The successes and the shortcomings – EURACTIV.com


Although officially introduced on January 1, 1999, the euro became a tangible reality for most Europeans on January 1, 2002, when the first euro banknotes and coins were put into circulation.

The following six charts provide an overview of the history of European currency with some of its successes, flaws and absurdities.

1. How many euro banknotes are there?

As of November 2021, a total of 27,640,019,753 euro banknotes with a total value of 1,519 billion euros were in circulation, according to the European Central Bank (ECB). In addition, 141 billion coins, with a total value of 31 billion euros, circulated in wallets, supermarket cash registers, trouser pockets and under sofa cushions.

Although more consumers have paid cashless, the amount of euro banknotes in circulation has increased and growth has even accelerated over the past two years. Researchers at the European Central Bank have pointed out that euro banknotes are increasingly used as a store of value, both within and outside the euro area. This could be particularly relevant during the crisis caused by the pandemic.

“A possible explanation […] is that during the crisis, people turned to cash as a tool to manage uncertainty, ”explained Fabio Panetta, member of the ECB’s executive board.

“Faster digitization doesn’t mean the end of cash anytime soon,” he said.

Even the number of euro coins in circulation continues to increase. The most numerous coin is the 1 cent coin, with 38 billion coins worth 380 million euros in circulation. If they were all stacked on top of each other, this slim tower would reach 63,460 km in space, or about a sixth of the distance to the moon.

2. The ECB’s balance sheet as a history book

The euro’s history has been short but eventful: the great recession of 2008, the eurozone crisis of 2010, the deflationary pressures of 2015-2019 and the pandemic all left their mark on the ECB’s balance sheet.

The cumulative effect of the ECB’s reactions to these events led to a nine-fold increase in the assets on the ECB’s balance sheet from 1999 to 2021.

Moreover, the evolution of the composition of the ECB’s balance sheet shows the different ways in which the guardian of the euro reacted to the challenges of the time.

For example, the category “Loans to euro area credit institutions in euros” (blue area in the graph) shows how the ECB has used long-term refinancing operations (LTROs) in times of crisis. In 2008, 2012 and 2020, the ECB provided European banks with cheap loans through these LTROs so that banks continue to lend to the real economy.

The rise of the category “Securities of residents of the euro zone” (green zone in the graph) shows the start of the quantitative easing (QE) program in early 2015.

As the eurozone risked slipping into deflation, the ECB, led by then-president Mario Draghi, began buying massive amounts of government bonds and corporate securities. The aim was to maintain attractive financing conditions for productive investments so that a warmer European economy could counter deflationary pressures.

Asset purchases had stopped for some time in 2019, but then resumed to a total of more than € 3.2 trillion by the end of 2021.

Bank policy can lead to inequalities, says ECB board member

Moving away from the orthodoxy of the European Central Bank, a senior bank official argued that while the ECB’s monetary policy led to a decrease in labor income inequality, its asset purchase programs would lead to wealth inequalities.

3. The lasting dominance of the US dollar

One of the goals of the euro was to challenge the global dominance of the US dollar as a reserve currency. Although the euro has quickly established itself as the second most important currency, with around 21% of global foreign exchange reserves denominated in euros today, it is still far from questioning the role of the USD.

Compared to the beginning of the euro’s history, the role of the euro now appears to have diminished. At the start of 2010, the euro represented 27% of global foreign exchange reserves.

In addition, the majority of international trade that does not take place between EU countries is denominated in USD. This gives the United States geopolitical leverage, as it can prohibit countries, businesses, or individuals from transacting in USD or holding USD denominated assets, essentially excluding them from the global trading system.

The EU felt this enduring US dominance when the US withdrew from the nuclear deal with Iran and unilaterally applied severe economic sanctions to Iran. A strengthened international role for the euro is therefore one of the preconditions for greater “strategic autonomy” for the EU.

4. How Germany succeeded, part 1

Reflections on the political consequences of currencies have always been at the forefront of French thinking about the euro. The French government wanted to be less dependent on the United States and also wanted to counter German domination in Europe.

When Germany wanted to reunite, the French government agreed, but on condition that a common currency be established, aimed at reigning over German domination.

Many Germans feared losing an independent central bank as the main monetary institution, which could then lead to inflation. With the specter of Weimar-era hyperinflation still haunting German consciousness, the Berlin government ensured that price stability was made the sole primary goal of an independent European Central Bank.

And it seems to have worked from a German perspective, although inflation has also remained low due to factors other than central bank independence. Inflation in Germany remained very low after the introduction of the euro.

In 2021, a sharp rise in inflation (not visible in the graph above) raised fear of uncontrollable inflation. In Germany, politicians were quick to blame the ECB’s low interest rates. However, the current pandemic-related inflation has its origins in high energy prices and other supply chain difficulties that the ECB cannot directly influence.

5. How Germany succeeded, part 2

If Germany won its case in terms of central bank independence and inflation control, has France at least succeeded in rebalancing economic power within Europe?

Not really.

Without the euro, the German D-Mark should have appreciated following the good economic performance of Germany. As a member of the euro, however, the German export industry benefited from a relatively cheap currency.

Meanwhile, other European industries suffered from a relatively expensive currency, making them less competitive in global markets.

This imbalance is especially visible in the current account of euro-zone countries. Germany had a current account surplus of 230 billion euros even in 2020, when the pandemic disrupted global trade. This means that Germany exported far more goods than it imported.

Meanwhile, France had a current account deficit of 44 billion euros. The fact that less productive countries cannot devalue their currencies to compensate for the competitive disadvantage has led to social problems, mainly in southern Europe. Eurozone countries could only hope to remain competitive by lowering labor costs, which means lower wages or weaker social protection.

The problem is exacerbated by the fact that Germany did not invest or spend its surplus, which would have supported the economy throughout the euro area.

6 – Where can we see the bridges on the euro banknotes?

Have you ever wondered why you never crossed the bridges depicted on the euro banknotes?

The reason is that they are fictitious. Or at least they were.

Initially, the ticket designer proposed to represent real bridges, like the Rialto Bridge in Venice. However, to avoid political disputes over the choice of the country’s bridges that should appear on the banknote, the ECB chose to opt for models of stylized bridges representing a certain architectural era instead of actual examples.

In 2011, however, the Dutch city of Spijkenisse seized the business opportunity of being the only European city represented on euro banknotes by actually building the seven bridges over its canals.

However, the effect of Spijkenisse’s ex-post appropriation of the banknote bridges may soon wane. In December, the ECB announced that it was looking for a new design for the euro banknotes. A decision on the new design is expected in 2024.

[Edited by Zoran Radosavljevic]


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