Back in January 2002, The Euro was welcomed by scenes of jubilation in Europe’s main cities.
Yet the mood in several European countries was soon depressed by sharp increase in prices due to profiteering. In Germany, outraged by price increases of up to 100 per cent for some everyday items, consumer groups dubbed the single currency the 'teuro' - a play on the German word 'teuer,' or expensive. The campaign against over pricing received a boost when German finance minister Hans Eichel, angered at being overcharged for a lunchtime sandwich, called for a consumer boycott of businesses which had cashed in on the currency switch.
In Italy consumer groups went as far as calling on citizens to join a spending boycott, in protest at what they see as profiteering by retailers and producers. Shops had often simply knocked off three zeros from the old lire price, converting - for example-a 70,000 lire tag into a 70 euro one.
Several Cabinet members expressed grave reservations about the new currency, causing the moderate foreign minister Renato Ruggiero, to resign in protest. Italian Prime Minister Berlusconi has made a scapegoat of the euro for Italy’s structural problems.
Getting in to Euroland
By January 2002, the single currency had been in existence for three years as a form of electronic money. Getting into Euroland was no mean fact for a number of European countries.
The Italian way-The Eurotax
Joining the euro was considered a mission impossible for Italy. Giovanni Agnelli, Chairman of Fiat and the leading player of the Italian economy, said that ‘only a miracle would permit Italy to join EMU in 1999.’
In order to join the European Monetary Union and the Single Currency by January 1st 1999 Italy had to reduce the budget deficit from 7.9 per cent to less than three per cent of the GDP.
The 1996 general election brought to the power the center-left coalition led by Romano Prodi, a post-graduate student at the London School of Economics.
Under Prodi’s leadership the government deficit was cut by four percentage points to 2.7 percent of GDP in 1997, one of the largest annual retrenchments recorded in the OECD area’s history.
In reducing the deficit Prodi relied more on taxes and the postponement of some infrastructure investments than on spending cuts.
Moreover, a once only Eurotax was inserted in the 1997 budget, which provided additional revenues of about eight billion dollars. The tax was to be reimbursable later.
The overall consequence of the government’s measures, including the Eurotax gimmick, was that the 1998 Italian budget deficit stood at 2.7 percent of the GDP, well within the three percent required by Maastricht.
The Greek way-Doctoring statistics
In 1996 Greece was considered as the EU country which nobody expected to meet the Maastricht convergence criteria, and adopt the new common European currency. Inflation was at 6.5%, the public sector debt stood at 113.4% of GDP, and the government predicted a 1997 budget deficit of 4.2%.
It was a great surprise when in 2000 Greece caught up by lowering inflation and cutting its deficit.
In 2004 an infringement procedure was launched against Greece which could ultimately lead to the country being taken to the European Court of Justice due to inaccuracies in statistics it provided from 1997 to 2003.
A Eurostat inquiry showed that from 1997 to 2003 the deficit needed to be revised upwards by an average of 2.1%. This means that in no single year during that period was Greece below the 3% limit set by the Stability and Growth Pact.
The French way-Partial Privatisation
An austerity programme launched by the French Prime Minister Alan Juppe with the euro in mind, cost him the elections in 1997. Before the elections socialist leader Lionel Jospin presented himself as a critic of the Maastricht's convergence criteria. Yet as Prime Minister Lionel Jospin played a crucial part in the transition to the euro. Jospin managed to reduce the budget deficit and the national debt, in order to fulfil the criteria for adopting the euro. He also began the partial privatisation of numerous large state enterprises, as well as the energy and water utilities.
The ten new countries
The ten newest European Union members should eventually use the euro, as eventual adoption of the euro was part of their accession agreements. Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia have already joined Denmark in the European Exchange Rate Mechanism, ERM II. The Czech Republic, Poland and Hungary have opted for a later date. Hungary, which started out as a frontrunner among the EU-10, appears to have encountered the most problems on its way to eurozone membership. At present, Hungary meets none of the Maastricht criteria. The deficit has soared to as high as 9% of GDP. The modified Stability and Growth Pact will allow Hungary and other EU countries to remove the costs of their ongoing pension reforms from their expenditure calculations. This will help these countries to bring their deficits down to the maximum 3 per cent of GDP.
Outside Euro Zone
While the United Kingdom and Denmark have no obligation to join the euro as they have a formal opt out from monetary union. Sweden does not have a formal opt-out from the monetary union and therefore must convert to the euro at some point. Notwithstanding this, on September 2003, a Swedish referendum was held on the euro, the result of which was a rejection of the common currency. The Swedish government has argued that such a line of action is possible since one of the requirements for Eurozone membership is a prior two-year membership of the ERM II. By simply choosing to stay outside the exchange rate mechanism, the Swedish government is provided a formal loophole avoiding the theoretical requirement of adopting the euro.
UK - Postponing the decision
The 1992 withdrawal of the UK from the European Exchange Rate mechanism, designed as a forerunner to a European political and currency union, sent shockwaves around the continent. John Major unsuccessful attempt to prevent a devaluation of the pound resulted in the sterling being forced out of the ERM on a day known as Black Wednesday. Yet things turned out better than might have been expected. The pound fell, but then rose again. And inflation has been rather benign since we left.
According to economists ERM did had prolonged the British slump, by preventing UK interest rates from being cut to the levels justified by the UK economy. This has been used as an argument against the adoption of the euro.
Yet since European exports make up 60% of the UK's total, the introduction of the euro would ease transactions in the single market.
Yet the euro is still unpopular in the UK and the Blair government has postponed this decision.
Gordon Brown has set five economic tests that must be passed before it can recommend that the UK join the euro. It assessed these tests in October 1997 and June 2003, and decided on both occasions that they had not all been passed.
Denmark-Still opting out
Denmark has not introduced the euro, but the Danish krone is now pegged closely to the euro in ERM II, the EU's exchange rate mechanism. Denmark negotiated a number of opt-out clauses from the Maastricht treaty after it had been rejected in a first referendum. On 28 September 2000 a majority of Danish voters voted against adopting the euro in Denmark. As a result of the referendum, Denmark continues to be a non-euro area EU Member State.