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Part - II
But how did the Euro actually come into existence?
In order to answer that question, we need to go back to the events of 1992, which culminated in the establishment of the European Union and the aforesaid Euroland countries agreed to have a common currency and a common Central Bank, the ECB. The Euro was introduced in three phases with Phase A ending in 1999. Phase B started subsequently with the launch of the Euro in electronic format. The exchange rate for individual currencies was permanently fixed at the rate prevailing at the last date of 1998. Phase C commenced in 2002 with the launch of the Euro in physical form.
Countries had to qualify for the Euro by complying with five essential conditions: -
The Govt. deficit had to be less than or equal to 3% of the GDP.
Total Govt. should not be more than 60% of GDP.
Nominal interest rates on long term Govt. rates should not be more than 2% above the rates of three Euroland countries with lowest such rates.
Consumer price inflation should not be more than 1.5% above the rates of inflation of three Euroland countries with lowest such rates.
Countries must be members of European Monetary System and their currencies must trade within the normal margins of fluctuation of the system.
The primary reasons for such stringent conditions were to prevent the currency from being highly volatile and in order to ensure convergence of economic policies and interests.
European Central Bank
The European Central Bank has been modeled on the lines of the independent Bundesbank. But even the Bundesbank is not truly independent. The German Parliament can issue a two-week veto to the policies of the Bundesbank. The US Federal Reserve is technically independent but Alan Greenspan keeps himself aware of the views of the US Treasury Department and the President and would be foolish to completely ignore their opinions.
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* Contributed by -
Pinak Rudra Bhattacharyya,
Ist Year, IMT Knowledge Forum,
IMT Ghaziabad.
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