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A Fall From Grace, Ten Years Of The Euro

By:
Barry Norman
Updated: Jan 1, 2011, 00:00 UTC

The euro was established by the provisions in the 1992 Maastricht Treaty. To participate in the currency, member states are meant to meet strict criteria,

A Fall From Grace, Ten Years Of The Euro

The euro was established by the provisions in the 1992 Maastricht Treaty. To participate in the currency, member states are meant to meet strict criteria, such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP (both of which were ultimately widely flouted after introduction), low inflation, and interest rates close to the EU average. In the Maastricht Treaty, the United Kingdom and Denmark were granted exemptions per their request from moving to the stage of monetary union which would result in the introduction of the euro. (Wikipedia).

The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. On January 1, 2002, the first euro currency was issued. The euro turns 10 years old this weekend.

When the euro was introduced, due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998. They were set so that one European Currency Unit (ECU) would equal one euro. The European Currency Unit was an accounting unit used by the EU, based on the currencies of the member states; it was not a currency in its own right.

The euro became the national currency of 12 member states of the EU. Overtime this would expand to 17.  The United Kingdom and Denmark negotiated exemptions, while Sweden (which joined the EU in 1995, after the Maastricht Treaty was signed) turned down the euro in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in due course.  Most recently the UK has withdrawn from the EU and will not adopt the euro in the foreseeable future.

Since its launch a decade ago the euro has been part of the booming global economy, with just some small bumps in the road. It was easy during the high times to enjoy the benefits of the single currency. Economies around the world blossomed and so did their national debt, but growth was continually improving and no one really looked twice at the balance sheets, the budgets and government expenditures during these times. It was not until the bottom began to sink and the economic cycle stopped dead did countries, bankers, economist or politicians, take a look at their national debt. As the banking, mortgage, financial and unemployment crashes hit global markets, countries around the globe, but mostly in the EU realized that they did not have the funds to continue paying government debts, bond yields were skyrocketing and several countries, such as Ireland, Greece and Portugal were forced to turn to the EU for bailouts.

The EU aided these member states but also imposed difficult and strict austerity measures on each country. They did not stop to realize that these measures would continue to reduce growth and income.

Within a short period, the economies of these nations began to drop as did their ability to borrow money. More and more nations in the EU also began to show cracks in their finances.

The EU, the European Central Bank, the EU Council and the International Monetary Fund have been faced with a crisis that they were unprepared for, no one, no nation; no country had prepared the EU for emergency financial crises. This unpreparedness has forced the euro to lose its sheen. The value of the euro has continued to drop, while the EU leadership has tried to cope and plan a course of action

The EUR/USD traded at .89 on January 1, 2002 and has had an uphill march for a decade. The euro dropped to its lowest level since mid-2010, and the currency could go even lower early next year.The euro dipped as low as $1.2857 — a level not seen since July 2010

 

 

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