Updated: Feb 16, 2022
On the 20th anniversary of the euro banknotes and coins, on January 1st 2002 at midnight, the European Union saw the arrival of its single currency: the euro.
Goodbye to the escudo, the franc, the peseta or the deutschemark... Fifteen billion euros banknotes and more than 50 billion euros coins were introduced on the market. The arrival of the euro will change the daily lives of 304 million Europeans. It is the first time that sovereign, equal countries decide to abandon their currencies and have a new common monetary history. Today, the Euro is the official currency of 19 of the 27 EU member states (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain) [symbol: €], divided into 100 cents. (The Euro has also been adopted as the national currency in Monaco, the Vatican and San Marino. And it is the de facto currency of Andorra, Kosovo and Montenegro).
The euro is the second most traded currency in the world, behind the US dollar.
The euro is managed by the European Central Bank (ECB) in Frankfurt and the Eurosystem, which is made up of the central banks of the euro area countries. As an independent central bank, the ECB is the only body with the power to set monetary policy for the entire euro area. The Eurosystem is involved in the printing, minting and distribution of banknotes and coins in all Member States and ensures the smooth functioning of payment systems within the euro area.
The Maastricht Treaty, signed in 1992, obliges most EU countries to adopt the euro once they meet certain monetary and budgetary criteria, known as convergence criteria. However, the UK and Denmark have been given opt-outs, while Sweden (which joined the EU in 1995, after the signing of the Maastricht Treaty) refuses to introduce the euro, after a negative referendum in 2003, and furthermore circumvents the obligation to adopt the euro by not meeting one of the convergence criteria. Nevertheless, all countries joining the EU since 1993 have committed themselves to adopt the euro in due course.
Coins and Banknotes
All euro coins have a common European side (1, 2 and 5 cents: Europe in the world; 10, 20 and 50 cents: Europe as an alliance of states; €1 and €2: Europe without borders) and a side specific to the issuing country (including Monaco, San Marino, the Vatican and Andorra, states in a monetary union with their immediate neighbours that are allowed to mint their own coins).
A new series of coins have been minted since the end of 2007, with a one-year delay for the Italian coinage (which also mints the Vatican and San Marino coins). Following the practice decided for banknotes, it now represents the whole of the European continent (whether or not it is a member of the Union), in order to avoid having to mint new series for each enlargement. Borders are therefore no longer visible.
All coins can be used in all Member States, except for collector coins, whether or not they are made of precious metal, which is only valid in the country of the issue. However, compatibility problems have been noted with certain machines (vending machines, toll booths, etc.).
The banknotes have a common design for the whole euro area. The bridges, doors and windows on the banknotes symbolize Europe's openness to the rest of the world and the links between people.
The European Central Bank is responsible for the design of the banknotes, while the Member States of the Eurogroup are responsible for the design of the coins. The next common face was thus decided at a Eurogroup meeting. This decision provoked a small controversy on the part of some MEPs because of the absence, according to them, of Turkey on the design chosen, unlike that of the banknotes.
The euro is not the first currency with a European (and international) vocation. Indeed, the Latin Union, born in 1865 on the initiative of Napoleon III, marks a monetary union, or supranational, signed and shared by France, Belgium, Switzerland, Italy, Greece and, later, Spain and Portugal, then Russia and some Latin American countries. The First World War (1914-1918) put an end to this monetary unification project.
The project to create a common currency was born in the 1970s with the turbulence of the agrimonetary system, since the implementation of the Common Agricultural Policy in 1962, and the impossibility of setting up a controllable exchange rate system.
The European Currency Unit was established in the 1970s.
The Maastricht negotiations
The decision to create the euro was formalized in the Maastricht Treaty. When the negotiations were launched, the leaders knew that, economically, the creation of the eurozone was a challenge. Indeed, economists have known since the work of Robert Mundell (in the 1950s) that, for countries to have an interest in having the same currency, they must:
be economically integrated;
not to have economies that react too differently to economic shocks;
to have mechanisms to remedy existing or potential divergences; among these mechanisms, migration in response to wage differentials, movements in the case of yield differentials, or simply internal flexibility of the price system in response to variations in demand". When the common currency was created, policymakers knew that, while asymmetries between European countries were no greater than between American states, the core European countries (Germany, France and a few others) had fewer divergences than those found in the periphery. They also know that the adjustment mechanisms are weak. Furthermore, Paul Krugman points out that integration will favour the regrouping of industries in the same economic regions, which will increase divergences between countries instead of reducing them.
There are two opposing visions:
On the one hand, the prevailing one of a stability pact with rather weak multilateral surveillance, based on the idea that if everyone manages their public finances and their economy soundly, developments would be positive.
On the other hand, some advocate compliance with the pact within a more proactive Eurozone, as part of an "enhanced cooperation". The eurozone, in this perspective, would have participated in the establishment of "a long-term agenda for structural reforms, such as the extension of working lives". Moreover, the idea of the French federalists who, under the heading of economic government, intended above all to reaffirm the link between currency and state, is opposed to that of the Germans for whom the currency is not so much that of a state as of a community.
