Completing the Changeover

As of February 28, 2002, national notes and coins of the twelve member states in the euro zone were withdrawn permanently and replaced by the euro. This was a huge logistical task with a corresponding impact on EU citizens in participating member states. Preparatory steps taken since January 1, 1999 included:

• Fixing the conversion rate of the participating currencies to the euro irrevocably;

• Having all operations of the European Central Bank in euros;

• Having wholesale financial and capital markets use the euro;

• Denominating all public debt in euros;

• Denominating private bank accounts in euros;

• Making euro-denominated credit cards available and making payments in euros possible on existing credit cards;

• Having public administrations in the euro countries allow companies to use the euro for accounting purposes, tax payments, and in some cases, social security payments;

• Dual pricing (in national currencies and euros) to help the general public adapt to the euro.

Participating in the Euro Area

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The decisions about which member states would participate in the euro were made for the most part on May 2,1998, at a special meeting of EU leaders in Brussels. The decisions were based on each member state's performance in meeting the economic "convergence criteria" set out in the Maastricht Treaty, including sound management in the areas of public finances, price stability, exchange rates, and interest rates. Following this decision, on January 1, 1999, the euro became the single currency for eleven EU member states: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Spain, and Portugal. On January 1, 2001, Greece joined this group after meeting the Maastricht "convergence criteria."

What Does the Euro Mean?

The euro means stability. Member states participating in EMU are legally bound to continue the fiscal discipline required by the Maastricht Treaty to qualify for EMU. This is the purpose of the Stability and Growth Pact, agreed to by EU heads of state and government in July 1997, under which sanctions can be brought against member states that do not comply with strict guidelines for managing public finances.

The euro consolidates and extends Europe's single market. By removing transaction costs and completely eliminating currency transactions in the euro zone, trade and investment are greatly facilitated.

The euro creates new opportunities in the financial sector. The market capitalization of stocks traded in a country or region divided by that region's GDP is a common indicator of the importance and size of an equity market. The euro area's ratio of market capitalization to GDP gained significantly in the 1990s. From 1990 to 1995, the ratio hovered around 25 percent and was remarkably lower than that in Japan or the United States. However, by 2000, the overall growth in the euro area's stock market resulted in an increase in this ratio to 89 percent, topping Japan's 68 percent.

The euro is likely to become a major reserve currency. According to some estimates, the euro could account for 25 percent or more of global foreign exchange reserves in the medium term. This should help the EU and the United States share the burden of global financial stability, particularly in the wake of an economic downturn. The European Central Bank moved to reassure world markets following the September 11, 2001, terrorist attacks in the United States, and subsequently cooperated with the US Federal Reserve and other central banks to ensure sufficient liquidity for market and other economic transactions.

Like any other currency in the floating exchange rate system, the dollar to euro exchange rate fluctuates, reflecting perceptions about economic growth prospects. The dollar to euro exchange rate averaged $0.90 in the first half of 2001 and $0.92 for 2000.