European Monetary Union: More gain than pain

The euro is often trumpeted as the European Union’s boldest and most successful project.

But like school, blood tests or traffic police, its benefits aren’t always readily appreciated.

Teething problems 

Less than half of the citizens living in countries that have adopted the European single currency consider it "advantageous," according to a Eurobarometer survey of September 2006; the latest available.

The drop in support for the euro, down from 59 per cent in September 2002 to 48 per cent four years later, coincides with a growing perception that the new currency has increased prices.

In fact, while eurozone inflation hit 3.5 percent in March on the back of a surge in food and oil prices, official statistics show that it has stayed at a historical low of around 2 percent for much of the time since the European Central Bank was created, in 1998.

This is a sharp contrast to the 1970s and early 1980s, when the oil crisis helped push European inflation to double-digit heights.

Petrol prices are up again. But this time round, the strength of the euro vis-a-vis the dollar is helping contain the damage done to European consumers.

While the dollar price of crude oil has shot up nearly fivefold since 2002-03, pump prices in the eurozone have risen far less steeply.

"Had it not been for the euro, there is no doubt that we would be paying a lot more for our petrol," notes Amelia Torres, the spokeswoman of EU Economic and Monetary Affairs Commissioner Joaquin Almunia.

Price stability is not the only advantage that the euro has brought to its 320-million-plus users.

Interest rates in the era of the euro, for instance, have hit all-time lows. And this is good news for people who need to borrow money.

In the bad old days, there were times when Greek or Italian mortgage holders faced usury-like rates of over 20 per cent.

Improvements 

Today, thanks to Economic and Monetary Union (EMU), they enjoy similar conditions to their friends in Holland, Germany or France.

Other benefits include greater economic stability, which helps attract investment, and sounder public finances by governments, which means that more money can be spent on roads or helping the poor.

While there are still some big offenders, most notably Italy, EU officials make much of the fact that the average budget deficit of eurozone countries reached an historical low of 0.6 percent of gross domestic product in 2007.

In fact, the euro’s appeal is so great that since its launch on January 1, 1999 by 11 EU countries, four more have joined and others are knocking on its door.

The share of the euro in foreign exchange reserves is rising, as is its usage in international trade, meaning it could soon be in the position to challenge the US dollar as the world’s dominant currency.

"The EMU has put a definitive end to such periods of internal currency strains and has fostered a decade of low and stable inflation. In turn, interest rates have progressively diminished to levels not seen for several decades," Almunia, who acts as the euro’s "guardian" at the European Commission, said in a recent speech.

"The EMU is a huge success," he added.

Simon Tilford, chief economist at the Centre for European Reform, a London-based think-tank, tends to agree with Almunia.

But he also draws attention to the fact that eurozone GDP growth has often disappointed.

"The euro will not be a success if half of its members remain trapped in extremely low growth," Tilford commented.

The problem is not with the euro itself, Tilford argues, but with those national governments that have failed to live up to the EMU’s "extremely liberal" economic agenda.

Changes needed 

Economists say that for EMU to deliver on its full potential, participating governments must push through unpopular reforms designed to make their economies more competitive, for instance by making their labour markets more flexible.

Aside from the fact that eurozone economies are not converging as fast as had been hoped, one explanation for the lack of popular support for the euro among ordinary citizens is that the common market that they had been promised is still far from becoming a reality.

The price of consumer goods still varies widely from country to country, and according to EU figures, only one in four Europeans has ever ordered a product from a different EU country than the one in which they live.

Officials in Brussels retort that there are signs that this may be changing.

They cite a recent study on cars, whose prices in eurozone countries have been converging downwards since the launch of the euro.

Another reason volunteered by Tilford is that governments all too easily blame the euro when their economies fail to perform.

One of the defining moments in the history of Europe’s common currency took place on the night between May 2 and May 3 of 1998, when EU leaders meeting in Brussels selected the 11 countries that would be allowed to join the euro.

These were: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Greece was to join in 2001, Slovenia in 2007 and Cyprus and Malta in 2008.

Slovakia is the next country hoping to adopt the euro, possibly next year.

DPA with Expatica