Page last updated at 13:15 GMT, Wednesday, 7 May 2008 14:15 UK

Celebrating 10 years of the euro?

By Stephanie Flanders
Economics editor, BBC News

Euro notes
The eurozone still lags behind the US in productivity

When the euro was launched there were plenty of people who thought it would crash and burn.

Ten years on, its role as a global currency is secure, even if it hasn't achieved everything its founders hoped.

Wednesday is the 10th anniversary of the agreement that launched the single currency.

However, residents of the first 12 EU states that adopted the euro didn't begin using euro banknotes and coins until 1 January, 2002.

Euro v. dollar

Things didn't start out so well.

The euro spent its early life hitting record lows against the dollar - but now it is the greenback that's falling.

Tourists and exporters in the eurozone have to cope with the euro at a record high. Many in Europe are now bracing themselves for the effects of the slowdown in America.

Stronger position

But as the European Commission is keen to remind us, for once the eurozone economies are coming into this credit crunch from a position of relative strength.

About 16 million jobs have been created in the eurozone since the birth of the euro, and unemployment has fallen, from 9% in 1999 to 7% in 2007.

In contrast to the UK, most governments also have room to cut taxes to boost growth if they need to: the average budget deficit in the eurozone countries last year fell to record low of 0.6% of GDP.

Who gets the credit?

Map of eurozone member states
European Central Bank established 1 June 1998
Euro launched 1 January 1999 as electronic currency and on foreign exchange markets
National currencies replaced 1 January 2002

Of course, neither of these achievements is necessarily due to the euro, any more than the fall in average inflation and long-term interest rates can be directly attributed to the European Central Bank.

Nearly all of the world's advanced economies have seen a steady decline in inflation since the late 1980s (at least until recently), a development that has pushed down interest rates as well.

However, supporters of Economic and Monetary Union would say that the budget deficit and employment figures do owe something to the euro.

They would say that the Stability and Growth Pact, which asks countries in the eurozone to keep their budget deficits below 3% of GDP has imposed budget discipline.

Even so, some large economies like Germany have sometimes flouted the rules, and the pact was revised in 2005.

Economic reform

Supporters would also say the single currency has forced countries to get on with reforming their economies - including the labour market - because being part of the eurozone means that governments have lost the option of devaluing their way out of trouble.

But many economists would disagree.

Germany has done an excellent job of retaining its competitiveness in recent years by keeping costs down - even as the euro has risen against other currencies.

But the same cannot be said of Italy, whose producers are struggling to keep any foothold in global markets.

This relates to one of the disappointing aspects of the euro's record to date, at least for some of its founders.

No convergence

Economic and monetary union does not seem to have promoted economic convergence among the major economies.

If anything, the reverse is true.

The situation right now is a case in point.

Woman speaks on her phone next to currency exchange signs
Unemployment has fallen since the euro was launched

Spain and Ireland did well out of the early years of the euro - too well, some would say.

Being part of the single currency meant that interest rates were lower, for longer than they would otherwise have been, during the boom years when their economies grew rapidly.

That allowed some US and UK-style imbalances to build up, particularly in the housing market.

Both economies are now set to slow sharply as a result of the credit crunch. It is possible that they will even suffer a recession.

By contrast, Germany and France had less of a boom, and may now only suffer a modest slowdown.

Pity the European Central Bank, which has to set interest rate policy for all of them.

Supranational powers

Monetary policy alone cannot make the mature economies of the eurozone converge.

It would be unrealistic to expect it to.

The only way to achieve that kind of convergence would be to create an enormous central eurozone budget which could redistribute money between countries to help smooth out the differences between them.

There are some die-hard Europhiles who would support this.

But don't hold your breath.

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