Switching to the Euro
The euro was created by the provisions of the Maastricht Treaty in 1992. To participate in the common currency, Member States are supposed to meet strict criteria such as a budget deficit of less than 3% of GDP, a debt level below 60% of GDP (both of which are regularly violated after the introduction of the euro), low inflation and interest rates close to the EU average. When the Maastricht Treaty was signed, the UK and Denmark were given opt-outs from the monetary union that would result in the introduction of the euro.
Many economists such as Fred Arditti, Neil Dowling, Wim Duisenberg, Robert Mundell, Tommaso Padoa-Schioppa and Robert Tollison participate in the creation of the common currency.
The name "euro" was officially adopted in Madrid on 16 December 1995. The Belgian Esperantist, Germain Pirlot, a former French and history teacher, was appointed to name the new currency; he sent a letter to the President of the European Commission, Jacques Santer, and suggested the name "euro" on 4 August 1995.
The conversion rates are determined by the Council of the European Union based on a recommendation from the European Commission, based on market rates as of 31 December 1998. They are set so that one European Currency Unit (ECU) would be equal to one euro. The European Currency Unit was a unit of account used by the EU and calculated based on the currencies of the Member States. It was not a currency in its own right. The rates could not be set earlier because the value of an ECU depended on the exchange rates of the non-euro currencies (such as the pound sterling) at the close of business on that day.
The procedure used to fix the irrevocable exchange rate between the Greek drachma and the euro is different: while the exchange rates for the original eleven currencies are determined only a few hours before the euro is introduced, the conversion rate of the Greek drachma is fixed several months in advance.
The currency was introduced in intangible form (travellers' cheques, electronic transfers, banking services, etc.) at midnight on 1 January 1999 in the eleven countries forming the newly created euro area: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The national currencies of the participating countries cease to exist independently. The exchange rates are then locked in at fixed rates against each other. The euro thus becomes the successor to the European Currency Unit (ECU). However, the banknotes and coins of the old currencies continue to be legal tender until the euro banknotes and coins are introduced on 1 January 2002.
Five surprising things to know about the euro
1. Old currencies are (sometimes) still prized
They can be found under a mattress, in grandma's furniture, when renovating a flat: the national currencies that preceded the euro are far from having vanished.
In Berlin and the neighbouring region of Brandenburg alone, some 2.63 million German marks were exchanged between January and the end of November this year, equivalent to around 1.35 million euros.
The Bundesbank assumes that nationwide there are still cash holdings of about 12.35 billion Deutschmarks (6.31 billion euros).
Some are kept by collectors, others are certainly abroad, as the mark was for a long time a popular reserve currency.
There is no limit to the exchange of coins and banknotes of the former national currency into euros, just as in Austria, Ireland or the three Baltic States.
Italy, since 2011, and France and Greece, since 2012, no longer use the old currency.
2. Large denominations are not popular
Many Europeans have never seen the colour - purple: since 2019, the production of 500 euros banknotes has been stopped by the decision of the European Central Bank. Apart from the fact that it was rarely used in everyday life, this banknote was suspected of facilitating illegal transactions.
500 euros banknotes issued between 2002 and 2019 is still allowed and as of November, there were still some 376 million purple notes in circulation.
3. Neither is the small ones
Is a similar fate awaiting the one- and two-cent coins? The question of stopping the production of the smallest coins in the euro area is regularly on the agenda.
Not only are these coins cumbersome for some, but they are also expensive to produce.
Belgium, the Netherlands, Ireland, Finland and Italy have already opted to phase out the coins by asking retailers to round up their bills.
4. There is such a thing as a zero note
It has the size, the colour, the design of an ECB banknote: the zero euro banknote appeared in 2015 and has become very popular... among collectors.
French entrepreneur Richard Faille had the idea of creating banknotes initially sold as souvenirs to tourists: on one side, they are illustrated with a site or monument (Eiffel Tower, Mont-Saint-Michel, etc.); on the other, a zero followed by the euro sign reminds us that they have no value.
Approved by the ECB, these banknotes are printed with the same technical characteristics as the euros: watermark, security thread, inks, holograms or individual security numbers. The resemblance is striking, but the paper used differs from that of the real banknotes.
To avoid disputes, euro banknotes are illustrated with imaginary architecture rather than existing monuments.
5. It must be declared to customs
In Europe, the transport of €10,000 or more in cash to or from abroad must be declared to customs.
In a modern version of the woollen stocking, a man travelling from France to Spain was intercepted in April by customs officers at Le Perthus, who found €388 460 hidden in 25 socks when they searched his German-registered van.
The bundles declared in transit are much larger on average. In 2020, German customs counted 13 335 declarations for a total of 31 billion euros, an average of 2.3 million euros per declaration.