Branding

1 Introduction of Euro 2

1.1 What is the Euro? 2

1.2 Countries in the euro area 2

2 Development of Euro 5

3 TRADE EFFECTS OF THE EURO

4. The Welfares Effects of Common Currencies

5 International risk-sharing

6 Macroeconomic

7 Conclusion 12

1 Introduction

The euro has been in existence just long enough to generate sufficient data for a first look at its actual performance, having been introduced in January 1999. This assessment presents eight studies that use post-1999 data to provide a first look at how the euro is actually affecting trade, financial markets, macroeconomic policy-making, and EuropeЎЇs economic performance.

1.1 What is the Euro?

The Euro is the single currency used in 12 EU member states. The euro came into being in cashless form on 1 January 1999 when these member states formed an Economic and Monetary Union (EMU) and permanently locked the exchange rates of their currencies against the Euro. Euro notes and coins were put into circulation in these 12 EU states on 1 January 2002 .

1.2 Countries in the euro area

The 12 countries in the euro area are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and Greece. The United Kingdom (UK) has decided not to participate but has indicated that it may consider joining at a later date.

Euro notes and coins were put into circulation on 1 January 2002. The euro is part of the process of EMU. EMU is provided for in the Maastricht Treaty, which the people of Ireland endorsed by referendum in June 1992. As well as the Euro, EMU has involved the creation of an independent European Central Bank (ECB).

The euro is used also in Andorra, Monaco, San Marino and Vatican City. Several overseas territories of the 12 "Euro zone" countries use the euro: these include the Canaries, Madeira, the Azores and the French Outre-Mer territories (Guyana, Martinique, Guadeloupe, Reunion and the collective territories of Mayotte and St Pierre and Miquelon) .

2 Development of Euro

1 July 1990 Stage one of economic and monetary union begins. Capital movements in the EU Member States are fully liberalized (except where temporary derogations have been granted).

1 January 1993 The single market is completed.

1 November 1993 • The composition of the ecru basket is frozen.

• The Treaty on European Union signed in Maastricht enters into force.

1 January 1994 • The European Monetary Institute (EMI) is set up in Frankfurt.

• Procedures for coordinating economic policies at European level are strengthened.

• Member States strive to combat 'excessive deficits' and to achieve economic convergence.

31 May 1995 The Commission adopts Green Paper on the single currency (reference scenario for the transition to the single currency).

15 and 16 December 1995 • Madrid European Council

• The name 'euro' adopted for the single currency.

• Technical scenario for introduction of the euro and timetable for changeover to the single currency in 1999 finalized (end of the process scheduled for 2002).

16-17 June 1997 Amsterdam European

Council • Madrid European Council

• The name 'euro' adopted for the single currency.

• Technical scenario for introduction of the euro and timetable for changeover to the single currency in 1999 finalized (end of the process scheduled for 2002).

1 June 1998 Creation of the European Central Bank

31 December 1998 Conversion rates fixed

1 January 1999 Stage three of EMU begins.

• The euro becomes the new currency for eleven Member States and a single monetary policy was introduced under the authority of the ECB, heralding the third and final stage of monetary union.

• Euro area financial markets are switched to the euro, including foreign exchange, share and bond markets. New euro area government debt is exclusively issued in euro as from this day.

1 January 2001 Greece becomes the twelfth EU Member State to adopt the euro.

1 January 2002 The euro is launched.

1 March 2002 The euro becomes the sole legal tender in all euro area countries.

28 June 2004 Among the 10 Member States that joined the EU in May 2004, Estonia, Lithuania and Slovenia enter ERM II.

2 May 2005 Latvia, Cyprus and Malta join ERM II.

3 TRADE EFFECTS OF THE EURO

The classic currency union trade-off highlighted by Robert Mundell in 1960 weighs a trade gain against a stabilization loss. While the existence of both the trade gain and the stabilization loss has always seemed intuitively plausible to most observers, measurement of the trade effect probed elusive. Indeed until Andy Rose published his path breaking paper in the April 2000 issue of Economic Policy, the received wisdom was that the trade effect of exchange rate volatility was negligible. What Rose found was that the pro-trade effect of a currency union was huge, with a common currency boosting trade between nations by as much as 300%. Subsequent studies confirmed the existence of the effect, but found it to be smaller. For example, using a different statistical technique, an article published in the October 2001 issue of Economic Policy by Torsten Persson