EUR: How the Currency Came to Be

Today, the European Union’s currency – the Euro (EUR) – is one of the most traded currencies in the world. It makes up 20% of the global Forex reserves and serves as the official currency for 20 out of the 27 EU member states, collectively known as the Eurozone.

In this article, we will cover the European currency’s history, from its predecessors, the EUA and the ECU, to its official launch in 1999 as an accounting currency and its physical introduction in 2002. 

First concepts and ancestors

The first idea to create a common currency for the European nations has been around since the League of Nations (1929), when Gustav Strezemann, chancellor of the Weimar Republic, called for a monetary union as a means of quelling the rising tensions between countries, which would have led to the Second World War.

After the War’s end, the European Economic Community (EEC) was created by the Treaty of Rome (1957). The main objective of the EEC was to foster economic integration among six founding members: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. 

Not long after its birth, the organization decided to pursue its purpose by finding a way to diminish the volatility of exchange rates in the currency market. However, this attempt failed.

At the same time, the idea of a common currency stayed, strengthening its appeal, especially after the collapse of the Bretton-Woods system, which caused heavy volatility in the foreign exchange markets. 

From the EUA to the ECU

The first major step towards monetary unification came with the introduction of the European Unit of Account (EUA) in the 1970s. The EUA was a notional currency used primarily for budgetary and accounting purposes within the EEC institutions. In terms of value, it was equal to 0.888671 grams of gold, or 1 US dollar. It provided a stable reference point for valuing financial transactions and subsidies but was not a circulating currency.

The EUA helped lay the groundwork for a more comprehensive monetary system by familiarizing member states with the concept of a shared monetary unit and the benefits of stability it provided.

In March 1979, the European Monetary System (EMS) was created, and the currencies of all the member states of the EEC were pegged through a fixed exchange rate to the European Currency Unit (ECU). Unlike its predecessor – the EUA – the ECU was a basket of European currencies weighted according to each participating country's economic strength. It was used for financial transactions, international reserves, and as a reference for exchange rate mechanisms within the EMS.

Finally, the ECU dominated the European monetary landscape until it was replaced by the Euro in 1999.

The Maastricht Treaty and unfair exchange rates

The decisive push towards a single currency came with the Maastricht Treaty (1992), which formally established the European Union (EU) and set out the roadmap for the Economic and Monetary Union (EMU). The treaty outlined strict convergence criteria that member states had to meet before adopting the Euro, including limits on inflation, budget deficits, and public debt.

The Euro was officially launched as an accounting currency on January 1, 1999, with exchange rates between participating national currencies irrevocably fixed. However, the mechanism of determining these fixed rates was not completely fair. While the exchange rates were ostensibly set according to prevailing market conditions, political influence played a significant role. Stronger economies, like Germany and France, had more bargaining power, securing favorable conversion rates, while weaker economies had little say.

Also, some currencies were set too high (e.g., the Italian Lira or the Spanish Peseta), hurting their countries’ exports, while others (e.g., the Deutsche Mark and the French Franc) were undervalued, boosting their trade competitiveness. It was a redistribution of wealth and influence, carried in a completely unbalanced way.

Moreover, these now less competitive countries lost the ability to adjust their currencies, impacting their ability to respond to economic downturns or inflation. This weakened them even more. The fact that some countries received leniency in meeting the Eurozone's economic criteria while others had to make painful adjustments to comply also looks a bit unfair.

The bright side of the Euro

It was introduced in physical form in 2002, replacing national currencies such as the Italian Lira and the Deutsche Mark across 12 EU countries. Despite its unfair exchange rate determination, it has provided numerous benefits to European countries, fostering economic stability and integration.

By eliminating exchange rate risks, it has created a more predictable environment for businesses and consumers, facilitating cross-border trade and investment. The single currency has enhanced price transparency, making it easier for consumers to compare costs across countries, which has increased competition and helped keep inflation in check. 

Additionally, the European Central Bank’s monetary policies have contributed to low interest rates and financial stability, encouraging borrowing and economic growth. The Euro has also strengthened Europe’s global influence, positioning it as the world’s second-largest reserve currency. 

Travel and tourism within the Eurozone have become more convenient, boosting the economy and cultural exchange. Furthermore, the common currency has deepened financial markets and facilitated large-scale projects across member states. Despite challenges, the Euro remains a powerful symbol of European unity and a key driver of economic progress.

Conclusion

The Euro’s journey from an ambitious vision to a functioning common currency has been marked by both triumphs and challenges. While its introduction brought undeniable economic benefits, such as increased trade, price stability, and stronger financial integration, it also exposed structural weaknesses and economic disparities among member states.

The fixed exchange rates, determined under political and economic pressures, created long-term imbalances that some countries still grapple with today. Nevertheless, the Euro remains a cornerstone of European unity, driving cooperation and economic progress. As the Eurozone evolves, addressing these imbalances will be crucial to ensuring its existence.

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