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The Launch of the Euro
Carol C. Bertaut and Murat F. Iyigun, of the Board’s Division of International Finance, prepared thisarticle. Tim Troha provided research assistance
.The introduction on January 1, 1999, of the euro—the single currency adopted by eleven of the fifteencountries of the European Union—marked the begin-ning of the final stage of Economic and MonetaryUnion and the start of a new era in Europe. Thishistoric achievement was the culmination of a lengthyprocess that began in March 1957, when six Euro-pean nations—Belgium, France, Germany, Italy, Lux-embourg, and the Netherlands—signed the Treaty of Rome, thereby founding the European EconomicCommunity (EEC).
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The Treaty came into effect onJanuary 1, 1958, exactly forty-one years before theinception of the new single European currency.
2
Although the Treaty of Rome created a closereconomic union among member countries, thesecountries did not at the time envisage an actualmonetary union. In 1971, a group of European ex-perts developed a proposal for coordinated or harmo-nized monetary policy among EEC members; thisproposal was made explicit in the Werner plan. Fur-ther progress toward monetary integration was set inmotion by the establishment in 1979 of a system of stable, but adjustable, exchange rates known as theEuropean Monetary System. The first major revisionto the Treaty of Rome was the Single European Act,signed in 1986, which affirmed old objectives and setnew ones, including the establishment of a Europeansingle market and the gradual realization of monetaryunion. In 1989, specific stages toward achieving Eco-nomic and Monetary Union (EMU) were detailed inthe Delors Committee report, and in December 1991in the Dutch city of Maastricht, European Union(EU) nations produced the Treaty on EuropeanUnion.
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This treaty, generally referred to as the MaastrichtTreaty, became the effective ‘‘constitution’’ for EMU,providing the criteria for judging macroeconomicconvergence and laying the groundwork for the even-tual establishment of the European Central Bank.
4
Inearly May 1998, the heads of state or governmentof the fifteen EU countries agreed that eleven coun-tries (Austria, Belgium, Finland, France, Germany,Ireland, Italy, Luxembourg, the Netherlands, Portu-gal, and Spain) should move forward into the finalstage of EMU, creating an economic area comparablein size to that of the United States (table 1). TheEuropean Commission of the European Union andthe European Monetary Institute evaluated eachcountry’s readiness for entry on the basis of the
1. The Treaty of Rome was preceded in 1951 by the Treaty of Paristo which the same six European nations were signatories; the Treatyof Paris established the European Coal and Steel Community, whichaimed at the more-limited objective of pooling the coal and steelresources of member countries.2. Over the years, membership in the EEC, which was renamed theEuropean Union, grew from the initial six countries to fifteen, withDenmark, Ireland, and the United Kingdom becoming full members in1973, Greece in 1981, Spain and Portugal in 1986, and Austria,Finland, and Sweden in 1995.3. For further background on the stages leading up to EMU, seeHerve´ Carre´ and Karen H. Johnson, ‘‘Progress toward a EuropeanMonetary Union,’’
Federal Reserve Bulletin
, vol. 77 (October 1991),pp. 769–83; Peter Kenen,
Economic and Monetary Union in Europe: Moving beyond Maastricht 
(Cambridge University Press, 1995), andRobert Solomon,
Money on the Move: The Revolution in InternationalFinance since 1980
(Princeton University Press, 1999).4. The Maastricht Treaty also provided the legal basis for theEuropean Central Bank and protocols for the European System of Central Banks (ESCB) and the European Monetary Institute (EMI).The ESCB comprises the European Central Bank and the fifteenEU-member national central banks. The EMI was the precursor to theECB. During its transitory existence between January 1994 and July1998, the EMI worked to strengthen cooperation and monetary policycoordination among national central banks and to facilitate prepara-tions for the establishment of the ESCB.
