20:20 vision: what is the euro’s story so far?

11 January 2019

The euro is now 20 years old, but how has Europe’s common currency, a product of Commission President Jacques Delors, endured the past two turbulent decades?

Twenty years ago, a virtual currency was launched in Europe, to great fanfare from Brussels, and became the official monetary unit of 291 million people in 11 countries. The value of the fledgling euro on the day it took flight was $1.174, almost exactly where it stands two decades later. 
 
But the intervening years have been far from uneventful. And from lows of $0.823 in 2000 to highs of $1.6 in the run up to global financial meltdown - followed by a white-knuckle ride through multiple sovereign debt crises and emergency interventions - the euro has shown itself to be vulnerable to both internal and external shocks.
 
Twenty years after its birth, those shocks keep on coming. And a failure to create the political and fiscal integration required to support the monetary union, combined with the unrelenting rise of populism, mean that the euro’s future remains uncertain. Here, we take a look at the journey that has brought this unique currency to where it is today.
 
The value of the fledgling euro on the day it took flight was $1.174, almost exactly where it stands two decades later. 
 

Early origins

 

Economic and monetary union in Europe was raised well before the establishment of the European community. The Latin Monetary Union linked the French, Swiss, Belgian and Italian currencies from 1865 to 1927 and the idea of a common European currency was raised by Gustav Stresemann in the League of Nations in 1929.
 
The idea seriously emerged again in the 1960s, when the original members of the European economic Community (EEC) – France, West, Germany, Italy, Belgium, the Netherlands and Luxembourg – launched the Economic and Monetary Union in order to forge “greater control of economic policies and monetary cooperation” with a multi-stage plan to create a single currency by the end of the 1970s.
 
The project was hit by a series of setbacks, from the US government’s termination of the  convertibility of the dollar into gold, to a global oil crisis. Nonetheless, in 1979, the European Monetary System was created, fixing exchange rates on the European Currency Unit (ECU).
 
In 1986, the Single European Act formalised political cooperation in Europe and in 1988 Commission President Jacques Delors headed up a committee of central bank governors to create a new timetable for creating economic and monetary union in the EEC, which now included Denmark, Ireland and the UK.
 
Four years later, European leaders signed the Maastricht Treaty, agreeing to create a single currency, although without the UK, by 1999. The path towards the modern-day euro was set.
Members of the European Union meet to discuss the Maastricht Treaty, to discuss further integration of the EU, including establishing a common currency before 1999. 

The euro goes live

 
On New Year’s Eve in 1998, as planned in the Maastricht Treaty, Brussels announced the irrevocable conversion rates for participating nations. At midnight, the euro became the official currency of each of the 11 countries, used for virtual banking operations, cheque payments and payments made by bank card.
 
4 January was the euro’s baptism on the European exchange markets and it initially traded at just under $1.18. However, by the start of 2000, the euro had dipped to under a dollar and by October that year, had hit its all time low of $0.823. The European Central Bank (ECB) stepped in to support the euro twice over the course of the year, first selling €2.5bn of accumulated interest income on FX reserves and second, in a joint intervention with the Federal Reserve and Bank of Japan.
 
In 2002, the euro became tangible. Some 15 billion notes and more than 50 billion coins went into circulation, shaking up the lives of the now 304 million Europeans effected. And by July, the euro had once again reached parity with the dollar.
 
In 2003, Sweden joined the UK and Denmark in rejecting the euro. But over the course of the next decade the eurozone expanded rapidly, as new member states from Slovenia to Cyprus to Lithuania, all adopted the common currency. And in 2008, when the US was in the midst of a punitive subprime mortgage crisis, the Euro hit its all-time high against the dollar at $1.60.

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Crisis strikes

 

It wasn’t long, of course, before Europe succumbed to what became a global financial meltdown. By November 2008, the eurozone had officially entered a recession which lasted for more than a year and kickstarted a decade of extreme turbulence for the euro.
 
With its sky-high spending deficit, Greece was the first EU country to find itself teetering on the brink of collapse. And in May 2010, the EU and IMF issued a €110bn bail-out linked to a programme of austerity measures. A month later, the euro plunged below $1.20.
 
Over the course of the next two years, a collapsed housing bubble cause Ireland to seek an €85m rescue package and Portugal received €78bn. When Spain’s long-term interest rated soared above 7.6% on July 25, 2012, fears mounted that the euro was poised to collapse. A day later and head of the ECB, Mario Draghi, made his infamous proclamation that the bank would “do whatever it takes” to stop the currency falling apart.
 
That August, the ECB bought back €22bn of bonds to support Italy and Spain and in October the EU accepted wiping out part of Greece’s debt along with a second set of loans. In 2014, the euro neared $1.40 before falling back to $1.05 months later in a slump attributed to the start of an unprecedented programme of quantitative easing (QE).
 
The ECB has called a halt to its QE programme and indicated that interest rates may rise from the fourth quarter this year.

The QE years and beyond

 

In 2015, the ECB joined the Bank of England and Federal Reserve in launching a QE initiative that ultimately saw it buy E2.6trn in government and corporate bonds - an initiative that only ended this month.
 
The ECB also dropped interest rates to all-time lows. The eurozone’s main interest rate has now been at 0% for close to three years, while the deposit rate is negative, at -0.4%.
 
Despite downgrades in economic forecasts for the eurozone at the end of last year, amidst the prospect of Brexit, concerns around trade tensions between the US and China, as well as tensions between individual EU states, such as Italy, and Brussels, over budgets, the ECB has called a halt to its QE programme and indicated that interest rates may rise from the fourth quarter this year.
 
The euro now stands at $1.18, not far from where it started two decades ago. With tightening monetary policy and a degree of current under-pricing, we believe it is poised to rise over the course of 2019.
 
But as Brussels struggles to deliver on the political integration and fiscal architecture required to support a common currency which has undoubtedly helped integrate trade across Europe and which today serves 340 million people across 19 countries, the euro remains vulnerable to the shocks that will continue to come its way.
The opinions and views expressed in this article are for information purposes only and are subject to change without notice. They should not be viewed as recommendations or investment, legal, tax, accounting or other embarking on any course of action.

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