Communicating on the euro

Changing over to a new currency affects many aspects of a citizen's daily life. Timely and effective communication is therefore an essential task for any Member State planning to introduce the euro, and experience shows that it is also crucial for a successful changeover.

But communication does not stop once euro coins and banknotes are in citizens’ pockets, as the success of the single currency also depends on success in explaining its benefits and how it works to the public.

Before, during and after

Communication plays a key role in building consumers’ confidence, and is an important complement to the measures taken in order to ensure transparency and fair conversion of prices before and during the changeover, such as the fair pricing agreements concluded between national authorities and businesses, or the price monitoring schemes designed to ensure that consumers’ unfamiliarity with the new currency is not exploited by businesses for unfair gain.

Information campaigns on the introduction on the euro must aim to ensure that people are able to recognise and use the new currency with full confidence. This involves tailoring messages and tools in order to reach every citizen, including those who are most vulnerable, like the elderly, disabled people and language minorities. Ultimately, as when learning a new language, people should be able to ‘think’ in euro and understand values without having to convert into/from the old national currency. Communication helps citizens assimilate this new ‘language’ and identify themselves with the new currency.

Identification means support. And public support is another key factor in the success of the single currency and its political framework, the Economic and Monetary Union. Explaining what the benefits of the euro are and how EMU works is necessary to win that support. The job of communication therefore does not stop at the end of the changeover process, but must continue well after the replacement of the old currency.

Working together in partnership

In 2004, the Commission adopted a Communication on an information and communication strategy on the euro and EMU (COM(2004) 552 final), which recognises the need to consolidate public support in the euro-area countries, and to help the newest EU countries to achieve a smooth changeover when the time comes.

One of the guiding principles of the strategy is decentralisation and subsidiarity: since communication is more effective if it goes local, Member States have a leading role in designing and implementing the information campaign on the introduction of the euro in their country, but can count on technical and financial support from the Commission, which provides it under what is known as partnership agreements.

Partnership agreements are voluntary working partnerships concluded between the Commission and those EU countries which are close to introducing the euro and have adopted a euro communication strategy. Under the partnerships, the Commission co-finances specific activities in the strategy, such as public surveys, direct mailings, advertising campaigns, publications, websites, conferences, or euro hotlines, and provides technical support and guidance. The first partnership agreements were signed in November 2005 with Estonia, Lithuania, and Slovenia. Cyprus and Malta followed in May 2006, and Slovakia is expected to be the next country to conclude one by the end of 2007.

A full range of activities

The Commission, for its part, carries out a number of activities, with two overarching objectives: one is to increase public knowledge of and support for the euro in those countries where it is already the official currency, and the other is to help EU members which will adopt the euro in the future with their preparations to do so.

• It regularly monitors the state of public opinion through Eurobarometer surveys, which are conducted once a year in the euro area, and twice a year in the new EU countries. The results are published on the Europa website.
• It helps set up ‘twinning’ programmes between euro-area and non-euro-area countries to encourage the transfer of know-how on practical preparations. As many as 10 twinning programmes have been developed since 2005.
• In 2006 it created a network of independent speakers on euro-related matters in 10 of the newer Member States – the Euro Team – who act as local ambassadors of the euro in their respective countries with no institutional or financial link to the Commission.
• To meet an increasing demand for specialised speakers on EMU-related matters, it has also constituted a pool of EU officials working in Brussels who can deliver presentations to groups of students, visitors, and specialised audiences.
• Finally, the Commission develops its own products, such as publications and websites, and organises conferences, seminars and travelling exhibitions, for both euro-area and non-euro-area countries.

All Commission activities, from partnerships to centrally produced publications, fall under the budget of PRINCE, the Information Programme for the European Citizen, born back in 1996 to ensure that funds were ringfenced for key communication priorities such as the euro. The Commission reports twice a year to the European Parliament on the activities financed from the part of the PRINCE budget allocated to the euro and EMU.

International financial markets

The euro is a key global currency which has an important role in international financial markets. It is used widely by third-country governments and private actors worldwide as a currency of choice for their reserves, their borrowing and for trade.

The euro is an attractive currency for the international financial markets because of the size of the euro-area economy, its openness to trade with the world, its commitment to prudent economic management, and the clear mission of the European Central Bank to run a monetary policy that ensures price stability.

