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Learning lessons from the Eurozone

It is hard to believe that the Euro is 15 years old, but it is. In fact, the notion of a shared currency unit for the European states was mooted back as far as 1929, but it took until 1979 it to finally start to take shape.

The catalyst for change was the collapse of the Bretton Woods agreement which linked currencies to the value of the US Dollar so the pathway was open to a different form of currency management.

So from 1979, the European Monetary System linked the currencies of Europe together through the European Currency Unit (ECU). This was little more than an accounting system to align currencies but it certainly began a series of negotiated steps to bring a shared hard currency into being.

One example was the German reunification, which despite being opposed by France, suddenly got French backing when Germany gave a commitment to a European monetary union. These deals and wrangles culminated in the signing of the Maastricht treaty in 1992: an agreement to create a shared currency by 1999 with criteria by which each country would become eligible to join.

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Sterling and Euro
At that stage, the British Pound was included in the Exchange Rate Mechanism (ERM) which maintained the exchange rate against the European Currency unit (ECU), as the Euro was formerly known. Sterling’s participation ended theatrically on 16 September 1992, or Black Wednesday as it’s now known. Speculators sold the Pound heavily because they saw vulnerability in the valuation that had been placed on the Pound at a time of poor UK economic performance. After a dramatic day in which interest rates were taken up into the 20 per cent area to no avail, Sterling had to be withdrawn from the ERM and the Pound was back to being a floating currency again.


In 2000, after a troubled first year, the Euro stopped weakening and began to assume the sort of strength you might expect from the second most liquid currency in the world, but things became a lot more volatile in the wake of the financial crisis of 2007/2008.

Since then, the European central bank has pumped significant amounts of funds into some of the vulnerable Euro-sharing states, notably the Mediterranean fringe countries, Spain, Portugal, Italy and Greece. The base interest rate has been cut to 0.25 per cent and yet there are few signs of recovery in the Eurozone other than in the German economy.

In spite of these turbulent times, the Euro has stayed together and has expanded from the 11 original users to 18 as of 2014. The Euro is also used as a peg against which a number of African countries value their local currency.

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In spite of this acceptance around the world as a reserve currency, the problems for the Eurozone persist. Adherence to the same base interest rate has exacerbated annihilated interest for the savers of Germany, whilst it has been not enough to create sufficient growth in the likes of Greece, Portugal and Spain where unemployment is at grotesquely high levels, especially amongst the young. The efforts by the Mediterranean countries to meet budget deficit targets have come at the cost of jobs and growth, and even brought rioters to the streets of Athens as austerity measures started to bite. Chris Madden via blake.co.za

Sharing a common currency without much closer financial and political integration is never going to be a trouble free undertaking and Europe has experienced the majority of the potential pitfalls over the last 14 years. So as Scotland and Quebec consider independence using their ‘old’ currency, they may consider the lessons of others and try to learn from their mistakes.

 

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