MATT MOORE and GEORGE FREY
December 28, 2008
FRANKFURT, Germany (AP) — Ten years ago, Europe launched its grand experiment with a shared currency — and watched it plunge so far it needed a bailout from central banks.
But as the anniversary approaches of the Jan. 1, 1999, arrival of the euro, 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 that, for the moment, underlines 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 non-cash 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 on Jan. 1, 2002, and the original 11 have been joined by Cyprus, Greece, Malta and Slovenia, with Slovakia slated to join on 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 that went it alone, such as Iceland, or that haven’t met the requirements to join yet, such as Hungary, 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 the storm of 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 told The Associated Press.
“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 — which can’t give rate cuts to individual countries if their economy dips while others rise. But the credit crisis has swept over the global economy due to heavy bank losses on securities backed by U.S. mortgages to people with shaky credit has hit everyone at pretty much same time.
That has helped people forget the euro’s early plunge, from around $1.18 at launch to only 82 cents by October 2000. The European Central Bank and the Federal Reserve had to intervene in currency markets to prop it up.
Howard Archer, an economist with IHS Global Insight in London, said “Obviously in the early days, the euro was weaker and there was some worry about its values.”
But since then, the euro has soared in strength and value, rising to as high as US$1.6038 against the dollar this year. It’s down to around $1.40, 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 economic reforms but place the blame on EU requirements.
“It has enabled governments to embark on the labor market and fiscal reforms that were absolutely necessary,” said Filer. “The euro became “a convenient scapegoat” that enabled reforms that were needed but Europe “did not have the political will to do.”
The euro spread the ECB’s tough anti-inflationary stance to countries that didn’t previously have it, said Bocconi economist Franco Bruni at Italy’s Bocconi University. “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 interests 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 new jobs in the last six years have been created by making trade and travel easier through a single market. That has also invited more foreign investment, too. With the inclusion of Slovakia, the euro will be used by about 330 million people with a gross domestic product of more than euro4 trillion ($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, said economist Lars Calmfors.
He also said EU-leaders’ swift response in agreeing to pour billions of new capital and loan guarantees in their financial systems boosted confidence in the euro. “It demonstrates that if you stay outside, you are not present at the table when the decisions are taken,” he said.
AP Business Writers Greg Keller and Emma Vandore in Paris, Jane Wardell and Emily Flynn Vencat in London, Colleen Barry in Milan and Louise Nordstrom in Stockholm contributed to this report.