10 years later, euro experiment pans out


Ten years ago, Europe launched its grand experiment with a shared currency -- and watched it plunge in value before recovering.

But as the anniversary of the Jan. 1, 1999, arrival of the euro approaches, economists say the new currency is finally fulfilling its promise as a way to lower borrowing costs, ease trade and tourism, boost growth and strengthen the European community.

And doing it amid a global financial crisis underlines, for the moment, the safety in numbers that comes from joining one, big currency.

"After 10 years it has truly created a zone of security and stability," French Finance Minister Christine Lagarde said in mid-December. "From all these points of view, the euro has in fact proven wrong the forecasts some made against the euro 10 years ago."

When it was launched for noncash purposes in 1999, just 11 countries were on board -- Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Notes and coins were added Jan. 1, 2002, and the original 11 have been joined by Cyprus, Greece, Malta and Slovenia, with Slovakia slated to join Jan. 1, bringing the total to 16. Now, some people in longtime holdouts such as Sweden and even strongly euro-skeptic Britain are beginning to reconsider the question.

Smaller countries have seen their currencies collapse in value and been forced to ask the International Monetary Fund for bailouts.

Otmar Issing, a former board member of the European Central Bank, said the euro's appeal has been its ability to provide a sense of stability and shelter from global crises. The bank, created specifically to oversee the euro, has taken a strong anti-inflationary stance that mirrors that of its chief predecessor, Germany's Bundesbank central bank.

"The euro is a stable currency; inflation expectations were under control right from the start," Issing said.

"Not surprisingly, quite a few observers -- with probably the majority of economists to the fore -- were more than skeptical as to the outcome of this experiment," he said.

The chief complaints from governments during the euro's first 10 years have arisen from the bank's one-size-fits-all interest rate policy, in which it can't give rate cuts to individual countries if their economy slows while those of others accelerate.

But the credit crisis that has swept the global economy, including heavy bank losses on securities backed by United States mortgages and people with shaky credit, has hit everyone at pretty much the same time.

That has helped people forget the euro's early plunge to only 82 cents by October 2000 from about $1.18 at its launch. The European Central Bank and the Federal Reserve had to intervene in currency markets to prop it up.

"Obviously in the early days, the euro was weaker and there was some worry about its values," said Howard Archer, an economist at IHS Global Insight in London.

But since then, the euro has soared in strength and value, rising as high as $1.6038 against the dollar this year. It's now down to about $1.41 but has risen strongly against the British pound.

Randall Filer, a visiting professor of economics at Charles University in Prague and Hunter College in New York, said the requirement to cut government debt before joining gave political leaders the backbone to make reforms but place the blame on EU requirements.

"It has enabled governments to embark on labor market and fiscal reforms that were absolutely necessary," Filer said.

The euro became "a convenient scapegoat" that enabled needed reforms that Europe "did not have the political will to do," he said.

The euro spread the ECB's tough anti-inflationary stance to countries that didn't previously have it, said economist Franco Bruni at Bocconi University in Milan, Italy.

"It gave us a monetary policy that we wouldn't have been capable of doing," Bruni said, adding that when Italy had the lira, the country had a greater tendency toward inflation and interest rates were higher.

"We entered in the euro area, we had integrated finances with other foreign countries, which made it easier to invest abroad," he said. "Italian banks can operate on a wider scale, and we could buy shares abroad more easily."

Some 15 million jobs in the last six years have been created by making trade and travel easier through a single market.

That also has invited more foreign investment. With the inclusion of Slovakia, the euro will be used by about 330 million people with a gross domestic product of more than 4 trillion euros ($5.5 trillion).

Euro countries now enjoy a bigger and more efficient bond market with less risk of currency devaluations and inflation.

Newer EU members such as Poland, the Czech Republic and the Baltic countries Latvia, Lithuania and Estonia are in the process of meeting the conditions of joining the euro zone, but the crisis has put their hopes off for now.

Pro-euro sentiment has risen in euro holdout Sweden, whose weaker krona has helped supporters in their arguments, economist Lars Calmfors said.



Key dates for the euro


1970: The Werner Report, named for Luxembourg's joint prime minister and finance minister at the time, outlines a plan for a European monetary union.

1978: The European Monetary System -- with an exchange rate mechanism and European Currency Unit -- is launched.

1992: Maastricht Treaty lays out the timetable and criteria for adopting the euro. EU members Denmark and Britain are given permission to opt out.

1994: The European Monetary Institute, forerunner of the European Central Bank, is launched.

1997: The Stability and Growth Pact is agreed on to ensure countries using the euro will support it with budgetary discipline.

June 1, 1998: The ECB begins operations.

Dec. 31, 1998: Exchange rates between the euro and the currencies of the first 11 countries are fixed.

Jan. 1, 1999: The euro is launched on financial markets; national notes and coins continue to circulate.

Jan. 1, 2001: Greece joins the euro zone.

Jan. 1, 2002: Euro bank notes and coins are rolled out.

September 2003: Swedes vote against adopting the euro.

Jan. 1, 2007: Slovenia becomes the 13th country to join.

Jan. 1, 2008: Cyprus and Malta join.

Jan. 1, 2009: Slovakia is to join.


Source: European Commission

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