European Union Politics

Palgrave Foundations Series

by John McCormick

Chapter 20: Inside the Eurozone

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Nothing has had quite so clear an effect on the idea of European integration as the euro: it has changed the daily lives of everyone living in the eurozone states, and is immediately obvious to anyone travelling in those states.While the primary motive behind its launch in 1999 was economic, there were also political considerations: it was designed to extend European integration not just into the pockets and bank accounts of Europeans, but also into global financial markets.

Prospects for the single market were always bound to be limited as long as any person or company moving across borders had to deal with different currencies. Exchange rates fluctuated, costs and profits could never be firmly predicted, and currency conversion meant additional layers of bureaucracy and planning. For ordinary Europeans, foreign currencies emphasized the psychological challenges of travel, and made it more difficult to compare prices with those at home. The euro not only stands as a visible reminder that Europeans are engaged in a common project, but has also re-emphasized the strengths and weaknesses of the EU as an international economic actor.

Seventeen EU member states now use the euro, and adoption in most of the others (even Britain, Denmark, and Sweden, where resistance is strongest) is on the political agenda. There was an unmistakable pause for thought following the stern consecutive tests of the 2007–10 global economic crisis and of the 2009–10 Greek debt crisis, but the former impacted every international currency, and the latter was less a euro problem than a home-grown problem sparked by bad political and economic decisions. The future of the euro now depends mainly on how soon – and with what effects – post-crisis policy adjustments make themselves felt.
  • The euro was launched in 1999 as an electronic currency, and in 2002 as a cash currency. Its creation was not only an economic act, but also a political act designed to help expand the international financial and political reach of the EU.
  • Twelve EU states adopted the euro in 2002, and were later joined by five more, with expectations that most of the rest (opposition being strongest in Britain, Denmark, and Sweden) would eventually follow.
  • The euro started out well, with optimistic speculation that it would quickly become a world-class currency. Then came the 2007–10 global economic crisis, when eurozone leaders at first appeared undecided about how to act, before taking ameliorative action. This was followed by the challenge of the Greek debt crisis of 2009–10.
  • The Greek crisis not only revealed the dangers to the eurozone of mismanagement and incompetence in even a single member state, but once again found eurozone leaders failing to agree on how to respond.
  • They eventually offered a large loan guarantee package to Greece, but many questions were raised about the future of the euro.
  • Immediately upon its creation the euro became the world’s second largest reserve currency, leading to speculation that it might pose a serious challenge to the US dollar. But after its share of reserves grew to just over 25 per cent it appeared to have settled onto something of a plateau, lagging well behind the 60–65 per cent share of the US dollar.
  • Many questions remain about the long-term prospects of the euro. How will it be impacted by the crises of 2007–10? Will eurozone leaders learn from their mistakes? How will its weaknesses compare with those of the United States, where doubts are growing about the underlying economic stability of the US dollar?