European Central Bank turns 10 years old – euro soon follows.jpg

European Central Bank turns 10 years old – euro soon follows

By: BILL BLEVINS

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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

THE EUROPEAN Central Bank celebrated its tenth birthday on June 1. Once established, it had just seven months to launch Europe’s single currency, the Euro, which came into being on January 1, 1999, and will celebrate its ten years of existence on January 1, 2009.

For three years, the Euro was operated as an electronic means of payment until banknotes and coins were put into circulation on January 1, 2002. The Frankfurt based European Central Bank (ECB) is the central bank for the Euro. Its’ main task is to maintain the Euro’s purchasing power and hence price stability in the Eurozone.

In a statement released in May, ahead of the June celebrations, the European Commission (EC) announced:

“The Euro is a resounding success. The protection provided by an international currency with a market of nearly 320 million people, supported by sound public finances and stable macro-economic policies, is particularly welcome in these times of uncertainty and worrying increases in the prices of energy and food.

“But as we complete ten years of Economic and Monetary Union (EMU), we must acknowledge that there is still work to be done. The Euro area’s governance and coordination of economic policies must be improved. This will involve both deepening and broadening economic surveillance arrangements to guide fiscal policy over the cycle and in the long term and, at the same time, address divergences in growth, inflation and competitiveness”.

European Commissioner for Economic and Monetary Affairs, Joaquín Almunia, commented:

“EMU is a solid construction and a remarkable achievement. But the experience of its first decade shows that economic policy decisions in one country may have important effects on others. Therefore we need to keep improving the economic governance of the Euro area through strong and binding political commitments…

“We now need to strengthen our coordination of budgetary and economic policies. We also need to step up our international economic strategy”.

Almunia intends to drive this debate forward with the Member States, the Council and the European Parliament during the French Presidency. France takes on the EU presidency from July. French president, Nicolas Sarkozy, has spoken out loudly against the strength of the Euro and has called for the ECB to focus more attention on stimulating growth.

The European Commission particularly felt that it needed to speak with a single voice and make it heard on the international stage. The Euro had no representation at institutions like the Organisation for Economic Co-operation and Development and the International Monetary Fund which would give the currency more weight and credibility.

Direct benefits

The EC maintained that the benefits of the EMU and the Euro are “tangible and real for everybody”. It listed a number of “direct benefits” which included:

• Over the last 10 years, inflation has been around two per cent on average. (The ECB’s inflation target is “below but close to two per cent”. In May the inflation rate was 3.3 per cent).

• Almost 16 million jobs have been created since 1999.

• Lower long-term interest rates fell to less than four per cent, half the level of the 90s.

• No need to exchange currencies which facilitates holidaying and shopping throughout the Euro area.

Stable exchange rates boosted trade among Euro area countries.

Other benefits less visible but equally significant were:

• Public budget deficits fell to a record low of 0.6 per cent of GDP on average in 2007, compared with around four per cent of GDP in the 80s and 90s.

• European markets are better integrated, including in the financial area, which for consumers means cheaper products and services.

• This rising international role of the Euro, second only to the US Dollar provides a shield against turbulences in the global economy.

It was ten years ago when 11 EU nations agreed to form a single currency. They were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. Today there are 15 Euro nations, the other four being Greece, Slovenia, Cyprus and Malta. Slovakia is due to join on January 1, 2009.

Thriving

The ECB is expecting other countries to eventually join the Eurozone. There are currently 27 members of the EU. So far the UK has refused to join, but future membership has not been ruled out.

In 2008 the Euro is thriving and is being hailed as the successor to the once world strong US Dollar. It’s a far cry from its beginnings when the Euro was mocked and in its first two years of infancy its value dropped. Now it has weathered the credit crunch better than the British Pound and the US Dollar.

The ECB has been hailed as innovative and transparent in the way it makes its interest rate decisions, based on a consensual opinion rather than on agreement by voting. Immediately after each interest rate meeting, the Bank’s president, Jean-Claude Trichet, gives a press conference, ensuring that the ECB’s decision is heard without misrepresentation through incorrect translation.

The Governing Council consists of six members of the Executive Board, plus the governors of the national central banks of the 15 Eurozone nations.

Otmar Issing, former chief economist of the ECB and a former employee of Germany’s Bundesbank on which the ECB is said to be modelled, summed up the ECB’s first decade by remarking that it had survived the 9/11 terrorist attacks, the technology bubble and soaring oil prices.  “It has worked well for 10 years – what else could happen in the next 10?”.