Europe before Euro

The European Union is an economic powerhouse. Albeit it is not one state but an organization of many states, the EU remains a central piece in any country’s international trade policy. In 2020, the EU had a GDP of $15.16 trillion. If it was a singular state it would be ranked second in the world. Further, its ties with other economic and military superpowers have bolstered its growth. Of course, with any international alliance comes internal bickering and the EU is no exception. With its recent divorce with the UK and difficult relations with Turkey and Croatia, the EU faces grim political and economic decisions. But seeing its current standing in the world, it is worthwhile to explore the economic history of such a superpower.

The Rome Treaty

Before the European Union, as we know it, was born the European Economic Community was established via the treaty of Rome. This treaty allowed member parties to trade with each other without any tariff or non-tariff barriers, thus creating a common market. This was initially started by Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. They further agreed on joint food production ensuring food security among the countries and leading to surplus agricultural produce. The European Coal and Steel Community was established allowing resource-rich nations to safeguard their trade interests and trade with other European nations. These were the first few steps towards the creation of the modern EU.

The EEC proceeded to expand with the addition of the UK, Denmark and Ireland. During this period the EEC focused its regional policy on job creation among its politically unstable members such as Portugal and Spain. After the fall of communism, the eastern bloc of Germany became unified with its west.  

A New Monetary System

In the 1970s the Werner Report was published which proposed a goal of reaching full integration among EU nations within ten years. The plan consisted of three phases: the first phase aiming to reduce fluctuations in exchange rates of member countries, to expand credit facilities and to promote economic cooperation. The second phase was to fix the exchange rates irrevocably. The third phase would involve total integration. Due to monetary instability, this plan was not put into place.

However, the European Monetary System was created in 1979, borrowing several facets of the Werner Report. This system included all EEC countries except the United Kingdom. The EMS was created by the agreement of all the member’s central banks in order to manage their exchange rates. EMS intended to reduce monetary fluctuations, where exchange rates were delimited with fluctuation bands.

The European Currency Unit was also introduced. The ECU was a basket of 15 currencies of EEC members used as the monetary unit for the EMS. This artificial currency was the weighted mean of the nation’s currency, weighted by the country’s output.

Unfortunately, this new monetary system was marked by political instability and infighting among the EEC nations. Germany, having the largest output at the time, had the lead on the ECU. Thus the entire EEC was forced to follow the German central bank’s wishes. Clearly, a newer system was required.

The Treaty of Maastricht and Euro

The Treaty of Maastricht was signed in 1992 by the members of the EEC. The treaty renamed the EEC to the “European Community”. This treaty further introduced new rounds of inequality reduction by allowing the free movement of capital within the borders of member countries. Secondly, it helped establish the EMI (European Monetary Institute) in 1994. This was the foundation for setting up a European System of Central Banks (ESCB), for the management creation of a single currency.

The term Euro was first introduced in Spain, in 1995. In 1999, it was decided that this single centralized currency would be called the “Euro”. Thus the European Community began their transition to a new currency. The aim of the Euro was to reduce the member country’s dependence on their central banks and reduce budget deficits. In 1997, the Stability and Growth pact was signed which ensured budgetary regulations.

Ultimately, the European Central Bank was established which regulated the monetary policy for the new currency. From 2002, the Euro started becoming accepted as a new currency and replaced the banknotes of 12 member states. The eurozone currently comprises 19 countries. In 2004 the political differences between Western and Eastern Europe were settled by incorporating the Euro into their economies. All countries were required to comply with the Maastricht treaty.

Currently, the Euro is the second most traded currency in the world, just behind the dollar. There are 1.2 trillion Euros in circulation. 

The EU’s history is marked with differences and political tussles, but it is an exemplary example of how a group of countries can come together to form one of the strongest economies in the world. Not including certain exits, of course.

Written by Rayandev Sen | Proofread by Alexey Dudarev