Mushin on Mulhearn and Vane, _The Euro: Its Origins, Development and Prospects_

[Book Reviews in Economic and Business History]

Published by EH.NET (January 2009)

Chris Mulhearn and Howard R Vane, _The Euro: Its Origins, Development 
and Prospects_.  Cheltenham, UK: Edward Elgar, 2008.  xii + 243 pp. 
£60/$115 (hardback), ISBN: 978-1-84720-051-8.

Reviewed for EH.NET by Jerry Mushin, School of Economics and Finance, 
Victoria University of Wellington, New Zealand.


The establishment of the euro in 1999 was a remarkable event. The rigid 
fixing of certain exchange rates, and then the replacement of a group of 
existing currencies with a single currency, has rarely been undertaken 
in the recent past [1], and never on the scale of the euro. It is for 
this reason that predicting its effects is both difficult and 
contentious. In this scholarly but accessible work, Mulhearn and Vane, 
of Liverpool John Moores University, summarize the origins of the euro, 
its development, and its prospects. Economic developments are placed in 
their historical and political contexts and are explained using economic 
theory.

The first two chapters of the book describe events from 1945 to 1999, 
when the euro was introduced. The authors show that, following the end 
of the Second World War, it was widely perceived that, in addition to 
its economic benefits, economic integration would decrease the 
likelihood of renewed conflict and destruction. There are useful 
comparisons with post-1918 experience. The significance of the 
establishment of the European Coal and Steel Community (1952) and the 
European Economic Community (1957) and of the beginning of monetary 
cooperation in Europe, including the founding the European Payments 
Union (1950), are explained. It was frequently difficult to balance an 
obvious loss of sovereignty and its uncertain benefits. The benefits of 
decreased fluctuation of exchange rates are difficult to quantify. The 
precise benefits of a common currency (decreased transactions costs, 
eliminated exchange rate risk, and greater price transparency) are 
particularly elusive, especially before they happen. The irrevocable 
loss of monetary independence has frequently, however, been perceived as 
a threat or even as a defeat.

Agreements to limit exchange rate fluctuations within a group of 
European currencies were introduced in 1973 (the “Snake”) and in 1979 
(the Exchange Rate Mechanism of the European Monetary System). Although, 
since parity changes are possible under fixed exchange rates, these 
innovations were not totally successful, they showed the benefits of 
monetary integration. They also showed the benefits of a common 
currency, such as the euro, under which individual national currencies 
cease to exist and can no longer be devalued and revalued against each 
other.

The creation of the euro area is explained in detail. This includes the 
conditions for membership, as defined in the Maastricht Treaty (1991), 
and the functioning of the European Central Bank. The Maastricht 
conditions refer to each country’s inflation rate, level of long term 
interest rates, exchange rate stability, budget deficit to GDP ratio, 
and government debt to GDP ratio. The relevance of Optimum Currency Area 
theory is shown.

The book includes macroeconomic information, and discussion, on the 
countries that adopted the euro at (or immediately after) its inception 
[2], on the eligible countries that refused to participate in the new 
currency arrangement [3], on the countries that have subsequently joined 
the euro zone [4], and on the countries that hope to join it [5].
The position of the UK, one of the three members of the European Union 
that chose not to adopt the euro at its inception, is interesting partly 
because of the size and the openness of its economy and partly because 
the British government has announced five tests which would need to be 
met before it would consider joining the new currency system. These 
tests refer to the convergence between the business cycles in the UK and 
the members of the euro zone, the degree of market flexibility 
(especially labor market flexibility), the likely effects on investment, 
the likely effects on the financial services industry, and the likely 
effects on economic growth, stability, and employment. It has been 
determined that these tests have not been satisfied.

The book includes the authors’ lengthy interviews with prominent 
economists. These seven conversations, which refer to theory, applied 
data, and their participants’ memories, and which fill about 40 percent 
of its pages, make this book unusual. They enhance the chapters written 
by Mulhearn and Vane by providing informed discussion and interpretation 
of the historical record. These interviews are especially illuminating 
about the causes and effects of the successive enlargements (and 
proposed enlargements) of the European Union and its predecessors, and 
about the political difficulties that have accompanied international 
monetary changes in Europe since 1945.

The only significant weakness of this book is that there is not much 
discussion of the role of the euro outside Europe. Issues include the 
fixing of exchange rates to the euro, either as an individual currency 
or as part of a basket, and the use of the euro as an international 
reserve currency. Of much less importance is that the currency 
arrangements in the European micro states that use the euro [6] are ignored.

This is an exceptionally thorough and lucid book. It is rigorous but not 
mathematical. It deals with a topic of great importance, especially 
since the successful introduction of the euro might encourage the 
development of other monetary unions. Mulhearn and Vane analyze 
historical information using economic theory and show the importance of 
political constraints. Their book will be of great value to students and 
to their teachers.

Notes:
1. Other examples, which both occurred in 1990, are the monetary unions 
that accompanied the merger of the former People’s Democratic Republic 
of Yemen and the former Arab Republic of Yemen and the incorporation 
into the German Federal Republic of the former German Democratic Republic.
2. Austria, Belgium, Finland, France, Germany, Greece, Irish Republic, 
Italy, Luxembourg, Netherlands, Portugal, Spain.
3. Denmark, Sweden, UK.
4. Cyprus (South) (2008), Malta (2008), Slovakia (2009), Slovenia (2007).
5. Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, 
Poland, Romania.
6. Andorra, Monaco, San Marino, Vatican. The euro is also used in Kosovo.


Jerry Mushin’s most recent book is _Interest Rates, Prices, and the 
Economy_, Scientific Publishers [India], Jodhpur, 2009. 
jerry.mushin at vuw.ac.nz

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