eurozone’ and allow businesses to redistribute their resources across the whole of the internal market. Effectively this means that European business now has the capacity to trade more freely, and as a direct result of this, generate more revenue. This in theory further adds to the sense of stability and prosperity through the opening of previously insular markets. Actual success has yet to be fully realised due to the Euro’s relatively short history.

Only time will tell, but in terms of economic theory it would seem to make sense. However, its real world success is a crucial factor as it will surely make or break the success of European Monetary Union. This could in turn present political limitations to the development of the EU if monetary union was deemed a failure. Indeed, as many have predicted the long-term stability of the Euro could be met with some short-term losses as each country adapts to the fiscal tightening needed for the integration of the currency5. This tightening could see more economically strong countries weaken as the adaptation to a single interest rate takes its toll on foreign investments.

Politically, many believe the single currency is both useful and vital to the success and progression of the European Commission’s view European politics. It provides a deepening of integration between participating states, which in turn furthers the ultimate goal of tighter political union between these states. This is deemed vital if long-term progression of European politics is achievable. Davidson6 puts forward a pro-integration perspective by describing states within the Euro as having a stronger political position in Europe for future political policy making. He goes on to describe monetary union as a heavily political step rather than purely economical initiative, and blames the UK for taking such a cynical stance. Davidson suggests that further integration would primarily run on financial lines as political issues such as common defence and security carry a more heated atmosphere. Indeed, there is much to be said for this perspective.

For instance, it would be logical to assume that monetary integration is somewhat of a forerunner to further integration politically and gives added weight to the concept of a ‘United States of Europe’ being realised at some future point. If success is achieved, this could provide the green light for more far reaching measures that are at present taboo subjects by providing evidence that integration can work. The Euro is effective in doing this by creating common ground for participating states across Europe.

This takes form in many different ways. For example, assuming that political integration between states is possible, European citizens simply having a single currency across a large number of key states allows for easier price comparison7. This relatively small incentive goes a long way to furthering the feeling of integration between Europe’s citizens of different countries. Politically speaking this type of common ground would have a powerful psychologically uniting effect with citizens if success is achieved economically. If the economics of the Euro fail, further integration could be deemed impossible in the minds of Europe’s citizens, thus both the success of political and economic targets for the Euro are vital for the progression of the EU.

In the face of wide spread Euro optimism many in more recent times have turned their attention to the cynical side of political integration of the Euro. Websites such as no-euro.com present a comprehensive offensive as to why the loss of political control and a move towards a central European bank presents problems, “Eurozone monetary policy, being set for the EU as a whole, would often be too loose or tight for Britain’s needs, increasing instability and threatening a return to “boom and bust”8 . Although this is a Britain specific perspective, it offers an incite into the perceived closed debate on the Euro and its danger of failure. It is interesting to note that the website directs its concern towards the instability created by the Euro, the point the single currency is squarely aimed at avoiding.

It is also curious that the website not an anti-Europe website but sees the Euro as a force that could destroy Europe. Much of this mistrust seems to stem from a belief that the Commission’s interests are largely about creating a mass internal market with some degree of misplaced enthusiasm. This is perceived to be connected with a reduced significance in the ideological goals of the EU, in uniting citizens. This skepticism seems wide spread and is further demonstrated by Risse et al. His journal article describes the main states of the Euro as, “their material and instrumental interests with regard to the Euro are deeply influenced by their visions of European political order”9 The journal presents its arguments interestingly because it puts forward the idea that there is a degree of self interest for the larger states in creating a stronger economy for themselves.

The reason for the further expansion of Europe is described as creating a larger internal market for the larger economies to exploit. It goes onto describe the Euro as, “inward looking” because although it is aimed at addressing unity inside the Euro zone it has the effect of cutting out foreign investment from the United States and Asia. Although it would be unwise to take either side of the political spectrum as the sole reason for the Euro’s implementation, its importance for Europe remains constant. Its success both economically and in a wider sense politically are vital for the future prosperity and unity of the European Union regardless of whether or not you believe it is a practical reality.

There is no doubt that a successful Europe is reliant on the success of the Euro. Economically, its importance lies in the stability it creates, and in theory, the increased prosperity that follows as a result. As debate continues over whether it this will become a reality, Euro notes and coins continue to fill the pockets of Europe’s citizens. This unifying concept would seem to suggest that the Euro is much more politically motivated. Its importance lies in whether it can create the framework in European citizen’s minds for further political unity between European cultures. It has the ability to become the first major manifestation of European unity that the EU has seen. Clearly, the Euro has a great deal of invested interest and importance. The member states are risking large political and economic stakes. The Euro’s success can only carry them forward to greater unity between European states; however, its failure could result in a collapse of the vision for Europe many have invested the last five decades in. A great deal hangs in the balance.

1 Taken from ideas put forward in, D Begg, J Genvon Hagen, C Wyplosz, K F Zimmermann, EMU: Prospects and Challenges for the Euro, Norwich UK, Page Bros, 1998, page 67.

2 P. Temperton, The Euro (2nd Edition), New York, John Wiley & Sons, 1999, page 7.

3 D. Begg, J. Genvon Hagen, C. Wyplosz, K. F. Zimmermann, EMU: Prospects and Challenges for the Euro, Norwich UK, Page Bros, 1998, page 67.

4 H.M. Scobile, European Monetary Union – The Way Forward ,

5 P. Temperton, The Euro (2nd Edition), New York, John Wiley & Sons, 1999, page 4.

6 J. Arrowsmith, Thinking the unthinkable about EMU, Coping with turbulence between 1998 and 2002, London, Latimer Trend & Co Ltd, 1998.

7 P. Temperton, The Euro (2nd Edition), New York, John Wiley & Sons, 1999, page 7.

8 http://www.no-euro.com/whatwebelieve/case.asp, accessed on Wednesday 12th February 2003.

9 T. Risse, D. Engelmann-Martin, H-J. Knopf, K. Roscher, To Euro or Not to Euro? The EMU and Identity Politics in the European Union Vol 5, Sage Publications, 2003. Stable URL: http://dandini.cranfield.ac.uk/vl=10029608/cl=118/nw=1/rpsv/~4093/v5n2/s1/p147

Chris Dunderdale, Pendle College – Politics 104 – Lena Karamanidou, 24th February 2003 1

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