1. Comparison of the euro area and the United States
Percent except as notedItem Euro area United StatesPopulation (1997, millions) ............... 282 268Nominal GDP (1998, trillions of dollars) .. 6.6 8.5Inflation (June 1999, twelve-monthpercent change)
1
.................... .9 2.0Unemployment rate (July 1999)
2
......... 10.3 4.3Exports as a share of GDP (1998) ......... 33.7 11.3Excluding intra-euro-area trade ......... 13.5 . . .Imports as a share of GDP (1998) ......... 31.5 13.0Excluding intra-euro-area trade ......... 12.1 . . .1. Euro-area harmonized inflation is calculated from a weighted average of harmonized consumer price indexes for individual countries. The harmonizedindexes are constructed by standardizing some aspects of statistical practice andeliminating categories from national consumer price indexes, leaving indexeswith basically identical coverage across countries.2. Euro-area unemployment estimates are based on the results of the Euro-pean Community Labour Force Survey.. . . Not applicable.
 
performance criteria for inflation, fiscal policy, long-term interest rates, and exchange rates and on theconformity of each country’s national central bank legislation with the Maastricht Treaty. The EuropeanCentral Bank came into formal existence on June 1,1998, and took over responsibility for the monetarypolicy of the EMU member states on January 1,1999.The creation of a single currency and a singlemonetary policy has provided both extraordinarychallenges and exceptional opportunities withinEurope. A new financial infrastructure was necessaryto handle transactions in the new currency. Althoughthe euro does not yet exist as a physical currency—bank notes and coins will not be introduced until2002—the euro is traded in financial markets, newissues of securities are denominated in euros, andofficial statistics in the euro area are quoted in theeuro (table 2). For financial firms, the creation of theeuro required conversion of numerous existingaccounts and systems for trading, risk analysis, andliquidity management to the new currency. Althoughdevelopment of these systems had been ongoing forseveral years, the actual switchover took place overthe long ‘‘conversion weekend’’ from the close of business on December 31, 1998, through the openingof business on January 4, 1999. Round-the-clock efforts in major financial centers were necessary forhandling the complexities of re-denominating euro-area government bonds to the new currency, convert-ing financial accounts, and doing final testing of thesystem for interbank payments. Now that the initialtransition has been successfully completed, the estab-lishment of the single monetary area and the removalof currency risk among member countries is expectedto provide unprecedented opportunities for cross-border trading, portfolio expansion, and mergers andacquisitions among European companies.This article reviews the organization, objectives,and targets of the euro area’s new central bank anddiscusses some of the early challenges it has faced insetting and implementing monetary policy with thenew common currency. It discusses the initial func-tioning of the payment system and the interbank market and reviews the effects to date of the singlecurrency on European bond and equity markets, onthe banking system, and in euro-area transactions.
O
 RGANIZATION OF THE 
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 EW 
E 
UROPEAN 
C 
 ENTRAL
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 ANK AND THE 
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UROSYSTEM 
With the start of the final stage of EMU, monetarypolicy is no longer set individually at each of thenational central banks of the euro-area countries.Instead, monetary policy is determined for the euroarea as a whole by the Eurosystem. The Eurosystemcomprises the new European Central Bank (ECB) atits center as well as the national central banks of theeleven countries currently participating in the mone-tary union.
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The Maastricht Treaty grants the ECBfull constitutional independence. It explicitly statesthat neither the ECB nor any member of its decision-making bodies shall seek or take instructions fromEuropean Commission institutions, from any govern-ment of a member state, or from any other organiza-tion or institution. The primary decisionmaking bod-ies of the ECB are the Executive Board and theGoverning Council. The Executive Board consists of the president and vice president of the ECB and fourother members (table 3). These members are ap-pointed by common agreement among the govern-ments of EMU member states on a recommendationfrom the EU Council after consulting with the Euro-pean Parliament. The members of the ExecutiveBoard are also members of the Governing Council,along with the governors of the national central banksof the eleven EMU member countries. The primaryresponsibility of the Governing Council is the settingof monetary policy within the euro area. The primaryresponsibility of the Executive Board is to implementmonetary policy and to issue instructions as neces-sary to the national central banks in accordance withthe guidelines of the Governing Council. Althoughrequired by law to meet at least ten times a year, theGoverning Council in practice meets every two
5. The ESCB includes the ECB and the national central banks fromall fifteen EU member states. At the time that the Maastricht Treatywas signed, it was generally understood that all EU countries wouldenter into EMU at the same time, and the Maastricht Treaty refers tothe ESCB and not the Eurosystem. The national central banks of themember states that do not participate in the Eurosystem are membersof the ESCB but have a special status; they are allowed to conducttheir respective national monetary policies, and they do not take partin the decisionmaking regarding euro-area monetary policy and itsimplementation.
