UNIVERSITY AMERICAN COLLEGE SKOPJE

MASTER IN APPLIED ECONOMICS

MASTER THESIS
THE EURO – 20 YEARS LATER,
ECONOMIC PROSPERITY AND
STABILITY OF THE EUROPEAN
MONETARY UNION

Student Mentor
Aleksandar Stoilkov Marjan Petreski

Skopje, 2023

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Content
ABSTRACT..........................................................................................................................................3
DECLARATION...................................................................................................................................4
List of figures........................................................................................................................................5
List of charts..........................................................................................................................................6
CHAPTER I.........................................................................................................................................7
1. INTRODUCTION.........................................................................................................................7
STRUCTURE........................................................................................................................................8
CHAPTER II.....................................................................................................................................11
1 LITERATURE REVIEW – Monetary politics of the European Union........................................11
2.1. THE CONCEPT OF MONETARY POLICY......................................................................11
2.2 EUROPEAN MONETARY UNION.........................................................................................13
1.2.1 Stages in the development of the European Monetary Union......................................13
1.2.2 Advantages and disadvantages of the European Monetary Union................................16
2.3 EUROPEAN CENTRAL BANK (ECB)...................................................................................18
2.3.1 The Single Supervisory Mechanism (SSM).................................................................19
2.3.2 Who is supervised?......................................................................................................20
2.3.3 Which countries participate?........................................................................................21
2.3.4 Independence of the European Central Bank...............................................................22
2.3.5 Tasks and objectives of the European Central Bank....................................................23
CHAPTER III....................................................................................................................................25
3 EURO - CHARACTERISTICS, INTRODUCTION, FUTURE..................................................25
3.1 THE THREE PHASES OF THE EURO CURRENCY.......................................................27
3.1.1 First phase....................................................................................................................27
3.1.2 Second phase...............................................................................................................28
3.1.3 Third phase..................................................................................................................35
3.2 ADVANTAGES AND DISADVANTAGES OF INTRODUCING THE EURO................37
3.3 FUTURE PROGNOSIS OF THE EURO CURRENCY......................................................38
3.4 DIGITAL EURO – INVESTIGATION AND PROGRESS.................................................43
3.4.1 Transfer mechanism.....................................................................................................46
3.4.2 Privacy.........................................................................................................................47
3.4.3 Tools to control the amount of digital euro in circulation............................................49
CHAPTER IV....................................................................................................................................51
4 METHODOLOGY......................................................................................................................51

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 4.1 RESEARCH AIM AND OBJECTIVES..............................................................................51
4.2 ELABORATION OF THE INSTRUMENT........................................................................51
4.3 RESEARCH QUESTION AND DATA COLLECTION PROCESS...................................51
CHAPTER V......................................................................................................................................56
5 DISCUSSION..............................................................................................................................56
WORLD PRICE SHOCK ARISING FROM COMMODITY PRICES IN 2008 AND 2022...........60
CHAPTER VI....................................................................................................................................65
6 CONCLUSION AND RECOMMENDATIONS FOR FURTHER RESEARCH........................65
REFERENCES....................................................................................................................................68

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 ABSTRACT

The monetary union is a single currency area and a wide economic space composed of
member states. With this in mind, the single monetary policy of the Eurozone (EZ) is
implemented at the level of the central banks of the member states of the European Union and
the European Central Bank, which together form the European system of central banks. The
European Economic Monetary Union, established in 1999, is a single currency area
consisting of 19 member states. Latest info comes from Croatia and their implementation of
the Euro.
After a decade of preparations, the Euro was launched on 1 January 1999: for the first three
years it was an ‘invisible’ currency, only used for accounting purposes and electronic
payments. Coins and banknotes were launched on 1 January 2002, and in 12 EU countries the
biggest cash changeover in history took place.
Now, as the 20 year anniversary passed in 2019 and the euro currency had become even
stronger after the stressful period with the Corona Virus, the new challenge rises in front of
the currency. The Russian aggression towards Ukraine is going to provoke new strokes on the
stability of the currency or better said the stability of the world.
Keywords: monetary union single currency, challenges within its existence in the past,
provocative future for the euro currency

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 DECLARATION

I hereby declare that the following Master thesis “The Euro – 20 years later, economic
prosperity and stability of the European Monetary Union” is my original work, and all data
gathered, analyzed and presented in this Master thesis are collected in the most professional
and ethical manner. All sources used or quoted in this work are indicated and acknowledged
in a detailed reference list.

Aleksandar Stoilkov
UACS
February, 2023

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List of figures

Figure 1: Eurozone Area – pp.26

Figure 2: Overall index HICP Inflation rate presented by ECB in 2022 – pp.41
Figure 3. Consumer price index in USA in 2022 – pp.41
Figure no.4 Overall index and breakdown by components in the Euro Area represented by
ECB – pp.43
Figure 5. inflation rate for the past 10 years in the USA – pp.43
Figure 6: The process of how the digitization of the euro will take place – pp.46
Figure 7: core elements of the three options – pp.47
Figure 8. Privacy options – pp.49
Figure no. 9 Commodity prices January 2020 – March 2022 – pp.62
Figure. 10 Oil and Gas Investment as Share of World GDP (%US$/barrel) – pp.63

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List of charts
Chart 1: Euro Area Consumer Price Inflation as Measured by the Year over Year percentage
Change in Harmonized Index of Consumer prices – pp.30
Chart 2: EU GDP and unemployment (2005 – 2017) – pp.31
Chart 3: Government debt 2006 -2017 – pp. 33
Chart 4: Unemployment by age group 2021 – pp. 35
Chart 5: the international role of the euro remained stable in 2021 – pp. 38
Chart 6: the euro remained the second most currency in the international monetary system –
pp. 39
Chart 7: US Dollar – Euro exchange rate from 31-01-1999 to 30-06-2022 – pp.52
Chart 8: US Dollar – Inflation rate (HICP) - pp.52
Chart 9: Unemployment rate (as a % of labor force) - pp.53
Chart 10: labor productivity (per person) – pp.53
Chart 11: Monetary aggregate M3- pp.54
Chart 12: Current account balance Percentage of GDP – pp.54
Chart 13: Government deficit (-) / surplus (+) (as a % of GDP) – pp.55
Chart 14: Government debt (as a % of GDP) – pp. 55

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 CHAPTER I

1. INTRODUCTION

The master's thesis discusses the theoretical and empirical determinations of the
importance of implementing the concept of one monetary politics in the EU. The idea and the
implementation of the Euro as one common currency for the member states of the EU.
The subject of research of this master thesis is the Euro, how this one currency
changed the European Community, how it affected the Union when the countries accepted it
and what were/ are the benefits of the euro for the individuals, businesses within the Union
and the economies of the countries that use it, as it enables the government to plan for the
future.
The focus point of the thesis is to present the real situation of the costs and the
benefits of the monetary integration according to the specifics of the Eurozone (hereinafter:
EZ) countries. The countries differ in historical, economic, political, and social aspects, and
hence, different theories, rules, and expectations apply. Therefore, due to the respective
differences in the nature of the EZ countries, different benefits from monetary integration
benefits, the countries have obtained.
The benefits that the euro brought to the European Union are interconnected in
aspects of stability of the EU member countries: The euro has eliminated the costs of
exchange rate fluctuations within the euro area. This protects consumers and businesses
within the euro area from costly swings in currency markets, which, in some countries, used
to undermine confidence, discourage investment and cause economic instability. Before the
euro, the need to exchange currencies meant extra costs, risks and a lack of transparency in
transactions between countries. Using a single currency makes doing business and investing
in the euro area easier, cheaper and less risky.
By making it easy to compare prices, the euro encourages trade and investment of all
kinds between countries. It also helps individual consumers and businesses to secure the best
prices.
The scale of the single currency and the size of the euro zone also bring new
opportunities in the global economy. A single currency makes the euro zone a more attractive
region for non-EU countries to do business with, thus promoting trade and investment.

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Prudent economic management makes the euro an attractive reserve currency for non-EU
countries and gives the euro zone a more powerful voice in the global economy. The euro is
the world’s second most popular reserve currency.
The stability of the euro also makes it attractive for businesses around the world that
trade with Europe to accept prices quoted in euros. This saves European businesses from the
costs associated with shifts in exchange rates and the cost of converting euros into other
currencies. The euro is the currency of choice for almost 40% of global cross-border
payments and for almost half the EU’s exports worldwide.
Scale and careful management also bring economic stability to the euro zone, making
it more resilient to external economic 'shocks', i.e. sudden economic changes that may arise
outside the euro zone and disrupt national economies, such as worldwide oil price rises or
turbulence on global currency markets. The size and strength of the euro zone make it better
able to absorb such external shocks without job losses and lower growth. (Ingram, Ingram,
1973).
First, the euro zone economy benefits from prudent management. The EU’s economic
and fiscal rules, including the Stability and Growth Pact, a central component of Economic
and Monetary Union, promote economic stability and growth. Second, the euro is the key
mechanism for maximising the benefits of the single market, trade policy and political
cooperation. As such, it is an integral part of the economic, social and political structures of
today’s European Union.(EU Institutions Law Budget).
There is still a lack of reliable empirical data about which eurozone countries have
gained from the introduction of the euro and which ones have lost out. Although there have
been studies of whether the euro has promoted trade between eurozone countries, (Berger,
Nitch 2005) the results are not clear-cut. In addition, focussing on trade only throws light on a
small aspect of the introduction of the euro. Disadvantages of introducing the euro arising
from the fact that eurozone countries can no longer devalue their currencies, remain
unaccounted for.
This master thesis is consisted of several chapters:

STRUCTURE
Chapter 1 - Introduction the main goal of the study is provided, along the objectives
of the research. There is also a short overview of the findings, the limitations and
recommendations for further research.

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 Chapter 2 - Literature Review shows the importance of the EU monetary policy is
expressed in the conditions of the existence of the monetary union. As a highest level of
economic integration, the monetary union is a single currency area and a wide economic
space composed of member states. With this in mind, the single monetary policy of the
European Union is implemented at the level of the central banks of the member states of the
European Union and the European Central Bank, which together form the European system
of central banks. The European Monetary Union, established in 1999, is a single currency
area consisting of 27 member states, with a single market, single market conditions and
macroeconomic objectives. The importance of the EU monetary policy is expressed in the
conditions of the existence of the monetary union.
Chapter 3 – Phases of the euro currency from the beginning until today and in future
prognosis.
The first peaceful period started with the implementation of the euro as a single
currency in EU accepted by the member countries, the second period with the crisis in 2008
and 2009 and the countries
The second period that was characterized as the most turbulent period of the euro as a
single currency in the EU because of the falls and the crisis of some countries like Greece,
Spain Malta etc. How the EU managed to overcome the crisis, which institutions were
formed back then to resolve the problems and how did they manage to overcome the great
crisis?
After three decades of working on the idea, in January 2019, exactly 20 years passed
since the launch of the "big project" on a common currency in the European Union. The
formation of the European Monetary Union and the single currency was a major step forward
in the process of economic integration in Europe.
The EU is the most stable and most preferable Union for the non-EU countries like
ours that intend to be members and wait to fulfill the conditions to start the process of joining
the big EU family.
Chapter 4 – Methodology – explains the aims and objectives and the
methodology of the research questions and collection of data. The aim of this paper is to
analyze the impact of the Euro as one common currency and to show the benefits of one
currency in the EU, how it affected on the stability of all the EU member states on
productivity, growth and employment, and economic prosperity in general.
The research question of this master thesis was to find out the if with the introduction of the
euro as a single currency in EU state members had brought more benefits to the Union or

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more damage and since the euro is still a current currency in the European Union how it
affects the stability of the economy of the European Union.
Chapter 5 – Discussion on the relevant graphs that are obtained from the site of
European union and can confirm or reject the hypothesis of this master thesis.
Over the past 20 years, the EU has faced numerous challenges. In that period, there was a
general consensus regarding the stabilizing role of economic policy, according to which
significant priority was given to monetary policy, while fiscal policy had a relatively passive
role, which was reduced to maintaining public debt within acceptable limits. Fiscal policy
measures began to be used more intensively after the world economic crisis in 2008, but the
application of restrictive measures led to a new shock that hit the members of the Eurozone in
2010. After that, monetary policy was again the main instrument for stabilizing the economy,
but soon all the capacities of conventional measures were exhausted, central banks switched
to unconventional measures to fight low inflation (but also deflation in some member states)
and low growth rates.
Compared to the Russian invasion that had not only resulted in fatalities and destruction
in Ukraine, but it also had a substantial negative impact on the world economy. New rounds
of supply chain disruptions and higher commodity prices have already caused downward
revisions in economic growth projections, along with higher inflation. This is in addition to
the geopolitical effects of the war, which reinforce the downward trend in trade globalization
and financial integration.
Chapter 6 – Conclusions and future research.
20 years after its introduction, the role of the euro as an international currency remains under
debate. While the euro has become and remains to be the second most important currency in
the international financial system, by most measures it continues to lag the US dollar by a
wide margin. Following a rise in importance in the first decade since its inception, the euro
experienced a setback between 2008 and 2014 in the wake of the global financial crisis and
the European sovereign debt crisis. These developments suggest that the euro’s international
use is highly dependent on the stability of the euro financial markets and the credibility of the
euro area institutions. As imports from the Russian Federation accounted for almost 25 per cent
of Europe’s energy consumption in 2020, a sudden halt in oil and natural gas flows from the
Russian Federation would likely further increase energy prices and exacerbate inflationary
pressures. EU member states from Eastern Europe and the Baltic region are severely impacted as
they are already experiencing inflation rates well above the EU average.

