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(History of the euro)

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The euro is the result of years of debate

The development of a European single currency goes back to the 1950s.

1957: The Treaty of Rome said a common European market could increase economic prosperity and help towards promoting closer ties among the people of Europe

 

1969: European summit at the Hague makes a single currency an official objective

 

1970: The Werner report envisages the creation of a single currency over 10 years

 

1970s: The oil crises, economic divergence and a weak dollar meant only a "currency snake", tying the currencies of Germany, Denmark and the Benelux countries together, was achieved

 

1979: The European Monetary System (EMS) is created, with the exchange rate mechanism (ERM) defining rates in relation to the European Currency Unit (ECU), a quasi-currency representing an average of participating currencies.

 

1986: Single European Act The Single European Act, which modifies the Treaty of Rome is signed and comes into force the following year. It sets up a framework for the Single European Market by increasing the Commission's powers and introducing qualified majority voting for a number of issues.

 

1988: The European Council of Hanover sets up a committee chaired by Jacques Delors, the then President of the European Commission, to put forward plans leading to European Monetary Union

 

1989: After consideration of the Delors report, the European Council meeting in Madrid agrees the first of three stages of EMU will begin in July 1990

 

1990: Stage one of EMU begins with narrowing of bands under the Exchange Rate Mechanism and closer co-operation on economic policy and between banks.

 

1991: Plans for a single currency by the year 2000 are agreed under the Treaty of European Union Plans by the 15 members of the European Union in the Dutch town of Maastricht.

 

Strict rules for those joining are agreed, including targets for inflation, interest rates and budget deficits

 

The UK and Denmark exercise their opt outs from the stage three of EMU.

 

1994: Stage two of EMU begins with plans for creation of European Central Bank and convergence of member states' economic and monetary policies.

 

1995: The name "euro" is chosen for the new currency at the European Council in Madrid.

 

 

1997: New UK Chancellor Gordon Brown announces five economic tests to be assessed before the UK joins the euro.

 

1998: The European Council agrees that 11 member states - Belgium, Germany, Spain, France, Italy, Ireland, Luxembourg, the Netherlands, Austria, Portugal and Finland - are ready to adopt the euro on 1 January 1999

 

European Central Bank established in Frankfurt to maintain price stability and set interest rates in the euro zone.

 

1999: Stage three of EMU: The euro is launched as an electronic currency used by banks, foreign exchange dealers, big firms and stock markets. Exchange rates of the participating currencies are set and euro zone countries begin implementing a common monetary policy.

 

2000: A referendum in Denmark ends with 53% of Danish voters rejecting entry to the euro.

 

2001: Greece joins the euro

 

The UK's Labour government, re-elected for a second term, says it will assess its five tests for euro entry within two years.

 

2002: Euro coins and notes become legal tender and national currencies become obsolete.

 

Sweden announces plans to hold a referendum on euro entry on 14 September 2003.

 

2003: The UK Government says it has decided the time is not right to recommend euro entry in a referendum.

 

Chancellor Gordon Brown says he will return to the issue again early in 2004.

 

They consist of five criteria, laid out in the Maastricht Treaty:

 

• The amount of money owed by a government - known as the budget deficit, has to be below 3% of Gross Domestic Product (GDP) - the total output of the economy.

• The total amount of money owed by a government, known as the public debt, has to be less than 60% of GDP. The public debt is the cumulative total of each year's budget deficit.

• Countries should have an inflation rate within 1.5% of the three EU countries with the lowest rate. This was supposed to push down inflation rates and lead to more stable prices.

• Long-term interest rates must be within 2% of the three lowest interest rates in EU. 

• Exchange rates must be kept within "normal" fluctuation margins of Europe's exchange-rate mechanism.

 

The UK's five tests

 

These are the five economic tests on UK entry to the euro as outlined by The Treasury in 1997.

 

Convergence

 

The Treasury sees the first test, the need for the UK economy to come together with the euro zone economy, as the "touchstone" towards a successful single currency.

 

And it says it must converge in a "sustainable and durable" way.

 

 

It says that to be passed, the UK economy must:

 

• have converged with Europe

• be shown to have converged

• show convergence capable of being sustained

• have sufficient flexibility to adapt to change and unexpected economic events

 

In the past, the UK's economic cycle has been both more volatile than others in the EU, reflecting different economic policies, oil price rises and German unification.

 

 Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?

 

This also been affected by differences in the UK economy such as trade patterns, oil, company finance and the housing market

 

Setting out the five tests, the government said a period of stability - via low inflation and controls on spending - would be needed in order to promote sustainable and durable convergence with the rest of the European Union.

 

Flexibility

 

The Treasury says the success or otherwise of the euro depends on business and the workforce being flexible.

 

The economy, it says, must have "the ability to adjust to change".

 

 If problems emerge is there sufficient flexibility to deal with them?

 

It says this is because of the "inevitable loss of domestic control over monetary policy" and the risk of future economic turbulence.

 

Firms would need to be flexible in terms of pricing and margins, and in their business strategy.

 

Wage bargaining in the labour market must be "realistic and take account of developments in productivity".

 

Employees would need to increase their skills in order to adapt to change in the job market.

 

Investment

 

The Treasury believes that a successful single currency would:

 

 Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?

 

create an attractive area - with low inflation and stability - for firms to invest

be a complement to the Single Market, boosting competition and providing new opportunities for companies

 

The Treasury says the euro could, if successful, help to reduce the risk of poor investment performance by reducing instability.

 

Investment could be boosted by the reduction of transaction costs and exchange rate uncertainty, it says.

 

And more transparent pricing - with companies able to compare prices between countries much more easily - could also encourage investment.

 

But the Treasury says entering the single currency before the UK economy has sufficiently converged with the euro zone would discourage investment.

 

Financial services

 

The Treasury says joining the euro would affect the financial services industry "more profoundly and more immediately" than other sectors of the economy.

 

 What impact would entry into EMU have on the competitive position of the UK's financial services industry?

 

It says whether the UK joins the euro or not, the City of London's strengths "should help it to thrive".

 

The test centres on whether the introduction of the euro would be advantageous for the sector and whether the sector is fully prepared for the introduction of the single currency in the UK.

 

 

Employment and growth

 

This is the "fundamental" test, says the Treasury.

 

 Will joining EMU promote higher growth, stability and a lasting increase in jobs?

 

Joining the euro could "enhance both growth and employment prospects".

 

But without sufficient convergence and flexibility, "the resulting turbulence could considerably damage them".

 

The Treasury will have to decide as it assesses the tests the potential effect on jobs and growth from joining the euro.