Euro Matters: EU Currency for Most Members

The European Union includes the so-called euro zone or area, where the EU currency circulates. The euro zone is comprised of 12 countries and some 300 million people. Use of the euro eliminates the need for currency exchange, therefore removing one of the most fundamental costs of cross-border business. This facilitates trade and investment within the zone.

The euro was originally just an accounting currency. It was introduced in 1999 as a “virtual” currency existing alongside the member states’ national currencies. From 1999 to 2002, the euro was used for writing checks and credit card payments, but there were no notes or coins. This transition period gave companies time to switch their bookkeeping and financial systems to the euro. The changeover to euro cash, with new notes and coins in the participating member states, began on January 1, 2002. Member states’ national currencies were taken out of circulation within two months following the introduction of the euro. The transition to the single EU currency has been very smooth. The euro, worth $1.07 in early February 2003, has appreciated against the dollar by about 20 percent since its debut as a “real” currency last year. The European Central Bank has set interest rates covering the euro zone since 1999.

Twelve member states of the European Union have adopted the euro: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Three member states have not adopted the euro: Denmark, Sweden, and the United Kingdom. However, Sweden’s government has set September 14, 2003 as the date for a referendum over adoption of the euro. The government of Denmark announced recently that it plans to hold a referendum on the euro sometime in 2004, its second since introduction. The United Kingdom has not yet set a date for a referendum on the euro.

At a summit in Copenhagen in December 2002, the European Union formally announced the schedule for bringing 10 additional countries into the union in 2004, successfully culminating many years of planning and negotiations for EU enlargement. On May 1, 2004, the following countries will join the union: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. The new members will not automatically adopt the euro upon accession. First, they must join the exchange rate mechanism (ERM), under which their currencies will be able to fluctuate only plus or minus 15 percent from a central rate. If these countries successfully operate within the ERM regime for at least two years as well as meet exacting criteria regarding budgets, debt, inflation, and long-term interest rates, they will then be eligible to join the euro zone. The new EU member states must eventually adopt the euro, but the timetable for actual adoption is not definite.