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 Despite the Russian invasion in Ukraine and the current situation of the European
Union that stands upright in front of the challenges brought by the world’s far biggest crisis
and the changing rates of the euro currency it can be said that the Union, as always, will be
the symbol of stability in all the member countries od EU.

CHAPTER II

1 LITERATURE REVIEW – Monetary politics of the European

Union

1.1. THE CONCEPT OF MONETARY POLICY

Monetary policy is a policy adopted by the state for the stability of domestic money
and implemented through the central bank as a body of monetary authority. In this regard,
monetary policy should be viewed as the policy of the state, which has the task of regulating
the amount of money in circulation by various issuance, credit and foreign exchange
instruments prescribed by the central bank. All this aims to maintain a dynamic monetary
balance as the basic goal of modern economic policy of every country (Furtula, Markovic,
2010).
Monetary policy is part of a general economic policy consisting of a set of
measures that affect the course of economic life by creating, annulling, distributing and
redistributing the purchasing power of money in the national economy. (Hadzic, 2010)
When it comes to monetary policy goals, central bank officials almost always
mention six basic goals:
1. Price stability (often cited as a key objective of monetary policy because policy
makers have become aware of the social and economic consequences of inflation,
and price stability is desirable to avoid uncertainties in the economy that threaten
economic growth);
2. High employment rate (implies a good state of society, low rate of families with
financial problems, lower crime rate, high production rate, and thus GDP growth);
3. Economic growth (closely related to the employment rate, is achieved by
encouraging companies to invest, in order to encourage an increase in overall
economic capacity);
4. Stability of interest rates (it is desirable because fluctuations in interest rates also
lead to uncertainty in the economy, reduces interest in buying real estate and
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 makes planning difficult, all of which generally affects the public's negative
attitude towards central bank policy);
5. Stability of financial markets (it is important to maintain a stable financial market,
and thus the entire financial system, which reduces the prospects for financial
crises);
6. Stability in foreign exchange markets (primarily due to the growing importance of
international trade for the economy, which is why stabilizing extreme changes in
exchange rates is a very important goal of monetary policy).
In order to achieve the most important goals and tasks of the country's economic
policy, the state, through the central bank as the highest body of monetary authority, puts the
application of monetary policy instruments and measures at the center of its activities.
Monetary policy instruments can be divided into two basic groups: first, quantitative
(indirect) instruments and second, qualitative (selective) instruments. Quantitative
instruments of monetary policy should act only globally at the level of the overall economy,
while qualitative instruments should act selectively in terms of type of credit, users, purposes,
uses, etc. (Ivanish, 2006). Quantitative instruments of monetary policy are: discount rate
policy, reserve requirement policy and open market policy. On the other hand, qualitative
monetary policy instruments include selective monetary policy.
The discount rate policy as the most important instrument of monetary policy
consists of changes in the interest rate at which the central bank provides loans to commercial
banks in order to act on the demand for money and credit, credit costs and credit potential of
banks.
With a discount rate policy, the central bank seeks to determine the price of loans it
grants to commercial banks, either through discounts or other forms of credit. Also, by
changing the amount of the discount rate, the central bank seeks to act on the supply and
demand of money in the money market and the conditions prevailing in the field of interest
rate policy. In this regard, an increase in the discount rate should lead to a decrease in credit
demand and, conversely, a decrease in the discount rate should lead to an increase in money
demand.
The reserve requirement policy requires each bank to keep a portion of its demand
deposits in a special reserve requirement account with the central bank. In conditions when
the central bank wants to reduce the amount of money in circulation, it raises the required
reserve, while in conditions when it needs to increase the amount of money in circulation, it
reduces the required reserve.

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 For required reserves, banks make allocations in a certain percentage and according to
these demand deposits, the required reserve rate appears as a function of these deposits. The
bottom line is that these funds cannot be used for banks' lending operations. (Kehal,
Varindes, 2005).
Open market policy is one of the most complex but also the most effective
instruments of monetary policy.
This means of monetary regulation involves the purchase and sale of government
securities by the central bank, with the aim of increasing or decreasing the amount of money
in circulation. At the same time, as a side effect, the exchange rate (price) of securities that
are the subject of sale is stabilized (Velickovic, Barac, 2009.)
Selective monetary policy consists of controlling the use of certain funds, and its main
purpose is, in addition to liquidity and security of funds by directing loans, to help realize the
goals of economic policy.
It directly affects changes in money circulation and lending only in certain sectors of
the economy, according to established purposes, regional distribution, etc. In this way, the
Central Bank controls the intended use and directing of newly created money in those
directions and jobs given priority (import, exports, agricultural production, etc.) among the
goals of current economic policy (Gros, Alcidi 2019).

2.2 EUROPEAN MONETARY UNION

The European Monetary Union is a currency area that has emerged from several
national currency areas that have adopted a single currency - the euro. In addition to the
single currency, the area of the European Monetary Union consists of a single central bank
and a single monetary policy.
The Maastricht Agreement accepted the program for the realization of the European
Monetary Union - EMU, which was the most complex step in achieving the full economic
integration of the member states. The single internal market was the basis for the transition to
a higher level of integration, economic and monetary union.
In the first half of 1988, the European Council authorized Jacques Delors, the then
President of the European Commission, to propose concrete steps in the realization of the
European Union. At the same time, the commission composed of the governors of the central
banks prepared Delors report according to which the European Monetary Union was to be
realized by applying three phases (Catanero, Morris, 2006)

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1.1.1 Stages in the development of the European Monetary Union

The first phase in the development of the European Monetary Union lasted 3 years,
i.e. in the period from July 1, 1990 to December 31, 1993. The basic content of this phase
was the creation of a single financial market, i.e. complete liberalization of capital
movements within the European Union. The Committee of Governors of the Central Banks,
established in 1964, was given a new task at this stage (until then it had been tasked with
monetary cooperation in the European Economic Community) to consult and coordinate the
monetary policies of the member states achieved price stability. This committee was also
supposed to initiate the beginning of the next phases of the European Monetary Union. In
order to approach the second and third phases, it was necessary to make adjustments to the
Treaty of Rome. In this way, the European Economic Commission was established, which is
the forerunner of today's European Union. The Treaty on European Union was signed in
February 1992 in Maastricht (von Hagen, Halleberg, Strauch, 2004).
The second phase in the development of the European Monetary Union is designed
as a transitional solution, i.e., a period within which the basic bodies and organizational
structure of the European Monetary Union should be established with the aim of economic
rapprochement between member states. This phase began in January 1994, when the
Committee of Governors of the Central Banks of the member states disbanded and the
European Monetary Institute was formed (the forerunner of the European Central Bank in
Frankfurt). The task of the European Monetary Institute was to strengthen cooperation
between central banks. Also, his task was to make preparations for the establishment of the
European System of Central Banks for conducting a single monetary policy, but also for
creating a single currency - the euro. At this stage, it is planned to harmonize economic
policies aimed at reducing inflation, limiting the budget deficit, reducing interest rates and
reducing public debt.
In the second phase of the development of the European Monetary Union, the criteria
that a country should have in order to join this union have been determined. These are the so-
called economic convergence criteria or Maastricht criteria:
 The inflation rate in the country that wants to join the European Monetary
Union must not be higher than 1.5 percentage points compared to the average
of the three European Union countries with the lowest inflation;

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  The total national debt of a potential state must not exceed 60% of the gross
domestic product.
 The budget deficit in the country must not exceed 3% of the gross domestic
product (or constantly fall towards this value);
 In a potential member state of the European Monetary Union, the normal
fluctuation margin must be monitored, ie that no devaluation is present in the
exchange rate mechanism of the European Union for at least the last two
years);
 The long-term nominal interest rate on government securities must not deviate
by more than 2 percentage points from the interest rate of the three Member
States with the lowest interest rates.
Prior to 1997, no member state met the requirements, however, in May 1998 a survey
showed and the Council of Ministers adopted a decision to qualify 11 EMU member states
(Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria,
Portugal and Finland). Greece joined the EMU in 2001, while Denmark and the United
Kingdom retained the right not to participate in the third phase. Sweden has not fulfilled the
condition of exchange rate stability. Slovenia, Cyprus, Malta and Slovakia later became EMU
member countries.
During this period, the euro strengthened against other currencies, and in this interval,
it appreciated against most currencies.
The biggest appreciation of the euro occurred in the third sub period from 2008-2009
year, when the euro "floated" and was widely used currency in EU countries. This period
covers the period that continues to the period from 2004, when the largest enlargements of
the European Union were established in relation to the current period.
The third phase in the development of the European Monetary Union is final, and it
envisaged fixing exchange rates, introducing a single common currency and delegating
monetary and economic responsibility to most European Union institutions and bodies. This
phase will last until all countries meet the conditions for joining the European Monetary
Union, i.e. until all EU member states have the euro as their national currency and until the
European Central Bank becomes the central bank of those countries.
With the creation of the European Monetary Union, the need arose for a new system
of European central banks. First there was the European Monetary Institute which was
replaced by the European Central Bank. The main task of the European Central Bank is to

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implement a single monetary policy, which de facto transfers the sovereignty of national
central banks in the field of conducting monetary policy at the ECB. The goal is to achieve
price stability, which is inevitable if you want a stable currency (Torres, Giavazzi, 2006).
Finally, the fourth sub-phase shows that the euro has reached a balanced position and
appreciated against four currencies. Based on that, it can be pointed out that the euro is a
stable currency today, with the increasing use of this currency in circulation, both in the
Eurozone and beyond.
After three decades of working on the idea, in January 2019, exactly 20 years passed
since the launch of the "big project" on a common currency in the European Union. The
formation of the European Monetary Union and the single currency was a major step forward
in the process of economic integration in Europe.
Although economic and other differences between countries and regions have existed
since its inception, with each enlargement, the issue of differences in the development of the
region is becoming increasingly important. It is for this reason that the European Commission
has developed a Policy of Economic, Social and Territorial Cohesion.

1.1.2 Advantages and disadvantages of the European Monetary Union

Membership in the European Monetary Union brings a number of advantages but also
disadvantages for the member states. The following are examples of the strengths of EMU
member states.
The advantages that Member States have are of both macroeconomic and
microeconomic nature.
 The most important benefit is that the European Monetary Union contributes
to the consolidation of the single market, ie improving the integration of
markets for goods, services and factors, which further implies production
efficiency and contribution to the growth of gross domestic product of the
union;
 Direct comparability of prices as well as their transparency increases
competition and specialization of goods and services, the next benefit is the
member states of this union;
 Also, membership in the European Monetary Union eliminates the risk of
exchange rate changes and uncertainty that contributes to the stability of
domestic investment and trade flows;

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  Due to price stability in EMU, there are no inflation expectations, which is
especially important for countries that have had high inflation in the past, so
foreign investors treat them as an area with high inflation expectations.
 Joining the European Monetary Union leads to a reduction in interest rates and
an increase in investment, and investors make decisions with a high degree of
confidence because there are no internal controls of the union for direct
investment.
 Furthermore, EMU membership leads to increased monetary stability and
greater influence in international monetary affairs due to the harmonization of
monetary and fiscal policy.
 The member states of the European Monetary Union are more protected from
the dangers of financial markets, which, together with other benefits, increases
the security of operations. In this way, the European Monetary Union becomes
a suitable market for investment.
 The common currency (euro), for all EMU member states, is becoming
significant as the world's reserve currency.
 Elimination of transaction costs within EMU amounting to 15 billion euros per
year or 0.4-0.5% of EU GDP.
In addition to numerous advantages, membership in the European Monetary Union
brings with it a number of disadvantages.
 A supranational body that independently and independently implements
monetary policy means the loss of national sovereignty, which can have huge
political and psychological consequences for the member states of the
European Monetary Union.
 The European Monetary Union restricts member states' free choice between
inflation and unemployment in the country (floating exchange rate) because
they are no longer free to manage inflation and interest rates and are prevented
from implementing their own stabilization programs.
 The integration of different economic systems, especially in terms of
economic structure, efficiency and productivity of production into a single
currency system, has been accompanied by certain difficulties.

