Euro

What kind of money is the euro?

An ordinary country prints its own money, sets interest rates through its central bank and can lower the value of its money if it needs to. A country that uses the euro hands all three to shared institutions. Interest rates and monetary policy are decided by the European Central Bank in Frankfurt, and national central banks carry out those decisions as parts of the Eurosystem. With Bulgaria's entry in 2026 the eurozone reached 21 countries.

Not every member of the European Union uses the euro. Denmark won an opt-out in the treaty and kept its krone, and the United Kingdom, before it left, won the right to keep the pound. Sweden rejected the euro in a referendum in 2003. Conversely, Kosovo and Montenegro, which are not EU members, have adopted the euro unilaterally, though such countries have no seat in any eurozone institution.

The name was fixed in Madrid on 16 December 1995. On 1 January 1999 the euro reached financial markets as an accounting currency, replacing the European Currency Unit (ECU) at one to one, and the exchange rates of the eleven founding countries had been fixed the day before. The notes and coins people actually handle came on 1 January 2002 and had fully replaced the old national currencies by March 2002. Greece entered two years later than the founders, on 1 January 2001.

Why did Europe want a single currency?

The first plan was the Werner Report of October 1970, from a group led by Luxembourg's Prime Minister Pierre Werner. It proposed moving in three stages over a decade to irrevocably fixed exchange rates and a single currency. Then the suspension of dollar convertibility in August 1971 brought down the Bretton Woods system, oil prices jumped, and the plan was never carried out. As rates once tied to the dollar began to swing, European countries tried in 1972 to hold their currencies within a narrow band of one another, the so-called "snake in the tunnel", but Italy left as early as 1973 and the scheme did not last.

In 1979 came the European Monetary System (EMS). It set up an Exchange Rate Mechanism (ERM) under which member currencies could move only within fixed margins, and created the ECU, an accounting unit weighted across the currencies. This framework genuinely constrained national politics. In 1983 the Mitterrand government in France chose to stay in the EMS and turned from nationalisation and demand expansion to austerity, a decision led by Finance Minister Jacques Delors.

The same Delors, as President of the European Commission, produced the Delors Report of 1989, the design that led to today's euro. Under its first stage of three, capital movements within the European Economic Community were fully freed on 1 July 1990, and the Maastricht Treaty of 1992 made economic and monetary union a formal objective. How risky fixed rates could be became clear the same year: on "Black Wednesday", 16 September 1992, the British government could not hold the pound above its ERM floor and withdrew from the mechanism.

What did a country have to do to join?

The Maastricht Treaty set convergence criteria as the threshold for entry, covering inflation, public finances, long-term interest rates and exchange-rate stability. The fiscal criterion is the best known: a yearly government deficit of no more than 3 percent of gross domestic product (GDP) and government debt of no more than 60 percent of GDP. A country must also show stable exchange rates after at least two years in the ERM.

So that fiscal discipline would not loosen once the euro existed, the Stability and Growth Pact of 1997 kept the same figures in force. Under pressure from France and Germany the rules were relaxed in 2005, but the ceilings of 3 and 60 percent stayed. The European Central Bank was built with price stability as its primary objective, and the treaties prohibit financing budget deficits with central bank money.

Critics of these rules called them a "reversed Keynesianism". Instead of supporting demand through government spending in a downturn to secure full employment, policy would restrict money and public spending to keep prices and financial markets stable, and look for jobs in lower labour costs.

What changes when a country gives up its exchange rate?

A country with its own money can let its value fall when exports stall and debts mount. Its goods become cheaper abroad, exports rise, imports grow dearer and the pain spreads across the whole country. A eurozone state has no such road. What remains is "internal devaluation": actually cutting wages and prices to regain competitiveness. It aims at the same effect, but the burden falls directly on workers' pay and jobs.

There is also only one interest rate. The European Central Bank can apply just one rate to countries whose inflation and business cycles differ. In the euro's early years that rate was high relative to inflation in Germany and low in southern Europe. Capital from the north flowed to the south, where cheap money was easy to borrow, and the deficits that built up there were mainly private.

The theory that deals with this is optimum currency area theory. Robert Mundell argued in 1961 that a floating rate is better when regions suffer different shocks, but in 1973 he also made an argument more favourable to a shared currency, so his work is cited on both sides of the euro debate. One other way to absorb shocks is for people to move. One study found that more than 40 percent of US residents were born outside the state in which they live, against 14 percent of people in the eurozone born outside their country of residence. Many argue that the EU did not meet the theory's criteria when it adopted the euro.

How does the eurozone crisis connect to the euro's design?

The course of the crisis after 2009 is told in The Eurozone Crisis and Greece. As for the link to the design: when foreign capital suddenly stopped flowing to countries that depended on it, they could not devalue. Greece, Portugal and Ireland, under bailout programmes, were asked for fiscal austerity, structural reform and internal devaluation together.

The crisis changed the euro's institutions. The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which had not existed before, took on emergency lending, and in 2012 the European Central Bank announced unlimited support for countries that accepted conditions. Even so, no country has left the eurozone, and there are no formal provisions for either voluntary withdrawal or expulsion.

How does political economy see the euro?

Mainstream debate centres on whether the eurozone is an optimum currency area and whether monetary union can last without fiscal union. Marxists and left economists ask instead who bears the cost.

The Greek Marxist economist Costas Lapavitsas holds that a monetary union has rules everyone must follow, and that Germany broke them by holding inflation low and paying its workers very little. For him the problem is therefore not Greece or Portugal but Germany, and a return to an economy in which the public sector leads is impossible within the EMU.

The left is not of one mind. Sotiris Martalis, of the Left Platform of Syriza, wrote that leaving the euro is a necessary step but not a sufficient one: separated from a wider programme of change, exit only feeds dangerous illusions about the liberating role of a national currency as such. The Communist Party of Greece puts forward a rupture with NATO and the European Union itself.