17

When it was introduced, the € (Euro) was supposed to be the common currency for the entire EU, even if it turned out many countries (such as the UK) would stay in the EU without using the € currency, and that other countries (such as Kosovo) would use € without being part of the EU.

Exchanging money is an inconvenience when for example exporting or importing goods, and while being on holidays in a foreign country. Nevertheless, it's a pretty minor inconvenience compared to the major issues the Eurozone have to face today.

The European union existed from 1957 to 2001 without having a common money and it was healthy at that time. What were the argument towards the requirements of a common money for member states?

  • 1
    The European Economic Community was established with the Treaty of Rome in 1958. The formation of the European Union happened in 1993 when the Maastricht Treaty came into force. The term EU refers to the latter only. – Jascha Goltermann Aug 7 '15 at 1:09
  • 5
    Euro was never necessary. Many economists had warnings about potential danger of such currency union - now that warnings have been materialized. Only country benefit out of this - Germany - and many thinks euro design was exactly to accomplish that. – lowtech Aug 10 '15 at 23:25
  • Note that 2004-2007 was also the time of the big enlargement of the EU. The Euro is an unmitigated disaster but not the only explanation for the EU's current difficulties. – Relaxed Aug 11 '15 at 6:09
  • 3
    There aren't many EU countries that stayed out of the euro, there are exactly two: the UK and Denmark. The rest is supposed to join it soon and still on a course to do it or, in one case (Sweden), finding technical reasons not to do it while still being (in theory) legally bound to adopt the euro at some point in the future. – Relaxed Aug 11 '15 at 6:19
11

The main reason for a common currency was to remove the business risk which came from currency fluctuations.

When a company in country A buys goods or services from a company in country B, they need to obtain some currency B to pay the bill. But what happens when the exchange rate between currency A and currency B suddenly changes and currency B is a lot more expensive? Company B can't reduce the previously agreed upon price, because they have contracts with inland suppliers and their employees denoted in currency B. This can make previously cheap imports suddenly prohibitively expensive and can destroy a whole business model.

With a common currency, this risk was removed and business relations across European borders became a lot easier which benefits the economies of all participating countries.

  • 1
    Oh this is exactly what's happening between Switzerland and the Eurozone right now. We're now twice as much expensive as we were before the subprime crash, and we were already expensive. – Bregalad Aug 6 '15 at 7:39
  • 2
    This was always an official explanation for those who don't have a knowledge of FX markets. There is standard financial tool to remove such kind of risks - futures contracts. They are used to remove FX rate fluctuation risk (hedging) and successfully used for this purpose in FX and other markets (e.g. oil) – lowtech Aug 10 '15 at 23:21
  • 1
    -1 I don't think this is historically accurate. – Relaxed Aug 11 '15 at 5:50
  • @lowtech Hedging works fine for large companies, and even for small companies whose main business is export. It doesn't work nearly so well (eg) a small double glazing company working near the French-German border. Today it is entirely sensible for Fensterbau Breisach GmbH to quote to replace a couple of windows in Neuf Brisach. Before the Euro ... less so. – Martin Bonner Apr 29 at 16:33
10

The main reason is that the European Union (and before that the European Communities) was intended by its architects to bring about ever tighter integration, possibly all the way to a federal state. Seemingly technical measures like the customs union and common market were not only or mainly intended at boosting economic output but at fostering understanding between people “from below”.

And the 2001 European Union was already very different from the 1957 European Economic Community, with the merger of the three European Communities, the directly-elected European Parliament, (mostly failed) attempts at creating a common defense or foreign policy, the police and justice cooperation, the Schengen border-free area, the “EU citizenship” and broader free-movement rights established by the Maastricht treaty, etc.

A single currency would therefore appear like the logical next step, a huge symbol of integration and cooperation. It's possible to find some very weak economical arguments for it (enforcing fiscal discipline, preventing currency fluctuations, etc.) but I don't think they were decisive in the process leading to the creation of the euro.

And Jacques Delors, who was actually very enthusiastic about the process, famously said that “Europe is like a bicycle. It has to move forward. If it stops, it will fall over.” So the Euro is perhaps the most visible and the most consequential – in a negative sense – of these but it's part of a series of initiatives to deepen the EU that were widely seen as necessary, not in a narrow technical sense, but for the sake of the European project itself.

2

The EU has undergone several stages of Regional integration for it to achieve full integration. The stages of Regional integration are :

  1. Preferential Trade Area (PTA)

  2. Free Trade Area (FTA)

  3. Customs Union (CU)

  4. Common Market (CM)

  5. Monetary Union (MU)- common currency is one of its milestones and have been explained by @philipp

  6. Full integration (either a political federation or a fully Integrated Economic community)

Basically last stage usually comprises of the preceding stages E.g a CU = PTA + FTA

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.