Global Finance (2): History of Euro

Question 1

Why was there no need for a common currency in Europe before? What did they have instead?

Answer 1

Because Bretton Woods. Once that started getting shaky, the Hague Summit in ‘69 considered new solutions for stability in Europe.

They had Treaty of Rome (1957) as well that had some economic measures.

Question 2

What did Pierre Werner want?

Answer 2

PM of Luxembourg wanted to replace national currency with common EU currency.

Question 3

What were the three main goals of a new currency?

Answer 3

1. Coordination of policies.
2. Free movement of capital.
3. Fixed change rates

Question 4

What were the two opposing views? Examples?

Answer 4

Economists (Germany, Netherlands), and Monetarists (France, Belgium, Luxembourg)

Question 5

What are the differences between how economists and monetarists think?

Answer 5

Economists: Want strict criteria because shared currency can spread negative policies.
Monetarists: Eager to start shared currency.

Question 6

What was the currency snake?

Answer 6

Enforced in 1973 to allow fluctuation of 2.25% between currencies.

Question 7

What ended the currency snake?

Answer 7

Oil crisis that caused devaluing of EU currencies.

Question 8

What is the European Monetary System (EMS)?

Answer 8

The plan to integrate the euro created in 1978.

Question 9

When were the three stages of the Economic and Monetary Union? When was it created?

Answer 9

1989.
Stage 1: 1990
Stage 2: 1994
Stage 3: 1999

Question 10

What was Stage 1 of the EMU?

Answer 10

To coordinate policies and have free movement of capital.

Question 11

Why were there issues with Stage 1?

Answer 11

Economists (Germans, Dutch) wanted strict criteria while Monetarists (France/Belgium) wanted to start.

Question 12

How did they fix the disagreements between economists and monetarists in Stage 1?

Answer 12

Maastricht Treaty of 1992. Compromised convergence criteria that is needed to participate (satisfying economists) and said common currency will start 1999 (satisfying monetarists).

Question 13

What did the convergence criteria include?

Answer 13

• Stable currency
• Limited public debt
• Durable convergence
• Price stability

Question 14

What was Stage 2 of the EMU?

Answer 14

To have gradual transfer of monetary policy, establish European System of Central Banks (ESCB), and have narrower inflation.

Question 15

What was accomplished in Stage 2?

Answer 15

European Monetary Institute. By 1998, 11 countries in.

Question 16

What was stage 3 of the EMU?

Answer 16

Full transfer of monetary policy, fixed exchange rates, European currency.

Question 17

What was accomplished in Stage 3?

Answer 17

1. European Currency Unit (ECU) - virtual with fixed exchange rates.
2. Coins/notes start in 2002.
3. 20/27 countries using.