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  In the European Monetary Union, it is often not possible to influence the
outflow of capital to more developed parts of the monetary union unless the
fiscal system is not sufficiently developed.
 EMU member states can formulate their own fiscal policy, but as it is linked to
monetary policy, the impact of fiscal policy is diminishing.
 Due to the reduction of the set of available instruments, the economic policies
of the EMU member states are becoming rigid.
 In the event that the population loses confidence in the single currency due to
its insufficient purchasing power, problems can be long-term (Fandl 2018).

2.3 EUROPEAN CENTRAL BANK (ECB)

Well-known economists recommend cautiously "handling money" and keeping

money "at a sufficient distance from politicians". The distance between politicians and money
is reflected in the position of the central bank in relation to the government's influence on
"handling money". There are very different solutions in the world between the Central Bank
and the government, i.e., the creation of monetary policy. (ECB web site)
The European Central Bank (ECB) is an independent financial institution that
establishes and determines the economic and monetary policy of the Union. It was founded in
May 1998 to introduce and manage the euro, but also to manage the official reserves of the
Eurozone countries and issue banknotes.
The European Central Bank is the central bank for the 19 countries of the European
Union that have adopted the euro. The main goal of the European Central Bank is to maintain
price stability in the euro area as well as to preserve the purchasing power of the single
currency. The center of the European Central Bank is in Frankfurt, and the president of this
financial institution is Christine Lagarde.
The European Central Bank manages the monetary union in cooperation with the
national central banks within the European System of Central Banks, in which the central
banks of the Eurozone member states also participate.
The European System of Central Banks is a pillar of monetary authority that
determines the framework of monetary aggregates, i.e., formulates and implements monetary
policy and implements monetary policy instruments, including interest rate policy. The task is

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to manage the foreign exchange reserves of member countries, improve payment operations
and supervise the operations of banks and other financial institutions.
The European Central Bank, as a legal entity in each Member State, has the broadest
legal powers that recognize national law for legal persons. The initial capital at the founding
of the bank amounted to 5 billion euros paid by the member states of the European System of
Central Banks. The share in the founding capital is determined by the share in the GDP and
the position of the European Union. Member states also participate in the formation of
foreign exchange reserves of the European Central Bank up to a total of 50 billion euros. The
decision-making bodies are empowered to manage the European System of Central Banks.
During the global economic crisis, the European Central Bank faced major financial
problems. Namely, in 2008, when the crisis began, the European Central Bank pumped large
amounts of money (16,000 billion euros) in order to save the endangered liquidity of the
financial system. Banks, due to large losses and uncollected receivables, were saved by
accepting suspicious receivables and partial nationalization. As the global financial crisis
eventually turned into a real sector recession, the European Central Bank continued to cut
interest rates (even to near-zero rates) in order to stimulate economic recovery. The public
debt crisis of a number of countries (Ireland, Greece, Italy, Portugal, and Spain) is the biggest
problem that this institution has faced. In that case, the European Central Bank had to
intervene by buying government securities and taking over bad and uncollectible assets of
banks from the mentioned countries into its balance sheets. This has resulted in criticism by
stronger member states of the European Monetary Union as monetization with a safe
inflationary effect. Therefore, the European Central Bank insisted on adjusting the policy of
public expenditures in the affected countries by providing sufficient revenues for servicing
public debt and strengthening government expenditures.
In mid-2010, the European Financial Stability Facility (EFSF) was established to
protect the financial stability of the Eurozone by providing financial support to members. It
foresees the possibility:
 Lending to countries in trouble;
 Interventions in the primary and secondary debt market;
 Responses based on problem prevention programs;
 Recapitalization of financial institutions through loans to the governments.

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1.1.3 The Single Supervisory Mechanism (SSM)

The Single Supervisory Mechanism (SSM) refers to the system of banking

supervision in Europe. It comprises the ECB and the national supervisory authorities of the
participating countries.
The main aims of European banking supervision are to:
 ensure the safety and soundness of the European banking system
 increase financial integration and stability
 ensure consistent supervision
European banking supervision is one of the two pillars of the EU banking union, along
with the Single Resolution Mechanism.
The reason for the need of European Banking supervision was seen in the recent
financial crisis, having in mind that the European Union has never seen a crisis as this one
since the current one.
This has shown how quickly and forcefully problems in the financial sector can
spread, especially in a monetary union, and how such problems directly affect people across
Europe.
The purpose of European banking supervision is to help rebuild trust in the European banking
sector and increase the resilience of banks. Therefore the role of ECB as an independent EU
institution is to supervise and oversee the ongoing monetary processes from a different
prospective.
This is done through:
 establishing a common approach to day-to-day supervision
 taking harmonised supervisory actions and corrective measures
 ensuring the consistent application of regulations and supervisory policies
The ECB, in cooperation with the national supervisors, is responsible for ensuring
European banking supervision is effective and consistent.

1.1.3.1 The ECB has the authority to:

 conduct supervisory reviews, on-site inspections and investigations

 grant or withdraw banking licences
 assess banks’ acquisition and disposal of qualifying holdings

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  ensure compliance with EU prudential rules
 set higher capital requirements (“buffers”) in order to counter any financial
risks

1.1.4 Who is supervised?

The ECB directly supervises the banks of the participating countries. Banks that are
not considered significant are known as “less significant” institutions. They continue to be
supervised by their national supervisors, in close cooperation with the ECB.

1.1.4.1 Directly supervised banks

The ECB directly supervises the 110 significant banks of the participating countries.
These banks hold almost 82% of banking assets in these countries.
The decision on whether a bank is deemed significant is based on a number of
criteria.

Criteria for determining significance

Ongoing supervision of the significant banks is carried out by Joint Supervisory

Teams (JSTs). Each significant bank has a dedicated JST, comprising staff of the ECB and
the national supervisors.

Joint Supervisory Teams

1.1.4.2 Indirectly supervised banks

Banks that are not considered significant are known as “less significant” institutions.
They continue to be supervised by their national supervisors, in close cooperation with the
ECB.
At any time, the ECB can decide to directly supervise any one of these banks to ensure
that high supervisory standards are applied consistently.

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1.1.5 Which countries participate?

All euro area countries participate automatically in European banking supervision.

Other EU countries that do not yet have the euro as their currency can choose to participate.
To do so, their national supervisors enter into “close cooperation” with the ECB. Bulgaria
and Croatia joined European banking supervision through close cooperation in October 2020.

1.1.5.1 Cooperation with non-participating countries

For those EU countries that are not participating in European banking supervision, the
ECB and the relevant national supervisors may set out in a memorandum of understanding
how they will cooperate on supervisory matters.

1.1.6 Independence of the European Central Bank

Central bank independence implies a high degree of freedom of decision-making in

conducting monetary policy.
The independence of the central bank starts from two dimensions: the independence
of the goal and the independence of the instrument. The independence of the goal is reflected
in the freedom of the central bank to define the goals of monetary policy. The independence
of the instrument is reflected in the freedom of the central bank to choose the appropriate
instruments that achieve the desired effects on the economy.
The central bank may have instrument independence without target independence,
and conversely, may have target independence without instrument independence.
For example, a country that has introduced inflation targeting has the independence of
the instrument, which does not mean that it has the independence of the target, because the
targeted inflation rate is mostly imposed by the government of that country.
The European Central Bank and the national central banks are independent in carrying
out their tasks. They do not have the right to seek or accept instructions from the bodies of
the European Union, from the governments of the member states or some other organizations.
In theoretical and practical terms, the independence of the European Central Bank is based on
the institutional framework of the single monetary policy of the European Monetary Union.
The financial arrangements made by the European Central Bank are separate from those of

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the European Union. The European Central Bank has its own budget, which is supplemented
by national central banks.
There are four aspects to the independence of the European Central Bank:
1. Functional independence - In order to carry out its tasks, the European Central
Bank has full freedom in formulating monetary policy and choosing the instruments for its
implementation. The official strategy is determined by the Board of Governors. The
European Central Bank has the exclusive right to authorize the issuance of euro banknotes
and may also authorize the issue of coins by the national central banks.
2. Institutional independence - is one of the main features of the European Central
Bank and implies independence from the influence of other forms of government. In relation
to other bodies and national authorities, the European Central Bank has a clearly regulated
mandate and position, which leaves no room for influencing its work with any instructions
and directives.
3. Financial independence - is very important for the realization of the concept of
independence and it essentially means that the European Central Bank has its own budget,
separate from the budget of the European Union. The Bank has capital originating from the
national central banks and the amount subscribed and paid, and is determined by the share in
the population and the gross domestic product of the European Union.
4. Personal independence - refers to the organizational structure, election of members
and the duration of their term. In this regard, the members of the Executive Board have a
term of office of 5 years, without the possibility of reappointment. They can be replaced only
in case of incapacity to perform duties or some abuse of work.

1.1.7 Tasks and objectives of the European Central Bank

The tasks of the European Central Bank are as follows:

1. Maintaining price stability;
2. Creation and implementation of the Union's monetary policy;
3. Management of the foreign reserves of the Member States and
4. Payment system management.
When it comes to the Euro system, which means the European Central Bank and the
national banks of EU member states that have adopted the euro, its tasks are: defining and
conducting monetary policy in the euro area, conducting foreign exchange operations,

23 | P a g e
holding and managing official foreign exchange reserves of member states and ensuring
smooth functioning of the payment system.
Defining and conducting monetary policy in the euro area - the European Central
Bank has complete control over the size of the monetary base because only it can authorize
the printing of banknotes and approve the extent to which euro area member states can mint
coins. As the banking system is dependent on reserve money, the Euro system has a dominant
influence on money market conditions and short-term interest rates, on which the formulation
and implementation of monetary policy is based.
Conducting foreign exchange operations - has a great influence on conducting
monetary policy. Foreign exchange operations affect the exchange rate and domestic liquidity
conditions, which are important variables in monetary policy. They are in line with the
framework of the exchange rate policy in the Eurozone from the Treaty. In addition to the
European Central Bank, the Council of the European Union is responsible for carrying out
this task.
Ensuring the smooth functioning of the payment system - for the implementation of
monetary policy as well as, in essence, for the good functioning of the economy, an efficient
payment system is of great importance.
Other tasks of the European Central Bank include: approving the issuance of
banknotes, collecting statistics, financial stability and supervision, and international and
European cooperation.
In relation to the tasks entrusted to the Euro system, the European Central Bank
maintains business relations with relevant institutions, bodies and fora both within the
European Union and at the global level.
The European Central Bank also acts as an advisor to the relevant institutions and
bodies of the European Monetary Union as well as to national authorities in the relevant field.
(Unkovic, Kordic, 2014).

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 CHAPTER III

2 EURO - CHARACTERISTICS, INTRODUCTION, FUTURE

The euro, as the single currency of most EU member states (19 out of 27 countries),
began to be used on January 1, 1999, and until 2002 it was used only for non-cash
transactions. Since 2002, the European Central Bank has started issuing primary issues of
banknotes and coins. Currently, the euro (€) is the official currency of 19 out of 27 EU
member countries which together constitute the Eurozone, officially called the euro area.
Euro banknotes are issued in seven denominations: € 5, € 10, € 20, € 50, € 100, € 200 and €
500. Banknotes are the same in all European Union countries and are their legal tender.
Each denomination has its own recognizable color and contains a representation of a certain
architectural style, in the period from classical to 20th century styles. The first series of
banknotes is gradually being replaced by banknotes from the Europe series.
The graphic symbol of the single European currency "€" is derived from the Greek letter
epsilon and means the first letter of the word Europe. The two parallel lines symbolize the
stability of the single European currency. The euro logo is yellow on a blue background. The
official and internationally standardized mark for the euro is EUR. (Stiglitz 2016).
All euro banknotes bear the mark of the state (i.e. the central bank that issued them). The
country code is hidden in the letter that starts the serial number of the banknote and each
country has its own letter. All European countries that have adopted the euro from the
beginning are arranged in alphabetical order and given one letter each - starting with the last
letter of the alphabet (Belgium is at the top of the list of countries and received the letter Z,
while the last in the UK alphabet received the letter J).

