Cause and Effect in European Politics and Law

10 years Euro Area

Adelina Marini, January 8, 2008

This year is the 10th anniversary of the euro. The years are 10 because the single European currency has been for the first time introduced to the financial markets in 1998. It enters into circulation in 2002. Of course, in spite of the feeling of the people in the Eurozone member states that the euro is the reason for the increase of prices, it has its irrefutable benefits for the economy.

Everyone that travels relatively often around Europe can feel one of those benefits. Calculating different currency rates is not only exhausting and depressing but also leads to losses, because whenever there is currency exchange money are being lost either because of the commission or because of the margins in the different currency rates. The single currency is good for the business at least because it saves money.

According to economists in Brussels and also some officials at the Commission, the euro has nothing to do with inflation nor with high prices. There are arguments, of course, in support of both camps because many Europeans remember that in 2002 the prices were rounded to the higher and not the the lower rates. But the rounding itself is not the reason for the higher prices which we, the Bulgarians, can easily understand because we are still not members of the euro area and the prices in Bulgaria constantly rise because of different factors like the price of oil and foods.

No matter if the euro is good or bad, according to the Lisbon Treaty all member states should endorse the single currency with the exception of Denmark and the UK. The stages of accession are 2: joining the ERM2 (exchange rate mechanism) which is something like a doorstep toward full membership to the euro area and which is a test on whether a country can fulfill the Maastricht criteria. Those criteria are: sustainable stability of prices, budgetary deficit less than 3% of GDP, debt no more than 60% of GDP, stability of currency rate which is not relevant for Bulgaria as its currency is bound to the euro and together with Estonia we are in a currency board.

You know that last year on the 1st of January the first of the 10 new EU member states that joined the Union in 2004 introduced the euro and that is Slovenia (a former Yugoslav republic). And on the 1st of January this year Malta and Cyprus also joined the euro area thus making it of 15 member states. At the moment Slovakia and the Baltic states are in the ERM2. It is very interesting that these countries joined the ERM2 in 2004 together with their joining the EU and some of them joined the mechanism in 2005. Slovakia is the country which is expected to join the euro next year. Slovakia and Romania are the only countries that have a firm date for joining. Under question are Bulgaria, the Czech republic, Hungary, the Baltic states, Poland and Sweden.

From my discussion here in Brussels with economic analysts and representatives in the Commission I found out that the procedure that tests the preparedness of a country is quite loose. Generally all countries are obliged to present by 1st of April each year information about the realisation of their budgets and the balance for the year before. These data are being processed in Eurostat for about 20 days which makes it clear that it is physically impossible the European Statistical agency to make a thorough audit of the finances of a country, not to mention 27. Probably some of you remember that Greece was revealed to had given misleading data about its budgetary deficit. But according to officials this incident had been a little exaggerated because it is very difficult, for example, to estimate how much was spent in the military budget and for what.

For example, if Bulgaria buys an airplane on a leasing it would be very hard to estimate in the year that is being checked what part of the plane had been paid. Nevertheless, the Commission has significantly increased its control and at the moment is relying mainly on national statistical services, the experts of the ECB and the clear consciousness of the governments that if they try to supply the Commission with misleading data, this might prove more expensive. Besides in a binding community as the euro area the mistakes of a member state often reflect on rest.

A main tool of the Eurozone is the Stability and growth pact which keeps an eye on countries whether they follow tight fiscal policy. If there are systemic violations of the rules of the pact, severe fines might follow. According to most economic analysts, the national fiscal policies have much less significance than other structural policies. In other words, the long term reforms are more important than fiscal policies which often fall victims of pre-election calculations.

In conclusion, the introduction of the euro definitely has benefits, which can be seen with bare eye. One of them is price transparency. For example if you travel in south Germany it would be a good idea for you to drop by in Switzerland and fill your gas tank there because the price of the A95 gas is 1.04 euro while in Germany the price is much higher and in the gas stations alongside highways it might reach 1.49 euro. This is an illustration of the typical competition of the single European market which might lead to improvements on the national market if, of course, consumers are enough hard to please.

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