Europe returns to old ways with the new euro

Political will made the launch of the euro possible

World Business Review
By Martin Webber BBC World Service business news editor

The euro's rise above one US dollar this week caps a successful six months for the European single currency.

Although there was a clear lack of popular enthusiasm for abandoning marks, francs and lira, the launch of the currency had an inevitability about it.

Historical destiny

For most politicians and many historians, the euro was, quite simply, Europe's destiny.

Professor Toniolo: Every major currency was ultimately exchangeable for gold

Indeed, it is possible to argue that the euro's launch was simply a continuation of where European integration had reached at the end of the 19th Century.

For many, the aberation was the 20th century, with its resurgence of nationalism that brought economic depression and two world wars.

The determination of the political elite of Europe to push through the euro can only be understood by a clear analysis of the past 100 years.

The 1900s began in a mood of confidence and optimism.

Global trade was growing fast with primary goods like wheat, coffee and metals, being exchanged for manufactured goods and machinery and exchange rates were effectively fixed.

Gold glistened

Each country had its own currency, but they were all fixed to each other because every nation tied itself to the Gold Standard.

Gianni Toniolo, professor of economic history at the University of Rome, explained that every major paper currency was ultimately exchangeable for gold at the central bank.

Gold was the single currency for an area ranging from San Francisco to Vladivostok.

He says the system helped both businesses and the millions of migrants who were moving around the globe.

"The migrants knew the value of the money they were sending back home", he said.

Trade was disrupted after the wars in Europe

The key economic benefit of fixing exchange rates is that it removes risks and costs suffered by businesses and consumers from fluctuating currencies.

That minimising of risks encourages more trade to take place, and more trade generally means more prosperity.

Old unions

In the 19th Century, there were not any Europe-wide institutions to match today's European Central Bank, yet Professor Toniolo points out that there were some kind of formal monetary unions in the 19th century.

The most important of them probably was the so-called Latin Monetary Union, sponsored by France and including Belgium, Switzerland, Italy and Greece, with other countries informally participating.

Dr Schulze: The Marshall plan played an enormous role

These countries all had the same currency unit, equal to about 4.5 grams of fine silver - and those coins were exactly of the same size - as is the euro.

Despite the veneer of cooperation, there remained the deep nationalistic rivalries that erupted into the First World War in 1914.

The peace settlement of Versailles after the First World War was a disaster and attempted to exact financial penalties from the defeated Germans.

Dr Max-Stephan Schulze, an economic historian at the London School of Economics, believes that carving brand new states in Central Europe out of the collapsed pre-war empires left a terrible legacy:

"We were now dealing with a much larger number of European countries than before the war."

There was the dismantling of the Tsarist and Hapsburg empires into several "successor" states and the creation of new countries like Czechoslovakia.

American aid

The policy of tariffs and import quotas which followed wiped out the economic gains from trade that the world had achieved in the previous century.

Adolf Hitler exploited the failure of conventional politicians in Germany to rebuild prosperity and the Second World War followed - leaving Europe in ruins again.

Chancellor Kohl consigned the deutschmark to history

Dr Schulze says it was the Americans who set in train the policy that has culminated in the single currency:

"The Marshall Plan played an enormous role - it was an injection of money from the US." he said.

But it came with strings attached - that Europeans had to open up to trade, both amongst themselves and also towards the rest of the world.

The biggest turning point however came in France in the early 1980s.

The socialist government tried to spend its way out of a recession but the policy failed.

After that left-of-centre politicians accepted they had to adopt the German model of prudence in government spending and low inflation.

Germany had a longer-standing reputation and therefore it was the deutschmark that set the standard.

The result was that the unelected bankers at Germany's Central Bank in Frankfurt, the Bundesbank, set interest rates for most of Europe.

But the German mark was weakened by the cost of integrating the East German economy in the early 1990s and the Bundesbank could no longer resist pressure for the euro.

Sceptic public

Chancellor Helmut Kohl chose to throw the deutschmark into the cauldron of European unity.

Professor Toniolo accepts there is a gap between what the political elite have created in Europe and the common feeling of the people, but says that shouldn't be surprising

"I think this was a moment for making a big leap forward in the creation of a more united Europe," he said.

Even if Europeans are a bit sceptical, they nevertheless return politicians that are publicly committed to the creation of a more integrated Europe to office.

Professor Toniolo says the euro is one of the greatest achievements in European history.

"This is a situation of great cooperation and great common vision," he said.