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 Figure no: 1 Eurozone area

Source: https://www.google.com/search?
q=Images+of+the+Euro+zone+countries+that+accept+euro&rlz=1C1CHBD_enMK758MK7
58&sxsrf=ALiCzsaS30UHqz4vINfOR5LE_hb4xyuVOQ:1654779269885&tbm=isch&sourc
e=iu&ictx=1&vet=1&fir=ZP-VxNnPWutzHM%252CbacpdyVAM7lTKM%252C_
%253BGGWtQ-1pTLYV-M%252CucOCMtpRdHSU1M%252C_
%253BpRIW0Pu0Mgd7cM%252C7Qc2LMutNIMlBM%252C_%253BBscAU7dnD9e_JM
%252Cb9z1vVQfy6IE3M%252C_%253BUJ1uTA0JIPsSIM%252Cb9z1vVQfy6IE3M
%252C_%253BqPjEqF2H-9bLAM%252Cp0lCdbNv6ky9HM%252C_
%253BBermbK7t9_e7nM%252CxFJGSaYr92vSWM%252C_%253BukUWZXv3r9Z5AM
%252C64-NpCHDfyU5zM%252C_%253ByIIb7d0s-030DM%252CczPD5Q2ROfyFuM
%252C_%253BdkH8GOnnQ3IhzM%252CxFJGSaYr92vSWM%252C_&usg=AI4_-
kSPPI62OoIFLSgqFiJuLMoZTxyyJA&sa=X&ved=2ahUKEwjspcCUtaD4AhXqSvEDHaC
MCS4Q9QF6BAgDEAE#imgrc=ZP-VxNnPWutzHM

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2.1 THE THREE PHASES OF THE EURO CURRENCY

2.1.1 First phase

Today, around 340 milion citizens in 19 countries live in the euro area. This number
will increase as future enlargements of the euro are continue to spread the benefits of of the
single currency more widely in the European Union. Croatia is to join the Eurozone in
January 2023 and accept the Euro as a single payable currency. (web sute of EU).
It all started in 1951 after the WWII with the European Community of Coal and Steel
(ECSC), where the members Belgium, France, Italy, Louxembourg the Netherlands and West
Germany agreed to create a common market undre supranational regulation for coal and steel.
The idea behind this community was to withdraw the resources that had been vital for the
world wars – coal and steel – from national sovereignty in order to preserve lasting
peace. This milestone represents the beginning of economic integration and the very first step
towards the creation of a single market. Building on this success, the six countries later agree
to integrate other sectors of their economies with the aim of removing trade barriers and
forming a common market. The European Economic Community (EEC) and the European
Atomic Energy Community (EURATOM) are formed in 1957.
Europe's leaders set up a high-level group led by Pierre Werner, the Luxembourg
Prime Minister at the time, to report on how an Economic and Monetary Union (EMU) could
be achieved within 10 years. The resulting report is issued in October 1970.
The successful Delors Committee: one market, one money from 1989 started the idea of one
currency lead by the success of the European Monetary System provides the impetus for
further discussions between EU countries on how to achieve an Economic and Monetary
Union (EMU), which resulted in 1990 as first step of the Economic and Monetary Union
(EMU), free movement of capital that leaded to abolishing of all restrictions on the
movement of capital between EU countries.
In 1992, European leaders sign the new Treaty on European Union, in Maastricht, the
Netherlands. The treaty includes the provisions needed to implement the Economic and
Monetary Union (EMU). Leaders agree on the criteria that each Member State must meet to
adopt the single currency.
Second step of the Economic and Monetary Union (EMU): the European Monetary Institute
(EMI) is set up in Frankfurt. The EMI carried out all the preparatory work for the ECB to

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assume its responsibility for monetary policy in the euro area. Monetary policies are
increasingly coordinated and economic convergence is strengthened.
On 1 June 1998, the European Central Bank (ECB) becomes operational in Frankfurt,
replacing the EMI. It is established as the core of the Euro system and the European System
of Central Banks (ESCB), together with all national central banks of the EU member states.
Third step of the Economic and Monetary Union (EMU): after a decade of preparations, on 1
January 1999, exchange rates are irrevocably fixed between the 11 participating EU
countries. Authority over monetary policy is transferred from national central banks to
the European Central Bank. The euro is launched as an accounting currency on financial
markets and used for electronic payments. It becomes the official currency of Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal
and Spain. In 2001, Greece becomes the 12th country to adopt the euro. After three years of
using the euro as an ‘accounting currency’ alongside national currencies, the 12 countries
swap their old notes and coins for euros. It is the largest currency changeover in history. In
the following years the euro currency strengthens its position among the other currencies and
most of the trade within Europe and out of Europe is already made in euro currency. The
great success is followed by Slovenia in 2007, Cyprus and Malta in 2008.
This could be marked as the first very successful and peaceful period of the euro
currency when everything goes by the plan of the European Union.

2.1.2 Second phase

The second period of the euro currency could be marked as very turbulent and risky
for the euro itself and for the countries that made the crisis.
The financial crisis that started in the summer of 2007 stands as the first major test case for
the Eurozone. The crisis, at least in Europe, was triggered by a conjunction of factors and
unfolded through many channels: current account imbalances occasionally related to
productivity developments, banking sector shocks and their relation to sovereign debt. It was
thus a strong catalyst to test the solidity of the Maastricht institutions and revisit the validity
of the underlying assumptions. The financial crisis revealed the weaknesses of the initial
EMU architecture and the policy divergences of the first ten years of the euro.
First, in the absence of exchange rate risks, investors did not take into account
country-specific risks in the banking and government sectors. Secondly, economies in the
periphery (like Ireland, Portugal, Spain or Greece) were expected to rapidly converge with

28 | P a g e
core Eurozone countries as counterparts with sustained current account deficits thanks to
capital and credit inflows. (Baldwin, GiavazziIn, 2015). However, part of those inflows went
into government sovereigns and non-tradeable sectors which drove prices up and eventually
resulted in an appreciation of their real exchange rates. While at the Eurozone level the
current account was broadly in balance, divergences between creditors and debtors
aggravated. In relative terms, the periphery became more intensive in the non-tradeable
sectors while core countries gained competitiveness. The resulting changes in industrial
structure led to agglomeration effects and contributed to diverging social and political
preferences over time. During the crisis, the negative effects of capital misallocation and
excessive debt levels that had accumulated came to the fore with the sudden stop of capital
flows towards the periphery. These countries corrected their external accounts but the
adjustment was asymmetric as surplus countries did not boost domestic demand. As a result,
the current account rebalancing proved considerably more painful in terms of output losses.
The collapse in flows among banks gave rise to a sovereign problem, while, in the opposite
direction, tensions on the sovereign weighed on banks‘ balance sheets. The sovereign bank
‘doom loop’ amplified financial distress and was responsible for deepening the recession,
notably through worsened lending conditions in the economy.
Greece received several bailouts from the EU and IMF over the following years in
exchange for the adoption of EU-mandated austerity measures to cut public spending and a
significant increase in taxes but still there was a possibility that Greece might leave the
European Monetary Union (EMU) entirely.
The withdrawal of a nation from the EMU would have been unprecedented, and if
Greece had returned to using the Drachma, the speculated effects on its economy ranged from
total economic collapse to a surprise recovery.
In the end, Greece remained part of the EMU and began to slowly show signs of recovery in
subsequent years (Alexe 2012).
European nations implemented a series of financial support measures such as the
European Financial Stability Facility (EFSF) in early 2010 and the European Stability
Mechanism (ESM) in late 2010. The ECB also contributed to solve the crisis by lowering
interest rates and providing cheap loans of more than one trillion euro in order to maintain
money flows between European banks. On 6 September 2012, the ECB calmed financial
markets by announcing free unlimited support for all eurozone countries involved in a

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sovereign state bailout/precautionary programme from EFSF/ESM, through some yield
lowering Outright Monetary Transactions (OMT).

Chart 1: Euro Area Consumer Price Inflation as Measured by the Year over Year percentage
Change in Harmonized Index of Consumer prices

There are two views to the European debt crisis. For the “fundamentalists”, the debt
crisis is caused by the lack of discipline in sticking to the principles of “a sound and
competitive macroeconomic base and solid public finance” (Weidmann 2001). Hence, the
remedy is to implement “painful reforms” and consolidate budgets, which would rebuild trust
and confidence in financial markets (Issing 2009). For the “monetarists”, the European debt
crisis is a liquidity crisis. A small local liquidity shock causes a sudden deterioration in a
specific class of asset values, can cause a global systemic financial crisis when the need for
liquidity spills over to banks that then get distressed because the deteriorating asset prices put
their balance sheets into difficulties and reduce bank capital (Chacko et al. 2011). In this
case, a crisis can be stopped by a lender of last resort that provides the necessary liquidity and

30 | P a g e
stops the crisis from turning into a default avalanche. These two views resemble the debate
between economists and monetarists in the 1980s regarding the preconditions of monetary
union. The economists, who were the predecessors of today’s fundamentalists, claimed that a
monetary union was only possible between similar economies, while the monetarists argued
that convergence will follow from the new institutions. At that time the conflict was
overcome by the Delors Committee that proposed the creation of an independent centralized
monetary institution, the European Central Bank (ECB), and defined so-called convergence
criteria that needed to be met in order to participate in the currency union. This proposal was
then enshrined into the Maastricht Treaty (Collignon and Schwarzer 2003).

Chart 2: EU GDP and unemployment (2005 – 2017)

The solution of Europe’s debt crisis required a similar compromise between long-term fiscal
consolidation and short-term liquidity management. However, such a coherent policy
approach will be unlikely to be forthcoming without a European economic government. From
a fundamental view, Europe’s fiscal framework—the Stability and Growth Pact (SGP) — has
failed to provide the fiscal discipline required to ensure financial stability. Clearly, this
requires reforms of Europe’s institutional framework and the issue of amending the European
Union Treaty is now more frequently evoked by policymakers. The European Council on
December 2011 agreed on new procedures of fiscal surveillance and asked member states to
introduce a “debt brake” into their national constitutions. However, on top of institutional
fragility, a genuine liquidity crisis has developed that has destabilized the banking system.

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The European Council was forced to create the European Financial Stability Facility (EFSF)
by which euro member states provided a mainly credit-funded facility to lend to small
countries that had lost access to capital markets. This was an institutional improvement for
crisis management of the euro area, but for financial markets the EFSF offered too little and
came too late. When financial crisis contagion spilled over into large member states,
especially into Italy, it became obvious that the original EFSF bailout fund was insufficient
and the European Council meeting in July 2011 increased the fund’s resources from the
initial amount of €440 billion to €780 billion.
Yet again, this was not enough. Given that Italy had to refinance approximately €350 billion
in 2012 and there were large liquidity risks for lenders, the European Council in October
2011 agreed to leverage the EFSF up to €1 trillion, although by mid-November it became
clear that this failed again to calm the markets. The highly indebted member states certainly
face important structural problems. In contrast to Germany, no adjustment was undertaken in
the years of the euro area boom. One problem was the slowdown of capital productivity in
southern member states as a consequence of falling and low interest rates in the 1990s and
early 2000s. This caused them to lose their competitive advantage and they became more
vulnerable to large shocks. These structural handicaps require deep reforms that will
necessarily take time before they produce tangible results provided the right measures are
implemented. In the meantime, governments have a choice. They can either finance deficits
until the reforms improve economic performance, or they can implement austerity measures
that will reduce demand. Fundamentalists are critical of the first option because it carries the
risk of excessive deficits and unsustainable debt. Monetarists criticize the second option
because it could bring the reform process to a halt, when excessive austerity becomes socially
unsustainable. To accommodate the fundamentalists, the liquidity-providing measures of the
EFSF were subject to severe conditions of fiscal consolidation in borrowing countries. Yet,
the draconian budget consolidation programs did not bring down public debt. In Greece,
economic growth continues to be negative and the deficit has stabilized in 2011 at rates close
to 10% of GDP. In fact large deficits persist everywhere, because the lack of domestic
demand in the highly indebted countries reduces revenue and low growth undermines the
confidence of financial markets. Monetarists therefore argue that there is an increasing need
for bailing out member states that have lost access to the capital market. But this is also
problematic as a general bailout commitment could generate moral hazard, while the volumes
of financial bailouts are increasingly awesome. While the European Union may be able to
bail out Greece, for larger member states like Italy this is impossible. These diverging

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opinions may be normal in a pluralist society, but in Europe they create fault lines between
member states. There can be no doubt that part of Europe's problem is caused by the fragility
of its governance structures. The system seemed to have worked well during the benign first
decade of the EMU, but seems now no longer able to cope with the policy requirements in the
crisis. This paper first discusses the euro area’s economic fragility and then looks at the
handicaps of Europe's economic governance.

