The Euro: Its Origins, Development and Prospects
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@vuw.ac.nz