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A New Currency to Compete With the Dollar

Euro ball/Reuters
Dancers raise a giant euro balloon to symbolize the trading of the new currency on Jan. 4, 1999. (Reuters)
By Tim Ito
Washingtonpost.com Staff Writer
Updated: January 1999

The idea for a common European currency first gained attention in the late 1960s, when the continent was thrust into the middle of a world currency crisis. European officials, feeling the effects of a weak U.S. economy battered by the Vietnam War, proposed a marriage of moneys that would act as a counterweight to the U.S. dollar.

The idea gained popularity, eventually receiving the backing of both Germany and France, and the nations of the Common Market by 1972. However, decades of negotiations and false starts produced little until 1991, when the European Union put itself on a firm course toward monetary union with a summit in Maastricht, the Netherlands. At Maastricht, the participants committed to establishing a single European currency by 1999. In 1995, member countries named the new currency the "euro."

In theory, the euro should provide many benefits to participating nations. Relieved of multiple exchange rates, the single currency should expand trade between nations and make travel easier throughout Europe. Contracts written between European companies – now denominated in dollars – would convert to the more accessible euro. And economists say the conversion will likely push the continent's investors to buy more shares of European firms like Italy's Fiat, given that comparisons of financial performance would be made easier in a single currency.

"The euro will be to the dollar as [European plane maker] Airbus is to Boeing."
Norbert Walter, chief economist for Deutsche Bank Group in Frankfurt.

Such a shift could significantly alter the balance in the world financial system. Experts say the euro's rise would mean an end to the domination of the dollar, adversely affecting both U.S. financial markets and interest rates. The end result, some believe, will be much slower economic growth in the United States.

However, pitfalls still line the path toward monetary union in Europe. The economies of member nations remain highly fragmented, and cultures vastly different. Many countries, in order to meet the requirements of the plan, will need to drastically overhaul longstanding national policies. For example, several nations will probably have to slash welfare and job security programs to meet the basic criteria for balanced budgets and national debt.

Many Europeans are concerned about losing sovereignty. Where the U.S. Federal Reserve can reduce interest rates to encourage economic investment and activity, the central banks of Europe will play a much less significant role when the euro is in place. The individual monetary institutions will be replaced by a European Central Bank that will set policy for all 11 participating countries, even though many may be operating on different business cycles.

Attempting to smooth the transition to a monetary union, participating countries began to tie their currencies together in the mid-1990s using a system of exchange rate parities. Since that period, however, cooperation on monetary policy has hit some snags. Many European countries have complained that Germany, for one, has been overzealous in maintaining the value of the mark, a move that limits other countries' abilities to lower interest rates and spur economic activity. That kind of disagreement may intensify as the countries move closer to a single currency.

Britain, Denmark, and Sweden, fearful of the loss of sovereignty, have decided against joining the monetary union for now.

Despite all the potential downsides, 11 countries took a large step toward monetary union in May 1998 when they officially signed up for the euro. In January 1999, finance ministers from the participating countries announced the exchange rates for each of their currencies on live television from European Union headquarters in Brussels.

On January 4th, the euro began trading against the dollar and other currencies in international markets, launching a new chapter in the historic drive toward economic integration. The new European Central Bank also began using euros for its monetary operations. In 2002, euro bank notes and coins will be put in circulation in member countries and national currencies will be canceled.

© Copyright 1999 The Washington Post Company

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