Chart 3: Government debt 2006 -2017

Mainly said, between 2010 and 2011 the EU established numerous new institutions: first the
European Systemic Risk Board (ESRB), to prevent or mitigate systemic risks and support
the development of effective macro prudential policies. Following calls from the European
Parliament – before and during the early stages of the financial crisis – for more integrated
European supervision, to reflect the increased integration of financial markets in the EU and
provide a truly level playing field, a European system of financial supervisors (ESFS) was
created. It comprises three European supervisory authorities (ESAs) for specific segments
of the financial sector: the European Banking Authority (EBA), the European Securities
and Markets Authority (ESMA) and the European Insurance and Occupational
Pensions Authority (EIOPA). A recent proposal for the reform of the role of the ESAs,
increasing their budget and mandate, particularly for ESMA with a view to capital markets
union (CMU), will potentially revamp the ESFS, but the final outcome of the negotiations
remains to be seen. Furthermore, an analysis of weaknesses in the banking sector led the EU

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to launch a single rulebook in 2012, which constitutes the foundation of the banking union.
Its pillars include:
1) A single supervisory mechanism (SSM), under which the ECB supervises banks to
determine how they lend, borrow, invest and comply with the single rulebook;
2) A single resolution mechanism (SRM) that constitutes the framework for the orderly
winding down of failing banks while ensuring minimal use of taxpayers' money.
Importantly, the banking union rules also determine capital requirements for banks (recently
under revision) and investment firms to improve the banking sector's resilience to economic
and financial shocks, enhance its risk management and ensure normal lending activities
during an economic downturn. They also provide an equal level of protection of bank
deposits across the EU to prevent bank runs and ensure the stability of the banking system
under the deposit guarantee schemes.
After relatively good progress during the crises and their aftermath, the pace of reform seems
to have slowed. In order to break the deadlock, the Five Presidents' Report was published in
2015 with a roadmap to deepen the integration of EMU. The least divisive ideas have been
implemented, whereas a crucial proposal to complete the banking union, the European
deposit insurance scheme, struggles to move forward and attempts to alter the current EMU
architecture with the creation of a European monetary fund, a euro-area treasury or an
economic stabilisation function are unlikely to succeed any time soon. Intergovernmental
mechanisms deployed in the crisis, such as the fiscal compact, the Euro Plus Pact and the
ESM have not been integrated into EU law, despite various proposals having been made by
the Commission. In this context the agreement on the role of the European Stability
Mechanism as a backstop to the Single Resolution Fund, probably in force even before the
previously envisaged year 2024, is a significant development.
Between 2007 and 2017, the ratio of investment to GDP decreased in 24 of the 28 Member
States, and the level is still well below its pre-crisis average. One helpful measure in this
context could be the creation of the capital markets union. It has the potential to boost
investment and money flows, and enhance Europe's resilience thanks to more integrated and
less bank-dependent financial markets.
The euro survived the first onslaught of the global financial crisis. The Eurozone
continued to expand, accepting new members. However, Eurozone member states appear to
be trapped in a rather dissatisfied European Union.
Most member states of the European Monetary Union have huge budget deficits.
However, given the high level of indebtedness, countries can easily become illiquid, so

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sustainable public finances and deficit reduction are needed by all Eurozone member states,
not just those that are currently unable to finance the deficit.

Chart 4: Unemployment by age group 2021

2.1.3 Third phase

Currently, Europe is divided into two blocs, "fiscally responsible" and "fiscally
irresponsible". Both are threatening to leave the Eurozone, and they are accusing each other
of the new situation. It is true, however, that both are to blame.
This divided Eurozone has little chance of surviving. Although the forecasts for the
future of the euro are bad, and no matter how much it saved the euro, the collapse of the
Eurozone would cost much more (Kettel, 2004)
Remaining in the European Monetary Union remains a better alternative for member
states than abandoning it and returning to old currencies.
According to the European Commission's Euro barometer survey of Europeans and
Eurozone residents on the European Monetary Union and the euro, 57% of Europeans are in
favor of the European Monetary Union and the euro, while the opposition has remained
unchanged and 36% for the third time. Consecutively against the European Monetary Union
and the euro.

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 Support for the European Monetary Union and the euro declined almost constantly
between spring 2007 and spring 2013 (from 63% to 51%), and from autumn 2013 to spring
2015 it has been rising steadily from 52 % to 57%).
In the Eurozone, about seven out of ten respondents support the European Monetary
Union and the euro, after an increase of about 1% since autumn 2014 (67% are for the
European Monetary Union and the euro while 26% are against).
Support for the European Monetary Union and the euro has (spring 2018) increased by
7% since spring 2019 (from 62% to 69%). Outside the eurozone, support is much less
widespread, and this trend is declining, i.e., one third of respondents are for the European
Monetary Union and the euro (33% are for the European Monetary Union and the euro, while
58% are against) (Ibid).
Compared to ten years ago, now the opinions of Europeans and residents of the Eurozone
are quite different. Namely, in the spring of 2005, 59% of them were for the euro, and 66%
for the European Monetary Union. 35% of Europeans and eurozone residents were against
the euro, and 30% against the European Monetary Union. In the spring of 2017, the
confidence of Europeans and residents of the Eurozone in the European Monetary Union
increased by 10% (from 59% it increased to 69%), and it was 25% against the European
Monetary Union. As for the euro, according to this research, in the spring of 2018, 57%
supported this currency, and 36% of Europeans and residents of the Eurozone were against it.
It can be concluded that the trust of Europeans and the inhabitants of the Eurozone is ten
years higher when it comes to the European Monetary Union, but because of that, the trust in
the euro as a single currency is essentially less.
Further up until the Corona pandemic the euro had been stable currency where it is
important to be mentioned that almost all worldwide 20% of the stock reserves were in euros.
Successfully the euro currency has grown in more stable monetary factor within the
Corona pandemic period 2020-2022. The European Council made a plan for recovery fir
Europe which was successfully implemented and made all the efforts to stabilize the
economy after the pandemics (web page of EU Council)
After the Covid 19 pandemics when most of the people thought that this will be the end
of the weak economy and the time for EU revival in all the aspects, Russia invaded Ukraine
and most of the NATO Courtiers and EU members have made so far 6 packages of sanction’s
to stop the war. This means that Europe is giving up of using gas, and natural fossils, oil, and
wheat and grain (produced in Ukraine) are now not available for EU.

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 The challenges are accepted, the euro as a currency is in danger because of the stock
exchange turbulences and the world is maybe in front of a big and unscrupulous war that is
impossible for the people to understand in and accept in when we are in the 21 -st Century.
(Web page of EU).

2.2 ADVANTAGES AND DISADVANTAGES OF INTRODUCING THE EURO

The advantages of introducing a single currency are multiple:

1. Lower inflation - Greater independence of central banks (in this case the European
Central Bank) contributes to lower inflation.
2. Lower interest rates - Due to lower inflation, interest rates are reduced. Investors
demand lower interest rates in conditions of price stability.
3. Structural reform and sustainable economic growth - in order to meet the
convergence criteria and qualify for the euro, countries had to put their economies in order
and reduce borrowing.
4. Formation of a global reserve currency - The euro, as a liquid, stable currency and
means of payment in a large economic area, has the potential to become the main reserve
currency to be used by central banks, governments and private firms to cover future financial
needs.
5. Economic growth - due to the expansion of the market, competition, reduction of
average costs, higher productivity, multinational companies achieve economies of scale.
6. Lower transaction costs - Tourists do not have to change money when crossing
borders between countries in the euro area or pay significant commissions to exchange
offices or banks for this type of service (saving money).
7. Benefits of international currency - for travelers traveling outside the euro area
because the euro is accepted in many countries, the ability to compare prices within the euro
area;
8. Maintenance costs - the cost of maintaining 19 currencies is much higher than the
cost of a single currency.
9. A blow to the US dollar and the Japanese yen - because with the introduction of the
euro, their comparative significance decreases.
10. Increase transparency in transactions and eliminate the risk of exchange rates in
relations between EU member states - by abolishing 19 exchange rates.

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 11. Expansion of financial markets - become more accessible and liquid to smaller
countries.
12. Issue profit - with the introduction of the euro, its amount kept in reserves
increases on a global scale, so small countries for the first time have a profit outside their
borders.

The introduction of the euro has its downsides, below are examples of some of them:
1. Lack of business - exchange offices and banks are the biggest losers due to smaller
foreign exchange transactions between countries;
2. High costs of the changeover to the euro - training costs in related jobs;
3. Less monetary autonomy - economies that are in different phases of economic
cycles find it difficult to adapt to a single monetary policy. Governments are deprived of
financial instruments to affect aggregate demand, or of the exchange rate to affect the trade
deficit / surplus. In the conditions of decentralized fiscal policy and political system,
centralized monetary policy is difficult to function;
4. Loss of exchange rate;
5. Controlled fiscal policy.

2.3 FUTURE PROGNOSIS OF THE EURO CURRENCY

As it can be seen in the Report of ECB for 2021 and the word of In the Report of the
international role of the euro remained stable in 2021. Over this period, the euro area and
other major economies recovered from the COVID-19 pandemic recession. The euro area
experienced one of the steepest recoveries in its history, bolstered by ample fiscal and
monetary policy support, in an environment of rising global inflation driven by higher energy
costs, supply bottlenecks and the normalization of demand as economies reopen. On balance,
these developments did not result in a significant change in the international role of the euro.

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A composite index of the euro’s international role remained stable over the review period
(Chart 5).
Adjusting for exchange rate valuation effects, the index remained unchanged. At current
exchange rates, it increased marginally by 0.1 percentage points. The share of the euro across
various indicators of international currency use remained close to historical lows, averaging
around 19%. The euro remained the second most important currency in the international
monetary system (Chart 6).

After the Covid 19 pandemics when most of the people thought that this would be the
end of the bad economy and the time for EU revival in all the aspects, Russia invaded
Ukraine. Therefore, the NATO allies’ countries and the EU, determinately press Russia with
sanction packages in order to make them weak and stop the war.
This means that Europe is giving up of using gas, and natural fossils, oil, and wheat and
grain (produced in Ukraine) are now not available for EU.
The challenges are accepted, the euro as a currency is in danger because of the stock
exchange turbulences and the world is maybe in front of a big aнд unscrupulous war that is
impossible for the people to understand in and accept in when we are in the 21-st Century.

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The European Union and the euro currency are now facing the new challenges and the
implications of the Russian invasion of Ukraine and of the financial sanctions imposed on
Russia for the future of international currencies. According to Lagarde (2021) the European
Union’s economic and financial resilience to the current geopolitical challenges can also
support the international role of the euro.
As confirmation from the written report, the international role of the euro is and will
be primarily supported by a deeper and more complete Economic and Monetary Union
(EMU), including advancing the capital markets union, in the context of the pursuit of sound
economic policies in the euro area. Considering the challenges that rise from the sanctions
that are imposed to Russia from the Union, and the support of the USA and UK, it will be
hard to say how the future of the stability of the euro currency will overcome this period.
That is to remain open for some other researches when this madness is over. For now the
prognosis of the ECB, are that ECB will continue to monitor developments and publish
information on the international role of the euro on a regular basis.
Finally, the Russian invasion of Ukraine might serve as a reminder of the relevance of
sound institutions, macroeconomic fundamentals, including price stability over the medium
term, and geopolitical considerations as determinants of international currency status.
Overall, time will tell whether more significant changes in the international role of currencies
will unfold. What is possible, however, is that the Russian invasion of Ukraine might have
acted as a catalyst in related domains. For instance, some countries have accelerated plans to
explore central bank digital currencies (CBDC) in the wake of the invasion, which may have
implications for the global appeal of major currencies. (The international role of the euro –
June 2022)
The following 4 figures are charts from the European Central Bank and the FED that
show the inflation rates from which it can be seen that the European Union is suffering big
crisis in terms of Consumer prices. These prices have been mainly stable but now variable
goods and services, as well as groups of good and services, experience different rates od
inflation.
FED’s Consumer price index shows the growth of consumer prices in the USA.

