Flashback Friday: How the euro emerged out of Europe’s quest for greater integration 

As the world welcomed 2024, another significant milestone in economic history completed 25 years.

The euro, the common currency of the 20-member euro zone, was first launched on New Year's Day in 1999.

For the first three years of its existence, between January 1999 and December 2001, the euro remained 'invisible'. 'Invisible' here means it was mainly used for accounting purposes and to make electronic payments.

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On January 1, 2002, the physical form of euro in the form of coins and notes entered the Euro Zone market.

It was the first time in history that several countries had come together to form a monetary union.Overnight, historical currencies like the franc and the deutsche mark became history.

The currencies did disappear overnight, but the process behind its introduction is a story for the ages.

How the war necessitated the union

Europe had been the battleground for numerous wars for many centuries, culminating in the Second World War.

The six-year-long war devastated the European economy and divided the continent into the US and Soviet spheres of influence.

While the Soviet-aligned parts of Europe remained under the 'Iron Curtain', the idea of closer political and economic union gained currency in the US-aligned Western Europe. The idea was to integrate the economies to disincentivises future conflicts on the continent.

A proto economic union began to take shape in the early 1950s - the European Coal and Steel Community (ECSC). The ECSC aimed to provide a common market for Western European coal and steel industries.

France and (West) Germany, the biggest economies on the mainland, held the key to the success of any common market in Europe.

In fact, the Schuman Declaration, which laid the foundation for the common market, noted: "Solidarity in production will make any war between France and Germany not merely unthinkable, but materially impossible."

The proto ‘European Union’

Fast forward to March 1957, and the six member countries of the ECSC transitioned into the European Economic Community - a common customs union to boost trade.

The six initial members were Belgium, France, West Germany, Italy, Luxembourg and Netherlands. Six other countries, including the United Kingdom, joined it later.

The common customs union and transnational market of the late 1950s and 1960s paved the way for the European Union in 1993. But the path leading to a single market, over-riding national identities, wasn't so easy.

France's then-President Charles De Gaulle, while supportive of a common market, was opposed to the inherent supranational idea of a larger political and economic integration of the continent.

His support to a common market remained as long as it helped French interests. The French war hero was also opposed to the entry of the UK, further complicating European unification.

A common market theoretically helps in better trade, but the often-differing economic structures of individual member-states played spoilsport. This also meant that each member-state had its own fiscal and monetary policy.

A 1992 article on the EU’s predecessor encapsulated its actual impact: “Most studies conclude that the European Community is a trade-creating customs union. But the benefits are surprisingly small, typically less than 1 percent of national income.”

Enter Delors – ‘The father of the Euro’

A big realization hit European policymakers in the mid-1980s – a common market was incomplete without a common fiscal and monetary policy.

It was at this point of time that Jacques Delors, then-President of the European Commission, entered the picture.

The Frenchman headed a committee to study the feasibility of complementing the single market with a single currency. During his chairmanship, he realised that fiscal policy coordination were too weak for a monetary union.

Despite the odds, Delors went ahead with the recommendations that paved the way for the Maastricht Treaty, which laid the foundation for a common currency and a common central bank – the European Central Bank.

Euro, as a common currency, was touted as a solution to encourage more trade and investment. Reason: a common would shelter businesses from exchange rate shocks, cut transaction costs and bring price stability to member-states.

One early estimate suggested that a common currency would help achieve savings equal to one per cent of the European Community’s Gross National Product.

Aftermath

So, has the euro project succeeded? Yes, to a large extent. But the currency has had to deal with its own share of problems.

The euro has given the continent an international profile, as over 300 million people use the currency. It is also the second-biggest foreign currency in the global trade basket after the US dollar.

Greater monetary congruence and enhanced trade environment has helped Europe punchabove its weight on the global stage.

In a joint column with Presidents of the European Commission, Council, Parliament and Eurogroup, ECB chief Christine Lagarde noted:

“Issuing the world's second most important currency has given us greater sovereignty in a turbulent world.”

At the onset of the 2007-08 global financial crisis, the European Union’s economy – the euro zone constitutes a large part of it – was more or less equal to that of the United States’.

But in 2023, the EU is just about two-thirds of the US economy, having stagnated for a decade now. A lot of it has to do with the debt burden of the late 2000s, which triggered a slowdown in a few member-countries.

Supporters of the euro blamed the crisis on the lack of total integration than on the pitfalls of adopting a common currency.

“It was the failure to follow through in all areas with the formula that had worked in those (banking supervision and fiscal coordination) areas,” argued ex-ECB chief Mario Draghi in September 2018.

However, many like former US Fed chairman Alan Greenspan doubted the feasibility of the euro project. But the currency has withered challenges and continues to tell its tale of resilience.