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Being able to use the same currency in a variety of countries across Europe has become an everyday part of life for Europeans. But those colourful bills and coins in your wallet are more than just money: the euro symbolises a feat of European integration that has contributed to the EU’s fiscal stability and high level of prosperity.
A common market with different currencies
Most Europeans can remember a time when a short trip over the border from Colmar to Freiburg involved a stop at the currency exchange. Switching between Francs and Deutsche Marks, however, wasn’t just a chore for families wanting to take in the sites in a neighbouring European country – it also meant extra costs for consumers and businesses, and less transparency in cross-border transactions.
The costs of doing business like this became apparent not long after the creation of the European Coal and Steel Community in 1951. As industry boomed and financial markets stabilised in the post-war period, six European nations – Germany, France, Italy, the Netherlands, Belgium and Luxembourg – agreed to run their coal and steel operations under common management. The project gave way to the European Economic Community (EEC) in 1957. It established Europe’s first common market in which goods and services could flow between participating states with fewer barriers. It also introduced a common pricing system for crops to boost agricultural production, known as the Common Agricultural Policy (CAP).
But the fruitful conditions that gave life to these projects didn’t last. Turbulent markets shook the price guarantees integral to the CAP, while the many international conflicts of the 1970s undercut attempts to stabilise exchange rates between European neighbours’ different currencies. That had a negative effect on trade within the EEC.
Financial integration for greater European stability
European leaders’ answer to this challenge was financial integration. In 1979, they created the European Monetary System (EMS), a system of bundling member states’ monetary sovereignty for greater financial stability. The central banks of member states agreed to adjust their exchange rates with one another based on a weighted average of all of their currencies, creating what became known as the European currency unit (ECU).
The ECU, an electronic means of payment without coins or cash, proved successful in minimizing cost increases linked to exchange rates between member states. It soon became the standard monetary unit to measure the market value of goods, services and assets in Europe. A private market for the ECU soon developed as well. Investors, better able to make foreign investments within the EU without having to exchange different European currencies, began to use the ECU for financial transactions.
The project’s success led to concrete plans about how a full European Monetary Union (EMU) could be achieved. Under the guidance of then-European Commission President Jacques Delors, European leaders agreed in 1988 on a roadmap towards monetary integration over the course of the 1990s. The decade would begin with complete freedom for capital transactions between member states and end with the launch of a common currency, the Euro, in 1999. This plan was codified in the new Treaty on the European Union in Maastricht in December 1991.
Safeguarding a strong economic and monetary union
On 1 January 2002, 12 EU member states rang in the New Year at the cash machine: after a transition period of only using the euro for cashless transactions, Europeans could now withdraw the colourful bills from their local banks.
In the two decades since that debut, the euro has faced many challenges. The financial crisis of 2008 had major ripple effects in the eurozone. Even so, member states acted in solidarity with one another to reform financial systems and ensure a return to solid public finances; their answer to the crisis was more financial integration, not less.
As a result, the European Banking Union was created. It aims to improve bank oversight, break the chain of interdependence between banks and public finances, more effectively protect consumer savings and sort out the issues of banks in need without an influx of taxpayer money. A Capital Markets Union was also created to diversify financing options within Europe and to reduce the dependency of small and medium-sized businesses on bank financing. Germany is working with its European partners to deepen and further integrate those systems during its Presidency of the Council of the EU.
Another step towards financial integration in Europe was the introduction in 2014 of the Single Euro Payments Area (SEPA), which harmonized payment transactions between most European countries, including all EU member states. Since then, payments in euros can be made across the EU using standardised payment methods such as bank transfers and direct deposits. This means that payments within Germany and Europe are processed according to the same rules.
In recent years the rise of digital markets has also presented challenges for the euro. That’s why Germany is working with its European partners to create new financial instruments that can help the EU reap the benefits of digital finances while mitigating risk. Germany’s Council Presidency is making an effort to make Europe into a modern, secure and innovative community for new financial services that safeguard monetary sovereignty and increase the cybersecurity and cyber resiliency of European financial markets.