THE SINGLE CURRENCY

In January 2002, euro notes and coins were actually being circulated in the different countries and by the end of the first quarter, national notes and coins no longer existed. This change had an impact on everyone, from manufacturers, importers and exporters with trade flows to hedge, central banks with reserve asset and debt management concerns, to financial institutions and pension funds with international portfolios. In fact, even though this event was specific to Europe, the impact affected the world’s currency market community from American to Japan. The single currency in Europe formed one corner of the new triangular world of the dollar, the yen and the euro.
The conversion of national legacy currencies meant that organisations had to have the ability to accept both forms of transaction. It has been quite complicated because, for instance, to convert sterling to francs you had to have a conversion via the euro. This is because the national legacy currency no longer existed in its own right but was a denomination of the euro, fixed by the conversion rate. The European currencies have always fluctuated against the dollar, even as the debate about the euro raged. This can be shown by:
Birth of European Monetary System – it was the economic crisis of the 1970s that led to the first plans for a single currency. The system of fixed exchange rates pegged to the dollar was abandoned. European leaders agreed to create a “currency snake”, tying together European currencies. However, the system immediately came under pressure from the dollar, causing problems for some of the weaker European currencies.
Kuwait crisis – on 2 August 1990 Iraq invaded Kuwait. On the same day, the UN Security Council passed a resolution condemning the invasion.
Maastricht Treaty – in 1991, the 15 members of the European Union, meeting in the Dutch town of Maastricht, agreed to set up a single currency as part of a drive towards economic and monetary union. There were strict criteria for joining, including targets for inflation, interest rates and budget deficits. A European Central Bank was established to set interest rates. Britain
and Denmark, however, opted out of these plans.
ERM crisis – the exchange rate mechanism was established in 1979 and was used to keep the value of European currencies stable. However, fears that voters might reject the Maastricht Treaty led currency speculators to target the weaker currencies. In September 1992, Britain and a few of the other EU countries were forced to devalue. Only the French franc was successfully defended against the speculators.
Asian crisis – the turbulence in the Asian currency markets began in July 1997 in Thailand and quickly spread throughout the Asian economies, eventually reaching Russia and Brazil. Foreign lenders withdrew their funds amid fears of a global financial meltdown and the dollar strengthened. ManyEUcountries were struggling to cut their budget deficits to meet the criteria
for euro membership.
Euro launch – the euro, of course, was launched on 1 January 1999 as an electronic currency used by banks, foreign exchange dealers and stock markets. The new European Central Bank set interest rates across the euro zone. However, uncertainty about its policy and public disagreements among member governments weakened the value of the euro on the foreign exchange markets.

Central bank intervention – after just 20 months, the euro had lost nearly 30% in value against the dollar. The European Central Bank and other central banks finally joined forces to boost its value. The move helped put a floor under the euro, but it has still not recovered its value. A weak euro has helped European exports, but it has also undermined the credibility of the currency and has fuelled inflationary pressures.

Terrorist attack on New York and Washington – this attack in New York severely tested the currency markets. Money flowed out of the dollar into safe havens like the Swiss franc and, for the first time, into the euro. The central banks tried to calm the markets and interest rates were cut across the globe. Many observers believe it may have marked the coming of age of the euro as an international currency.
Euro becomes cash currency – on 1 January 2002, the euro became a reality for approximately
300 million citizens of the 12 countries in the euro zone. The arrival of the euro as a cash currency may foster closer integration and greater price competition within the euro zone. It may also help boost its international role, as doubts grow over the strength of the dollar, especially as American economy continues to slow.