The Euro

Gary Arndt (0:00)

For centuries, European nations had their own currencies, each representing their national identity and economic independence. However, following the Second World War, European leaders began pursuing an ambitious idea that would require countries to surrender one of their most important symbols of sovereignty. It was a decades-in-the-making plan that promised enormous economic benefits, but also carried risks that nearly tore the continent apart. Learn more about the history, creation and challenges of the euro. On this episode of Everything Everywhere Daily.

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The Euro is one of the most ambitious economic experiments in modern history. It represents an effort to do something rarely attempted on such a scale. Create a single currency for numerous independent countries without a single government to control them all. The origins of the Euro trace back to the destruction of Europe during the Second World War. Following the war, European leaders sought to establish institutions that would make another major European conflict less likely. Their solution was to tie European economies together so closely that war between participating countries would become economically devastating and politically unthinkable. The process began with the European Coal and Steel Community in 1951, which brought together France, West Germany, Italy, Belgium, the Netherlands and Luxembourg. In 1957, the same country signed the Treaty of Rome, establishing the European Economic Community. The ultimate ambition was to create a common market in which goods, services, people and capital could move freely across national borders. However, this presented a problem. Although trade barriers could be eliminated, every participating country still maintained its own currency. France used the franc, West Germany used the Deutsche Mark, Italy used the lira, the Netherlands used the gilder, while Belgium used the Belgium franc. These currencies fluctuated against one another, and that created uncertainty for businesses engaging in international trade within Europe. A French company selling products to Germany might agree to a contract that seemed profitable, only to discover that changes in the franc mark exchange rate had wiped out its profit.

Currency exchanges also imposed costs on businesses, banks and travelers. During the 1960s, these problems seemed manageable because the international monetary system operated under the Bretton Woods agreement. Under Bretton Woods, major currencies maintained relatively fixed exchange rates against the US dollar, which was itself convertible into gold for foreign monetary authorities. The arrangement provided a degree of currency stability that helped European economic integration. In 1969, European leaders began formally discussing the possibility of establishing an economic and monetary union. Luxembourg's Prime Minister Pierre Werner chaired a committee to develop a plan. The resulting Werner Report published in 1970 proposed creating a European monetary union within approximately 10 years. Its proposals included permanently fixed exchange rates, the eventual elimination of separate national monetary policies, and closer coordination of economic decisions. The plan was remarkably ambitious, considering that European economic integration was still in its early stages. However, events soon overtook it. In particular, in August of 1971, American President Richard Nixon suspended the dollar's convertibility into gold, effectively ending the central pillar of the Bretton Woods system. By 1973, the world's major currencies had largely moved towards floating exchange rates. During the 1980s, European integration accelerated. The Single European Act, signed in 1986, set out a plan to complete Europe's single market by the end of 1992 European leaders increasingly argued that a single market would work better with a single currency. In 1988, the European Commission President Jacques Delors chaired a committee to examine how to achieve monetary union. The committee's 1989 report proposed a three-stage process leading to a common currency and an independent European central bank. It was called the Delors Plan. Political events gave the proposal additional momentum. In particular, the Berlin Wall fell in November of 1989, and Germany reunified in October of 1990 Some European leaders, particularly in France, believed closer European integration would help anchor a reunified Germany within European institutions. Monetary union was already being planned before the Berlin Wall fell, but German reunification strengthened the political urgency surrounding it. Germany initially resisted abandoning the Deutsche Mark, yet German leaders agreed to support a common currency, provided the new European monetary system emphasized price stability and central bank independence. The decisive political agreement came with the Maastricht Treaty, signed in the Netherlands on February 7, 1992 The treaty formally established the European Union and laid out the framework for economic and monetary union. The Maastricht Treaty entered into force on November 1, 1993, but it did not immediately create the Euro. Instead, it established the legal institutions and economic requirements countries needed to adopt a future common currency.