The Euro: Faith Hope and Parity

Abstract

The inauguration of the euro as the currency of the European Union is the most far-reaching step so far taken in the long-term movement for regional political and economic integration. The new money demonstrates that the initial customs union established by the Treaty of Rome has grown to such an extent that member states are willing to surrender control over their national central banks and currencies. Only three members of the EU have refused to join—Britain, Denmark and Sweden. Despite widespread scepticism, the euro so far has been a success. The new currency, while a dramatic innovation, is also congruent with financial dimensions that can be traced through the history of the European Community. The experience of inflation in the 1960s and 1970s was a powerful incentive to establish strong European central banking institutions. The euro is both derivative from and competitor with the US dollar, and American historical experience over the long term as well as foreign policies since the Second World War are germane to analysis. For Britain, remaining outside the euro zone so far has not brought negative consequences and may have been beneficial to the economy. For most member governments of the EU, the opportunity to pool resources through a regional currency understandably has been a persuasive incentive, especially given the enormous growth of private capital markets. The creation of the euro has been facilitated by the shifting nature of money. Currencies have changed from distinctive national components of the highly structured Bretton Woods system to relatively freely traded commodities, and the traditional distinctive characteristics of money have been blurred with the evolution of credit markets, financial instruments and technology. The fundamental test of the euro will occur when member states face differentiated political pressures to inflate economies in order to combat unemployment. To date, the European currency has been the latest confirmation of the insight of Jean Monnet and others to employ economic integration to reduce the likelihood of a resurgence of militarism and war.