2. Official currency conversion rates
Country Currency Currency units per euroAustria ............... schilling 13.7603Belgium ............. franc 40.3399Finland .............. markka 5.94573France ............... franc 6.55957Germany ............. mark 1.95583Ireland ............... punt .787564Italy ................. lira 1936.27Luxembourg ......... franc 40.3399Netherlands .......... guilder 2.20371Portugal ............. escudo 200.482Spain ................ peseta 166.386
Source.
European Central Bank.
656 Federal Reserve Bulletin October 1999
 
weeks, a schedule similar to that employed by theGerman Bundesbank through December 1998.
Objectives and Targets
As specified in the Maastricht Treaty, the primaryobjective of the ECB is to ‘‘maintain price stability.’’Without jeopardizing this objective, the ECB is alsoexpected to support the general economic policies of the European Commission. In this respect, the man-date of the ECB is similar to that of the Bundesbank.Section 3 of the Deutsche Bundesbank Act, whichwas signed into law in 1957 and later amended tocomply with the Maastricht Treaty, names the mainduties of the central bank as the regulation of theamount of money in circulation and of credit suppliedto the economy with the aim of ‘‘safeguarding thecurrency.’’ In practice, safeguarding the currency wasinterpreted to mean price stability. In comparison, theFederal Reserve Act states that U.S. monetary policyshould seek ‘‘to promote effectively the goals of maximum employment, stable prices, and moderatelong-term interest rates.’’The ECB’s published definition of price stability isinflation, measured as the twelve-month change inthe harmonized index of consumer prices for the euroarea, of below 2 percent—with no explicitly definedlower bound.
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Although the ultimate goal of euro-area monetary policy is clearly specified as pricestability, the Governing Council of the ECB hasadopted a flexible approach toward achieving thisgoal. Unlike the Bundesbank, which followed aspecific intermediate target for a broad monetaryaggregate, the Governing Council would—as WimDuisenberg, president of the ECB, announced inOctober 1998—take into consideration a ‘‘referencevalue’’ for growth of a monetary aggregate and a mixof other indicators defined as ‘‘a broadly-basedassessment of the outlook for future price develop-
6. Harmonized inflation for the euro area is calculated from aweighted average of harmonized consumer price indexes for indi-vidual countries. The harmonized indexes are constructed by standard-izing some aspects of statistical practice and eliminating categoriesfrom national consumer price indexes, leaving indexes with basicallyidentical coverage across countries.
3. Comparison of the organizational structure of the Eurosystem and the Federal Reserve SystemItem Eurosystem Federal Reserve SystemStaffingTotal 53,000+ 24,500+At headquarters 500+ 1,700+Monetary policy decisionmakingcommitteeThe Governing Council The Federal Open Market CommitteeNumber of members on themonetary policy committeeSeventeen: six members of the ExecutiveBoard plus eleven governors of the nationalcentral banks of EMU member states.Twelve: seven members of the Boardof Governors, plus the president of theFederal Reserve Bank of New York, andfour of the remaining eleven regionalFederal Reserve Bank presidents rotatingon a one-year basis.Geographic representation No specific requirements for the sixExecutive Board members.No more than one member of the Boardof Governors may be selected from anyof the twelve Federal Reserve Districts.Meeting frequency At least ten meetings per year requiredby law. In practice, bi-monthly, everyother Thursday.At least four meetings per year requiredby law. In practice, eight times per year.Publication of minutes Minutes accessible after thirty years. Inspecial cases, the Governing Council mayshorten this period. The president and thevice president hold a press conferencefollowing the first Governing Councilmeeting of each month.Minutes released a few days after thenext regularly scheduled FOMC meeting.Lightly edited transcripts of all meetingsfor a complete year released after a lagof five years.Regulatory and supervisoryresponsibilitiesMost of the key prudential regulationsare harmonized in the EU. The primaryresponsibility for supervision remains atthe national level. European BankingSupervisory Committee of the ECB aimsto ensure coordinated supervision.Primary responsibility for supervisingand regulating all bank holding compa-nies and their nonbank foreign subsidi-aries, state-chartered banks that aremembers of the Federal Reserve andtheir foreign branches, and Edge Actand agreement corporations.
The Launch of the Euro
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