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Figure 2. Overall index HICP Inflation rate presented by ECB in 2022

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Figure 3. Consumer price index in USA in 2022

Figure no.4 Overall index and breakdown by components in the Euro Area represented by
ECB

This kind of chart was not quite comparable but it can be seen in the one that the
consumer price index for all urban consumers, containing food and beverages, alcohol and
tobacco, clothing, Housing electricity and gas, health, transportation restaurants and
miscellaneous show increase as well as in EU.

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Figure 5. inflation rate for the past 10 years in the USA
Source: Federal Reserve Bank of St. Louis
In this graph is shown the growing of the line for the housing with electricity and gas. And,
as it can be observed the USA has a very high rate of inflation in 2022 because of the Russian
gression in Ucraine, same as in the European union.
From the given figures/ graphs the rate of inflation is growing in EU and in the USA. The
inflation rates do not only vary across countries, they also vary over time. This year has
shown exactly that, that the inflation varies over time. It is crucial to understand how inflation
will develop over the next few years. This is because looking at average inflation over the
medium to longer period gives a clearer picture of changes because year-on-year inflation in
the prices of certain goods and services can vary greatly in the short term (from month to
month).
Because of this, categories are created from the inflation rates of several particular items and
services. Monitoring changes in groupings of goods and services can provide a more accurate
picture of pricing changes through time and a hint as to how prices might change in the
medium run.
As evidenced by the competition for coal and new oil supplies, the energy transition has not
exactly benefited from the conflict in Ukraine and the shock to energy commodity prices.
This is on top of the pandemic, which is still ongoing as will be evident in the coming weeks
from the global repercussions of China's lockdowns due to its pursuit of zero-COVID-19.
The world must stop further drastic climate change brought on by more delays to the energy

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transition in order to prevent the recent combination of pandemic pestilence, conflict, and
fatalities from assuming apocalyptic proportions. (Canuto,2022)

2.4 DIGITAL EURO – INVESTIGATION AND PROGRESS

The ECB and the euro area national central banks have started the investigation for
the implementation of digital euro. The investigation phase will last 24 months and it will end
approximately in October 2023. The body in charge for this process is the High-Level Task
Force on Central Bank Digital Currency (HLTF-CBDC), which is composed of
representatives from the ECB and the national central banks of the euro area. This means that
the digital euro will be an electronic means of payment for retail payments which will be
issued by the central bank. The intention of using the digital euro is not to replace the cash
money but to ease the payments that are already made digitally.
As more consumers choose to pay digitally rather than with cash, payments are
undergoing a potentially disruptive transition. E-commerce prohibits the usage of cash, while
many customers like using cashless transactions at physical locations.
During the coronavirus epidemic, the popularity of internet shopping and contactless
payments increased even more. As payments become more digitalized, it makes sense to
bring central bank money into the digital age.
The role of public money as the foundation of the payments system in the digital age
would be preserved by a digital euro. It would make sure that the various kinds of money
coexist peacefully, are interchangeable, and complement one another. People must have faith
that private money can always be changed into money from the central bank. Central bank
money serves a crucial role in preserving a smooth payment system, financial stability, and
ultimately, confidence in the currency by acting as a monetary anchor. This in turn is a
prerequisite for maintaining monetary policy transmission and, by extension, for maintaining
the value of money.
By providing a currency that can be used for all digital transactions, meets social
goals for Europe, and is built on a European infrastructure, a digital euro would also increase
Europe's strategic autonomy and economic efficiency. By utilizing synergies with the
business sector, it would support the ongoing digital shift. By enabling intermediaries to
provide cutting-edge services based on the digital euro, for instance, it would be simpler to
quickly scale up payment solutions to span the entire euro area and for smaller businesses to
provide more cutting-edge services at competitive pricing.

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 By determining if a use case can serve the policy goals of a digital euro and targets a
significant market segment to encourage network effects, a collection of use cases for a
digital euro have been found. The largest market for digital payments is retail, which
accounted for more than 40 billion transactions in the euro area in 2019. Although there are
fewer e-commerce payments, they are anticipated to expand quickly over the next few years.
In addition to their size, it is significant that these markets are currently dominated by non-
European providers and technology and are covered by a wide variety of payment solutions,
many of which have just domestic reach. Therefore, the adoption of a digital euro may help to
bolster European strategic autonomy and further harmonize payment methods (two policy
objectives). Additionally, in the future, digital alternatives for inter-person payments may
potentially make this a market area that is more and more relevant for a digital euro.
Payments in e-commerce, physical businesses, and person-to-person transfers are all
obvious contenders for prioritizing among the potential uses of a digital euro due to their
significance now and in the future.
The digital euro might also be used to make payments between governments and
citizens, such as to pay taxes or distribute public assistance benefits. Prioritizing these
payment categories does not mean that new trends and unmet requirements cannot be
addressed in the future. Emerging use cases will be kept an eye on in case they are covered in
later editions. Machine-initiated payments are openly monitored while also taking into
account the possibility that the European private sector will come up with solutions.

Figure 6: The process of how the digitization of the euro will take place.

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Source: European central bank, progress on the investigation phase of a digital euro

Initiated by the Euro system, a digital euro is also a single European effort with a very
broad range of players. A cooperative strategy is essential to the development and ultimate
viability of a digital euro. Both stakeholders and the general public are actively engaged. The
European Parliament and the finance ministers of the euro area often examine important
design concerns and features that are crucial to policy in the Eurogroup. Additionally, there is
strong collaboration with the European Commission to assess a wide range of policy, legal,
and technological concerns on a technical level.
The Euro Retail Payments Board (ERPB) has also established a regular discussion with
market stakeholders regarding a digital euro so that all market participants, including banks,
payment service providers, consumer representatives, and merchants, can express their
opinions on such a currency.
The Commission will put up a regulation to create a digital euro in the first quarter of
2023, which is anticipated to aid in achieving the goals of the digital euro. One of the most
crucial aspects of a digital euro's design, privacy, will depend greatly on the regulatory
environment.
2.4.1 Transfer mechanism
The transfer mechanism used to validate transactions has been thoroughly considered for
the Euro system. The Governing Council gave the green light to the Euro system's continued
investigation of a digital euro solution in which transactions would be completed online and
verified by a third party ("online third-party validated solution"). Additionally, the Governing
Council authorized the continuation of research into an offline peer-to-peer validated
payment option. A more experimental option is a possible peer-to-peer validated system for
online payments that does not involve a third party. Although it merits monitoring, the
research phase does not call for any additional focused analysis.

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Figure 7: core elements of the three options

Source: European central bank, progress on the investigation phase of a digital euro

As part of the initial digital release of the euro, the Governing Council approved the
pursuit of an online, third-party certified solution. This provides flexibility in various design
choices pertaining to the digital euro and covers the widest range of high-level use cases. It is
also thought to be able to serve Euro system policy objectives. To strengthen its resilience to
connectivity failures, it will be crucial to look into further alternatives .
Additionally, it has been determined that an offline peer-to-peer validated solution needs
to be created. The time to market for this solution is more unknown, though, due to its
reliance on technology advancement, legislative modifications, and security risk acceptance.
In the event that the timely delivery of a peer-to-peer certified solution for offline payments
proves to be impractical, the development of a third-party validated solution for online
payments shouldn't be postponed.
2.4.2 Privacy
One of a digital euro's most crucial design elements is privacy, and it is required by law
to create a digital euro that respects individuals' right to private.
To preserve trust in payments in the digital age, 43% of respondents to an ECB public
survey in 2020 identified privacy as the most crucial component of the digital euro (far ahead
of other aspects). Participants in the focus groups also stated that they would value
alternatives that allowed them control over their personal data.
Several solutions to resolve the trade-off between maintaining a high level of privacy and
other significant public policy goals have been studied as part of the study phase. Given the

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associated political implications and the reality that legislators will eventually have to make
decisions on these matters, these have also been discussed with European officials.
Public policy experts do not view complete anonymity as a workable solution. Concerns
concerning the possibility of illegal usage of the digital euro would be raised (e.g. money
laundering and the financing of terrorism). Additionally, it would be nearly hard to restrict
the use of the digital euro as a means of investment, a restriction that is crucial from the
standpoint of financial stability.
A digital euro would offer an equivalent level of privacy to current digital private sector
solutions in a base case that is compliant with the existing regulatory framework.
When utilizing the digital euro for the first time, users would have to identify
themselves, and intermediaries would run customer checks before onboarding. Only
intermediaries would have access to personal and transaction data in order to ensure
compliance with EU legal requirements for fighting money laundering and terrorist financing
(AML / CFT) and other pertinent legislation. If an intermediary collects user information
during the onboarding process, that information will be kept by that particular intermediary
and won't be shared with the Euro system or with other intermediaries unless doing so is
mandated by law or necessary to carry out tasks related to the digital euro.
The Euro system will also investigate two alternatives that differ from this standard case.
These might offer more anonymity for low-value/low-risk payments and recreate some
cash-like qualities for the digital euro.
In the following figure no.3, the privacy options are revealed concerning transparency as
a current applicable baseline scenario, the privacy for low-value payments and the privacy
under offline functionality as desirable options.

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 Figure 8. Privacy options
Source: European central bank, progress on the investigation phase of a digital euro
For payments with low value and low risk, the "selected privacy" option would permit
more privacy.
When first using the digital euro, users would need to identify themselves, however
streamlined due diligence checks might be used, allowing for a higher level of anonymity for
low-value/low-risk payments. Higher-value transactions would continue to be subject to
regular controls at the same time. Additionally, it would be crucial to make sure that large
payments are not divided into numerous smaller ones in order to avoid using checks.
Greater anonymity might be possible for nearby low-value offline payments if "offline
functionality" was selected. When making one of these payments, the payer and payee must
be physically close to one another and not connected to the internet (just like paying with
cash). Customers would be subject to customer checks during onboarding, but only they
would have access to real-time information about their holdings, balances, and transaction
amounts, not financial intermediaries or banks. The risk of unauthorized use could be reduced
by restricting offline payments to low-value transactions and circumstances in which the
payer and payee are physically close to one another. At the same time, more privacy might be
advantageous to people. Aside from that, allowing an offline feature could be advantageous
for financial inclusion due to the absence of internet access in some of the euro area's most
rural and vast regions.

