Happy Birthday EURO

BenjAii

A lot of the papers are marking the 10th anniversary of the birth of the Euro (though of course strictly speaking it didn't go into circulation until 6 years ago).

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5425706.ece

It has certainly succeeded where all its detractors thought it would fail and I can't helping thinking shielded Ireland from far worse in the financial turmoil of 2008.

It's downsides are familiar; loss of versatility in setting interest rates & exchange rates.

Although low Euroland interest rates (in the interests of Germany) are often given as an explanations for the property booms in Ireland & Spain, I'm puzzled why these stresses never seem to affect the US.

It has a single currency, across a comparable (though smaller) economy & population, but you never hear of uniform interest rates being a factor in why regions within the US differ in their economic activity.

I'm familiar with some of the arguments given to why European countries would be different (different business cycles, laws& business cultures) - but you could say the same about regions in the US.

Wondering if there is an explanation for this I have missed ?

silverharp

BenjAii wrote: »

I'm familiar with some of the arguments given to why European countries would be different (different business cycles, laws& business cultures) - but you could say the same about regions in the US.

Wondering if there is an explanation for this I have missed ?

I'd put it down to a once off adjustment down of interest rates that affected Ireland /Spain in a disproportionate manner. The US has its own internal business cycles, compare Texas , Detroit and California and you will find very different things going on but they will have had common interest rates

Économiste Monétaire

I'd agree with Silverharp. Ireland was considered to be a low cost country (I know the irony of saying that now...), and a convergence with higher cost countries, such as Germany, was an inevitable side effect. A fairly applicable example of PPP under fixed exchange rates. Just put it down as a negative, on our behalf, of monetary union; i.e. negative real interest rates for a protracted period of time was fuel to the fire, but certainly not the only cause of our property bubble.

silverharp

Économiste Monétaire wrote: »

negative real interest rates for a protracted period of time was fuel to the fire, but certainly not the only cause of our property bubble.

In the Irish case that is true, demographics, returning immigrants, inward migration, labour participation rates and tax policy all fuelled the fire. Spain became Europes "Florida" so I guess in their case is was a more conventional poperty bubble.

silverharp

Can I throw out a question, does anyone think any country will leave the Euro? one of the PIGS maybe? I've no opinion either way except to say that the first 10 years of the Euro were in fairly benign conditions. From the weaker countries perspective they may not like the fact that they have gotten themselves into a synthetic "gold" standard by their standards.

Économiste Monétaire

The Governor of the Central Bank of Ireland had a piece in the IT about the Euro anniversary:

JOHN HURLEY

OPINION: THURSDAY - NEW Year's Day - marks a very significant milestone for the euro, as on that day 10 years ago Ireland and 10 of our European neighbours officially adopted a common currency.

It would be another three years before the euro was issued in the physical form of banknotes and coins, but on January 1st, 1999 the currency was born and began to be traded on financial markets.

On the same day, the Eurosystem - comprising the European Central Bank (ECB) and the national central banks that made up the euro area, including our own Central Bank - assumed responsibility for the formulation and implementation of monetary policy in the region. The introduction and launch of the euro was a major achievement and one that took place very smoothly.

Of course, there were concerns at the time about how sustainable the euro might be. Given the diverse nature of the European economy, some commentators felt it was only a matter of time before different economic developments in member states led to possible conflict and severe strains on the system.

The last decade has demonstrated the robust nature of monetary union, however, and has also brought to light its many benefits, both from a euro area and domestic perspective.

It is clear that Europe has benefited significantly from the establishment of the common currency. Prices in the region have been remarkably stable over the last decade, despite a series of global shocks.
It is generally accepted that monetary policy can contribute to economic activity by maintaining a sound, stable, low-inflation economic environment. This provides the best basis for economic growth, employment creation and improvements in living standards. In this context, inflation in the euro area has averaged just over 2 per cent since 1999, compared with a rate of more than 4 per cent at the beginning of that decade.

Furthermore, there has been a greater stability in medium- and long-term inflation expectations across the region, a development that has been most impressive in recent times, given the backdrop of very sharp changes in global commodity prices. This stability in expectations reflects the high level of credibility that the ECB has built up in a very short period of time.
Linked to these favourable inflation developments, monetary union has also led to historically low interest rates across Europe. Since 1999, there has also been a significant improvement in the euro area's labour market, with more than 16 million jobs created. Further progress in structural reforms is required, however, before the full growth potential of the region can be realised.

An additional benefit of monetary union has been the continued progress in European economic and financial integration. The former is evident from the increase in trade activity that has occurred between euro area members, while the latter has manifested itself in the deepening of euro area money and capital markets and in a gradual portfolio re-allocation, away from domestic financial instruments towards financial instruments issued by other countries in the region. In 2010, the Single Euro Payments Area will be established, allowing payments to be made as easily and inexpensively throughout the euro area as they can be locally.

Of course, by becoming a member of a monetary union each national economy loses whatever independence it may have had in regard to monetary and exchange rate policies. In reality, however, prior to EMU Ireland had limited independence in these policy areas, reflecting links to sterling and the EMS. Since the launch of the euro, all of the governors of the participating central banks have a seat and an equal voice in decisions on monetary policy made at the governing council of the ECB, with such decisions being taken by reference to economic conditions in the euro area as a whole.

The single currency has led to an increase in price transparency and competition. It has also eliminated exchange rate risk and has reduced transaction costs. It is in the current harsh economic and financial environment, however, that the benefits to a small open economy of being in a large single currency area are most clear.

The global economic environment is experiencing a period of substantial turmoil and the economic outlook is clouded by uncertainty. Problems in financial markets are affecting the real economy across the world and global growth is expected to be very weak in 2009. In this context, there needs to be a focus domestically on improving our competitiveness. In the short term, this means being very flexible and adaptable in responding to adverse economic developments while putting in place policies for the medium term that will boost living standards. Although the current situation poses very significant challenges, one only has to look at the difficulties in some other small open economies outside of the euro area to imagine the situation in which we could have found ourselves.

In particular, a separate domestic currency would have been extremely vulnerable to market sentiment, with the potential for sharp volatility. Given our position in a large currency area, however, such a concern is no longer relevant. Irish financial institutions, meanwhile, have been able to access the ECB's well-developed liquidity facilities that were established long before the recent financial turmoil began.

The coming year will not be an easy one for the global or domestic economy, but monetary union has already proven itself resilient to challenges. Over the next decade I have no doubt that the euro will establish itself further as an alternative reserve currency. In the 10 years since EMU, we have seen the region expand, with five additional economies adopting the currency since its launch, including Slovakia on New Year's Day 2009. The continued attractiveness of monetary union is evidenced by the desire of most of the other EU member states outside the euro area to join, as soon as their economic circumstances permit.

• John Hurley is governor of the Central Bank