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 The Euro system is dedicated to ensuring the highest levels of privacy within the legal
parameters, as agreed by the Governing Council. The Euro system has no interest in using
specific payment information for any kind of profit. This contrasts with private corporations'
monetization of customers' payment information. Only the data required for the Euro system
to carry out its functions or that which is mandated by regulation will be available to it. To
achieve this, the digital euro solution must be created in a way that minimizes the
participation of the Euro system in the handling of user data.
2.4.3 Tools to control the amount of digital euro in circulation
The Euro system will pay careful attention to issues relating to financial stability.
A digital euro may structurally replace bank deposits if consumers hold them in
sufficient quantities. This might have an impact on monetary policy, financial stability, and
how credit is distributed to the real economy.
Any unfavorable effects that the issuing of digital euros may have on monetary
policy, financial stability, and the distribution of credit to the actual economy should be
minimized beforehand and intentionally.
In both prosperous and difficult economic times, any possible hazards from the
adoption of a digital euro should be minimized. In exchanges with market participants and
EU institutions over the past few months, the ECB has gone into great depth about these
topics.
A CBDC's potential negative effects on bank runs may be mitigated by carefully
designing and calibrating central bank digital currency (CBDC) safeguards, according to
ECB staff analysis.
To prevent the use of a digital euro as an investment vehicle, limit and compensation-
based tools will be incorporated into the design of the currency.
On the one hand, quantitative restrictions on the amount of digital euro that any one
user may retain may restrict both the number of people who use it and the rate at which bank
deposits are converted into digital euro. On the other side, compensation-based mechanisms
might be adjusted to make substantial holdings of digital euros above a specific threshold less
desirable than other highly liquid, low-risk assets.
The development of a digital euro will feature a wide range of tools so that the
relevant tools and parameter setting can be established earlier in the issuance process and
remain flexible going forward. Closer to the potential launch of a digital euro, a choice on
how to integrate and calibrate these instruments could be made, taking into account the
financial and economic climate at the time. The financial environment that would be present

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during the potential operation of a digital euro in the future, including the broader monetary
policy environment (such as interest rates, the number of excess reserves, and the potential
availability of alternative digital payment methods), cannot be predicted at this time.
A particular limit for offline holdings could be imposed within the overall holding
cap. This would enable for the maximum number of digital euros to be in circulation to be
managed and shouldn't present any major technical difficulties. The Governing Council has
given its approval to the prospective application of various limits for online and offline use,
as well as the potential approval of brief departures from the holding limit.
Additional features could prevent the detrimental consequences of setting limitations
on the user experience. One such tool might be the "waterfall" functionality, which would
automatically transfer money above the digital euro holding limit to a linked business bank
account. The Governing Council has given its approval to the "waterfall" instrument.
In order to satisfy end user expectations, the inquiry phase looks into design and
distribution alternatives for the digital euro. Before a digital euro can be implemented, a
number of steps must be done, including an examination of the front-end services that
financial intermediaries can offer based on a digital euro, the distribution of the digital euro to
users, and the settlement of payments. It's crucial to define who should have access to the
digital euro ecosystem and when, as well as to come to an agreement on an appropriate pay
structure.
Overall, decisions will need to be taken about the distribution model, the role of
intermediaries, the funding / defunding, and the settlement methodology.
The remainder of the investigative phase will see the Eurosystem maintaining active
communication with numerous parties. This includes the finance ministers of the nations that
make up the euro region, the European Commission, and the European Parliament.
Additionally, extensive participation from market participants will guarantee that a digital
euro satisfies customer requirements.
In the fall of 2023, the Governing Council will determine whether to begin a
realization phase to create and test the required technical frameworks and commercial
agreements to provide a digital euro. This stage might go on for three years. A decision
regarding the potential issuance of a digital euro might not be made for some time, depending
on legislative developments as well as a regulation to set up and regulate key aspects of the
digital euro that will be discussed by the European Parliament and the Council of the EU,
based on a proposal by the European Commission. (ECB-report on progress of digital euro)

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 CHAPTER IV

3 METHODOLOGY
The methodology of collecting the data in order to approve or decline the hypothesis that
were used in this master thesis are: the methods of deduction and induction method.
However, not only in determining how to assess the strength of the relationship between
records and hypotheses, but also in explaining the general nature of the relationship, this
relationship is considered inductive, i.e., induction provides a criterion for determining the
degree to which records support hypotheses.
The comparation method is used as a relevant method compare the given data to the
hypothesis.

3.1 RESEARCH AIM AND OBJECTIVES

The aim of this paper is to analyze the impact of the Euro as one common currency
and to show the benefits of one currency in the EU, how it affected on the stability of all the
EU member states on productivity, growth and employment, and economic prosperity in
general.
According to the aim of the master thesis the 2 hypotheses are analyzed:
H1: The introduction of the Euro in the EU brings benefit to all the EU member
countries.
H2: 20 years later the Euro keeps the economic stability in all the member countries
od EU.

3.2 ELABORATION OF THE INSTRUMENT

The research was conducted of comparation of tables from reports on satisfaction from the
euro as a currency in the Eurozone. With data derived from tables that show the economic
scale through the period of 20 years, the benefits were visible with a rising line in perspective
throughout the years. The stability and the benefits that the single currency brought to the
Eurozone were more than evident.

3.3 RESEARCH QUESTION AND DATA COLLECTION PROCESS

The research question of this master thesis was to find out the if with the introduction of the
euro as a single currency in EU state members had brought more benefits to the Union or
more damage and since the euro is still a current currency in the European Union how it
affects the stability of the economy of the European Union.

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The data from the internet site: European Central Bank, Statistical data warehouse as most
relevant data that can be used for this master thesis.
All the graphs that are derived from European Central Bank, Statistical data warehouse to
prove the upper mentioned hypothesis and to discuss them in the next chapter.

Chart 7: US Dollar – Euro exchange rate from 31-01-1999 to 30-06-2022

Chart 8: Inflation rate (HICP)

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Chart 9: Unemployment rate (as a % of labor force)

Chart 10: labor productivity (per person)

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Chart 11: Monetary aggregate M3

Chart 12:
Current account balance Percentage of GDP

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Chart 13: Government deficit (-) / surplus (+) (as a % od GDP)

Chart 14: Government debt (as a % of GDP)

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Source of the Charts 8-15 is available at: European Bank Statistics site https://sdw.ecb.int/

CHAPTER V

4 DISCUSSION
The discussion can be led from many practical points of view and from many experts on
the euro currency issued papers.
The analyses of chart 8 where the illustration shows the US Dollar – Euro exchange rate
from 31-01-1999 to 30-06-2022 shows the how the euro has strengthened through the years
and made the US dollar to be a second dominant currency up till the period when the crisis
stared in 2007, 2008 the euro loses its primacy. After this period the line goes up and down
many times but since the pandemics and the Russian Ukraine crisis the euro is equal to the
US dollar and maybe even going down.
Depending on the current situation as it was written previously the future of the euro as a
single monetary currency of the EU is not predictable.
Theory and historical evidence show that the international role of a currency depends on
a host of factors that can change, gradually, over time. The factors favoring the role of the
dollar as the most important international currency are likely to persist, but the share of the
euro as the second ranking currency could change, either shrinking or growing. Overall, a
greater role for the euro is desirable, mostly because it would provide a greater degree of
financial autonomy to the euro area, shielding it from the increasing use of the dollar by the
US administration as a foreign policy tool, possibly conflicting with European interests.
There are policies that the EU could put in place to increase the international use of the euro,
but those with the greatest impact are very broad measures, including the completion of
banking union, progress on capital markets union, the issuance of a common bond, progress
on the economic policy set-up in the euro area and more effective and united foreign and
defense policy. (Papadia, Efstathiou, 2018)
These policies would have effects well beyond the international use of the euro and,
while desirable in principle, are not easily achievable.
Chart 9 shows the inflation rate over the past 23 years and the situation that it shows is
clear that stability of the currency is in the first period of its existence. From the second
period meaning the crisis in 2008 up till today is very variable.

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Since its inception, the Economic Monetary Union has maintained a strong current account
position. The union has had account surpluses in five of the eleven years it has been in
existence. The deficits experienced seem immaterial when compared to the region’s overall
GDP. The deficit outliers were years 2000 and 2008, both global recessionary periods. These
incidents were most likely attributable to the relative weakness in the U.S. dollar that stifled
demand for Euro area goods. By contrast, the U.S. has incurred increasing current account
deficits each year. Its account deficit has grown from $398 billion in 2001 to 706 billion in
2008 (Flatness, Whitake, & Yuskavage, 2009). Ordinarily, these deficits would eventually
lead to a weakened dollar, assuming other countries used the proceeds from these imbalances
to invest in other economies’ financial markets.(IMF Survey 2008)
Another contributing factor is the high global demand for American investments. This has
artificially strengthened the dollar and made American goods overpriced compared to foreign
offerings, thus making them less competitive. Overall, America’s excessive debt burden in
addition to its rapidly increasing deficits is quite alarming in the current period.
The unemployment rate and the labor productivity show that the European Union has been a
desired destination for work for a longer time. Even though the economic strength and the
current situation can show instability, the economic growth comes from the growth in the
number of factors of production or increases in the efficiency with which those factors are
used. In other words, more efficient finance leads to increased economic growth (Gregorio,
1999). Financial integration has a dual effect on economic growth. On the one hand, the
development of domestic financial markets may enhance the efficiency of capital
accumulation. On the other hand, financial intermediation may contribute to raise the savings
rate and, thus, the investment rate (Goldschmidt, 1969).
In general, European policy makers define three benefits of financial integration: the
development of more risk sharing and risk diversification, more efficient allocation of capital
amongst investment opportunities and the potential for higher growth (Baele, et al., 2004).
These factors are still the ones that can determine the employment and satisfaction of
employees in the EU countries on one hand and on the other the desire of non-EU countries
population to work in EU countries.
Based on international portfolio equity investments and FDI, there is research by Gur (2015),
which addresses financial dependence and employment growth to financial integration in
general. He concludes that financial integration increases growth of employment relatively
more in financially dependent industries.

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Empirically, this is underlined by numerous academics. With respect to risk sharing,
academics show support for the idea that higher financial integration leads to less symmetric
fluctuations in capital markets (kalemli-Ozcan, et al., 2001). The view that greater financial
integration leads to better allocation of capital is generally accepted amongst research.
Elimination of barriers to trading, clearing houses or cross-border mergers and acquisitions
allow corporations to participate in the most efficient capital accumulation processes and
therefore spur investments, by decreasing finance and transaction costs (Baele, et al., 2004).
Accessibility by less developed countries to foreign markets forces financial intermediaries to
reduce the cost of their services to firms and consumers in these countries, leading to the
expansion of local financial markets. These better credit conditions stimulate investments and
are expected to lead to higher economic growth. This is in accordance with Buch (2000), who
find evidence that cheaper financial intermediation has a positive impact on productivity
growth, which increases overall GDP growth.
The EU follows the rationale of greater transparency and increased competitiveness due to
the effectiveness of the single market, more stable macro-economics and therefore increased
investments.
A lot of research focusses on the convergence of debt markets. Fernandez et al. (2007) argue
that financial integration in Europe should affect the competition between markets and
intermediaries and generate a convergence of both interest rates and margins among different
countries.
Current trends suggest that governments’ funding needs might even increase in the months or
years to come. The health crisis, which left lasting scars on economies and public finances, is
not over. More recently, long underestimated geopolitical risks resurfaced at Europe’s
borders. Russia’s invasion of Ukraine prompted the European Union to make costly decisions
regarding sanctions, defense, refugee reception and alternatives to Russian energy. Finally,
Europe’s lofty climate ambitions will be extremely expensive (Krecke, 2022).
As shown in the graphs 14 and 15 the debt of the countries of the European Union rises in the
past few years due to the Corona pandemics and the Russian aggression towards Ukraine.
The war in Ukraine has upended the fragile economic recovery from the pandemic, triggering a
devastating humanitarian crisis in Europe, increasing food and commodity prices and globally
exacerbating inflationary pressures, says the latest United Nations forecast released today.
According to the World Economic Situation and Prospects (WESP) as of mid-2022, the global
economy is now projected to grow by only 3.1 per cent in 2022, down from the 4.0 per cent
growth forecast released in January 2022. Global inflation is projected to increase to 6.7 per cent in

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2022, twice the average of 2.9 per cent during 2010–2020, with sharp rises in food and energy
prices.
The downgrades in growth prospects are broad-based, including the world’s largest economies, —
the United States, China and the European Union — and the majority of other developed and
developing economies. The growth prospects are weakening particularly in commodity-importing
developing economies, driven by higher energy and food prices.
The sharp increase in energy prices represents a large negative terms-of-trade shock for the
European Union, which in 2020 imported 57.5 per cent of its total energy consumption. The
growth prospects for the European Union economy weakened significantly, with its
GDP forecasted to grow by only 2.7 per cent in 2022, instead of the 3.9 per cent projected earlier
in January.
As imports from the Russian Federation accounted for almost 25 per cent of Europe’s energy
consumption in 2020, a sudden halt in oil and natural gas flows from the Russian Federation
would likely further increase energy prices and exacerbate inflationary pressures. EU member
states from Eastern Europe and the Baltic region are severely impacted as they are already
experiencing inflation rates well above the EU average. (UN article 2022).
In general, from the obtained data and the opinions of the researchers the confirmation of
the first hypothesis can be made, that the introduction of the euro in the EU as a single currency
has brought many benefits to all the EU member countries.
Despite the Russian invasion in Ukraine and the current situation of the European
Union that stands upright in front of the challenges brought by the world’s far biggest crisis
and the changing rates of the euro currency it can be said that the Union, as always, will be
the symbol of stability in all the member countries od EU.
Even though, over the past 20 years, the EU has faced numerous challenges the
hypothesis of this master thesis can be both confirmed. The first one that the introduction of
the Euro in the EU brings benefit to all the EU member countries, according to the presented
data in the thesis shows that the benefits of the EU countries are more and are very important
for the stability of the whole EU region. This stability has affected even the non EU countries
and brought stability in the past 30 years of the existence of the euro as a single currency in
the European union.
Also, with the results shown in this thesis the second hypothesis can be also confirmed that
20 years later the Euro keeps the economic stability in all the member countries od EU. In
this case it has to be taken into consideration that the Russian invasion on Ukraine has made
many changes for the stability of the euro, but based on Financial Stability Expert

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(ESCB/IO), European Systemic Risk Board, the stability of a currency in terms of analyzing
the developments in the financial sector of EU, the analysis and the statistic show that the
euro currency will remain stable in the future.
In that period, there was a general consensus regarding the stabilizing role of
economic policy, according to which significant priority was given to monetary policy, while
fiscal policy had a relatively passive role, which was reduced to maintaining public debt
within acceptable limits. Fiscal policy measures began to be used more intensively after the
world economic crisis in 2008, but the application of restrictive measures led to a new shock
that hit the members of the Eurozone in 2010. After that, monetary policy was again the main
instrument for stabilizing the economy, but soon all the capacities of conventional measures
were exhausted, central banks switched to unconventional measures to fight low inflation
(but also deflation in some member states) and low growth rates (Papaspyrou 2017).

WORLD PRICE SHOCK ARISING FROM COMMODITY PRICES IN

2008 AND 2022.

As previously mentioned, the shock from 2008 and the crisis affected the EU Countries
that arose from commodity prices in 2008 and 2022. These Rising commodity prices causing
inflationary pressures. The IMF’s commodity price index has risen by cumulative 10 percent
in 2008 after the increase of about 30% between December 2006 and December 2007. Given
supply shocks, more price rises for some commodities, including wheat and tin, were
expected; however, the sharp spike in prices for other commodities came as more of a
surprise. In particular, oil prices increased sharply, surpassing their previous record high in
constant prices established on December 17, 1979, from over $90 a barrel in late January
2008 to over $105 a barrel by mid-March. Following a decline during the second half of
2007, base metal prices rose. The dual nature of commodities were the goods that were both
consumed and used as inputs in the production of other goods and financial assets that were
used.
The appeal of commodities as financial assets was viewed against the backdrop of
persistently tight market balances, which meant strong net demand for commodities
(consumption minus production) in the context of low stocks and, in the case of
nonrenewable resources, limited spare capacity. Market tightness was supported by a number
of variables, as detailed in more detail in the March issue of Finance & Development
("Riding a Wave").

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 Inflation had been under pressure as a result of rising commodity prices. The impact of
rising food prices on inflation is especially concerning, especially for emerging and
developing economies, as equivalent expenditures far outpace expenditures connected to oil
by a significant margin. In many nations, rising gasoline and food costs had already increased
headline inflation, and the effect on headline inflation remained for a significant portion of
2008 even in the absence of further increases in the prices of the underlying commodities.
Risks included the possibility that increasing gasoline and food costs would have an influence
on inflation expectations, which would then have a second-round impact on inflation. This
would constrain monetary policy at a period of heightened spillovers from advanced nations'
sluggish development.
Rising commodity prices also put more financial strain on producers and decreased the
purchasing power of households in nations that import commodities. The negative
consequences of the credit market crisis on consumers in advanced nations were compounded
by these factors. At the global level, it seemed improbable that the effect of these reductions
in aggregate demand would be completely offset by increased spending in countries that
export commodities in response to the significant terms of trade advantages.
The poor in emerging and developing nations have been more burdened by rising
commodity prices, particularly for food products. In such nations, the poor's share of
household spending on food was significantly higher than that of other income groups.
In an effort to preserve sufficient domestic food supply at the time and relieve societal
pressures brought on by rising food costs, an increasing number of nations resorted to
lowering import restrictions and raising export duties, which contributed to the tightening of
the global market. Others have implemented subsidies that, often at significant financial
expense, lower price pass-through. Instead, whenever possible, well-targeted cash transfers
had been the primary vehicle of policy.
Compared to the Russian invasion that had not only resulted in fatalities and destruction
in Ukraine, but it also had a substantial negative impact on the world economy. New rounds
of supply chain disruptions and higher commodity prices have already caused downward
revisions in economic growth projections, along with higher inflation. This is in addition to
the geopolitical effects of the war, which reinforce the downward trend in trade globalization
and financial integration.
So far in 2022, prices have increased dramatically as a result of the commodity price
shock, which has intensified patterns that have been prevalent since mid-2020.

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 Higher prices will remain in the medium term, according to the World Bank’s
Commodity markets Outlook report issued on April 26, 2022

Figure no. 9
Commodity prices January 2020 – March 2022
The length of the conflict in Ukraine, the severity of the sanctions placed on Russia,
and the level of interruption to commodity flows will all affect the future of the commodities
markets. Energy, fertilizers, some cereals, and metals are all key sources of supply from both
Russia and Ukraine. While Ukraine is the largest exporter of sunflower oil, Russia is the
world's largest exporter of natural gas, nickel, and wheat. These goods have noticeably
increased in price since the commencement of the conflict in Ukraine, which is not a
coincidence.
The import of Russian oil has already been banned or phased out by a number of
nations, including the United States, Canada, and the United Kingdom. Additionally, private
buyers have committed to reducing their purchases of Russian oil. What about alternatives to
the supply? One issue, as noted in a report by the Federal Reserve of Dallas, is that OPEC+
member countries are unable to even satisfy the limits set by the organization due to
production capacity restrictions.
According to the World Economic Outlook report from the International Monetary
Fund, which was published on April 19, there has been a 20% decrease in global investment
in oil and gas over the last three to four months as a result of the expectation that demand for

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fossil fuels will decline due, among other things, to the energy transition. Global upstream oil
and gas investment peaked at 0.9% of global GDP in 2014, increasing during the "shale
revolution" before declining to less than 0.5% of global GDP in 2019 and further declining
during pandemics. (IMF report October 2022)

Figure. 10 Oil and Gas Investment as Share of World GDP (%US$/barrel)

Source: World Bank (2022) Commodity Markets Outlook, April 2022
Two variables will contribute to the pricing remaining stable at greater levels. First
off, with fossil fuel costs rising across the board, there isn't much room to switch out the most
affected energy commodities with other fossil fuels. Second, the prices of other commodities
are significantly impacted by energy commodities. For instance, the price of natural gas has
already increased the cost of fertilizer, which has pressured agricultural prices.
Trade repercussions and rising input costs have also significantly affected the food
industry. According to the UN food price index, food prices are now at their highest point
since tracking began 60 years ago. There are other factors at play besides merely increasing
wheat prices. Their availability around the world has been adversely impacted by South
America's lower-than-average wheat and soybean crops. (UN – Ukraine war drives
international food prices to new all-time high,2022)

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 Concerns about rising costs and the possibility of fertilizer shortages for the next year.
Many nations around the world, notably those in Africa, the Middle East, and Asia that are
among the poorest and most dependent on food imports, have made food security and
potential social unrest major concerns.
Due to concerns about supply interruption, some metal prices also reached previously
unheard-of heights in March, while stockpiles were at record-low levels. Palladium and
platinum, which are both utilized in the production of catalytic converters for the automotive
sector, are abundant in Ukraine and Russia. Battery components like platinum, copper, and
nickel are essential. Additionally, 50% of the neon gas used in lasers to create semiconductor
chips is produced in Ukraine.
Aluminum and nickel prices have mostly been affected by the conflict in Ukraine, but
increased energy prices have also had an impact on zinc pricing. These materials are essential
components of renewable energy systems like solar cells and wind turbines. Therefore,
further price rises or disruptions in the supply of these metals could increase the cost of the
energy shift.
Depending on whether an emerging economy is an exporter or an importer, the
macroeconomic effects of the commodity price shock will vary among them in the short run.
For instance, there is a recent surge in inflation in Latin America, yet exporters often benefit
in terms of GDP, trade balances, and public sector accounts. The IMF modestly raised its
growth forecast for Brazil for 2022 and 2023 to 0.8% and 1.3%, respectively. (IMF – World
Economic Outlook April 2022, Wwar sets back the global recovery 2022)

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 CHAPTER VI

5 CONCLUSION AND RECOMMENDATIONS FOR FURTHER

RESEARCH

After its inception in 1999, the euro quickly established itself as a key international currency
on global financial markets. An upward trend in the popularity of the euro as a reserve
currency and emerging concerns around the soundness of US economic policy in the longer
term even led to speculation by some economists that the euro might surpass the dollar as the
leading international currency over the next decades (Chinn and Frankel, 2005). However,
the trend towards the euro reversed with the global financial crisis which emerged in 2008
and strengthened the dollar for two reasons: The dollar still acted as a safe haven asset despite
the fact that the crises originated in the US and the subsequent Eurozone crisis affected trust
in the sustainability of the euro area.
20 years after its introduction, the role of the euro as an international currency remains under
debate. While the euro has become and remains to be the second most important currency in
the international financial system, by most measures it continues to lag the US dollar by a
wide margin. Following a rise in importance in the first decade since its inception, the euro
experienced a setback between 2008 and 2014 in the wake of the global financial crisis and
the European sovereign debt crisis. These developments suggest that the euro’s international
use is highly dependent on the stability of the euro financial markets and the credibility of the
euro area institutions.
International currency status is not necessarily a binary variable but can be a matter of degree.
A currency can be of different international importance to private and public users along
different roles and functions – a currency does not have to be equally important as an
international medium of exchange, unit of account, and store of value, respectively.
High demand for a currency as an international store of value will reduce external financing
costs for the issuer. On the flipside, there is a concern that this results in currency
overvaluation reducing the international price competitiveness of domestic firms. Overall,
however, domestic agents are set to benefit, although the size of the “exorbitant privilege”
may be relatively small in the current low interest rate environment.
The effects of international currency status on the effectiveness of monetary policy are
ambiguous. On the one hand, an increased international transmission with positive spillbacks
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to the domestic economy and a reduced exposure of domestic prices to exchange rate shocks
make it easier for a central bank to hit its target for inflation or economic activity. On the
other hand, lower effects of monetary policy on import prices as well as blurred signals from
monetary aggregates can also complicate matters.
Being the issuer of an international currency can change one’s relationship with the rest of
the world. On the one hand, it can enable the issuer to achieve non-monetary side objectives
because foreign agents may be forced to follow domestic financial regulations. On the other
hand, international pressure on the issuer may arise to deviate from own policy preferences in
order to accommodate foreign needs (e.g. provide financial support in times of economic
trouble abroad).
Strengthening the international role of the euro can be pursued along different lines. The
euro’s international attractiveness could rise as a natural outcome of improved, more
consistent institutional arrangements in the euro area leading to credible and sound economic
and fiscal policies. Policy could also try targeting individual markets, such as emerging
economy debt markets or energy markets, with interventions in order to increase the
international use of the euro.
However, it is far from clear that a (further) substantial mutualisation of debt would increase
the supply of euro assets of highest credit quality. Credit ratings of these assets would depend
fundamentally on their design, how well European rules can be enforced, and how well the
design will address the issue of moral hazard. Moral hazard here means that individual
Member States will be less inclined to follow sound fiscal and economic policies if part of the
costs of their debt is shifted onto others. With all the currently debated designs for such
assets, moral hazard would remain a major issue. Note that depending on the amount of
European debt that they will have to guarantee the creditworthiness of the few remaining
AAA-rated sovereigns may be insufficient, leading to downgrades. In addition, it is unclear
whether a common euro area debt instrument would be able to improve overall liquidity in
the euro area government bond markets, and if any potential improvements in liquidity
conditions would substantially decrease total financing costs.
The future of the euro is essential for the political and economic landscape on our continent
for the years to come. The currency is the touchstone of how Europe will succeed in defining
its place in the 21st century. The global sea is getting rougher: the emergence of new powers,
the ageing of our societies and climate change pose formidable challenges. To keep the
European dream alive—which is not only about raising prosperity but maybe even more
about sustainability, social justice and diversity—Europe as a whole has to find new ways of

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joint decision making and shared responsibilities. Otherwise, Europe will cease to be a voice
that is heard in tomorrow’s world economic and political order. And without international
relevance and influence, slow but steady decline seems inevitable. But as the saying goes,
every journey starts with a single step, and that has been undertaken.

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