These factors give international financial markets the confidence to use the euro widely, alongside the US dollar, in a range of financial instruments:

• International debt markets
• Third countries wishing to raise large amounts of money can do this by issuing bonds that are repaid with interest at a fixed future date. Large institutional investors, such as pension funds, usually buy such bonds because they are seen as low-risk investments. When a country issues bonds in a foreign currency, they are known as sovereign bonds. Large private corporations can also issue ‘corporate bonds’ in a foreign currency to fund their operations and investments. Such bonds are traded on ‘international debt markets’. At the end of 2006, the share of euro-denominated debt in international debt markets was 31.4%, while the US dollar comprised 44.1%
• International loan and deposit markets
• Banks make loans and accept deposits across the world in various currencies which form the international loan and deposit markets. This lending and borrowing involves countries and corporations worldwide, for example a corporation borrowing to fund new investments in a developing country, or a government placing oil revenues on deposit with a bank until needed. The euro is playing an important role in these markets. In December 2006, euro-area bank lending to non-bank institutions outside the euro area was denominated at 36.3% in euro and 44.8% in US dollars.
• Foreign exchange markets
• Foreign exchange (forex) markets are those where currencies are traded for others. The euro has become the second most actively traded currency in forex markets. At the beginning of 2007, it was a counterpart in around 37% of the daily transactions, compared to a share of 86.5% for the US dollar, 16.5% for the Japanese yen and 15% for the pound sterling (both sides of transactions are counted so that shares add up to 200%).
• International trade
• The euro is increasingly used by euro-area Member States as the currency of settlement and invoicing in international trade. In the first quarter of 2006, in most euro-area countries where data was available the average share of the euro in euro-area exports of goods to countries outside the EU was around 50% – slightly surpassing the US dollar, which is used in around 44% of the transactions in terms of value – whereas in imports of goods the euro's share was around 35%. To a much smaller extent, the euro is beginning to be used as a 'vehicle currency' for trade between third countries, although the US dollar is still dominant in this. As the euro area constitutes the largest trading block and one of the most open economies in the world, the use of the euro in international trade can be expected to grow in the future.
• Reserves and anchors
• As a major currency, the euro is used as an ‘anchor currency’ by some third countries to manage their own exchange-rate regimes. For example, Russia uses the euro as part of a basket of currencies for the daily management of the rouble exchange rate. In addition, the euro is increasingly held as a reserve currency by third countries because they have confidence it will maintain its value. The share of the euro in global foreign exchange reserves is over 25% (mid 2007) and close to 29% in developing countries, which have increased their reserves significantly from 18% held in 1999. In comparison, the US dollar accounts for around 65% and the pound sterling for around 4.5% of global currency reserves.

The establishment of the euro area also created the second largest currency area in the world. On international markets, the euro is the second most important international currency after the US dollar. The size and stability of the euro-area economy and the liquidity of its financial markets make holding and using the euro attractive to third countries as an alternative to US dollars – helping reduce the risks of currency fluctuations and contributing to global economic stability. The euro-area Member States also benefit, as trading in euro becomes more widespread. Further, the importance of the euro gives the euro area a stronger voice on the international stage.

Links to other currencies

Several countries and territories outside the European Union have linked their currencies to the euro. This is because the stable monetary system behind the euro makes it an attractive 'anchor' currency for them. In some cases, it is by bilateral agreement with the EU, while in others it is a unilateral decision of the country concerned.

Non-euro area Member States link their currencies to the euro through the Exchange Rate Mechanism (ERM II). This linkage is part of the preparations for entry to the euro area. However, other countries can also link their currencies to the euro by supporting a fixed exchange rate against the euro. This is known as a ‘currency peg’.

In some cases, countries with weak economies make this linkage as a safety measure. Linking the value of their national currency to a ‘hard currency’, such as the euro, brings more certainty and stability to their national economies. In other cases, the linkages can be made to promote trade stability by avoiding strong exchange-rate fluctuations. While for some, this linkage is made through a ‘basket’ of currencies that includes the euro – in such cases the link is less direct.

Currencies linked to the euro by bilateral agreements are:

• The CFP franc used in French overseas territories in the Pacific region (French Polynesia, New Caledonia and Wallis and Futuna Islands). The CFP franc was previously linked to the French franc via a fixed parity and is now pegged to the euro. The euro area has no obligation to support the exchange rate with the CFP franc.
• The two CFA francs used by several countries in two monetary unions in West Africa and Central Africa. These countries have historical relations with France, and the CFA francs were previously pegged to the French franc. They are now pegged to the euro through bilateral agreements with France. The euro area has no obligation to support the exchange rate with the CFA francs.
• The Comorian franc (Comoros Islands) and the Cape Verde escudo (Cape Verde) were previously linked to the French franc and Portuguese escudo, respectively. They are now linked to the euro through bilateral agreements. The euro area has no obligation to support these currency pegs.

Examples of currencies linked unilaterally to the euro

• Several countries link their national currency directly to the euro. This is achieved through supporting an exchange rate against the euro that is only allowed to fluctuate within defined limits. The third countries’ monetary authorities support this exchange-rate peg on their own by intervening in currency markets. The euro area has no agreements or obligations to support these currencies. Such unilateral links with the euro exist, for example, in Croatia, the former Yugoslav Republic of Macedonia, Serbia and Tunisia.
• A number of EU countries which are not yet part of the euro area – Czech Republic, Romania – also manage their currencies in this way. And Hungary even shadows the Exchange Rate Mechanism (ERM II) by pegging the forint and applying a ±15% fluctuation band.
• Bulgaria and Bosnia and Herzegovina maintain euro-based currency boards in charge of supporting the fixed foreign exchange rate, to which the normal objectives of central banks are subordinated.
• Other countries link their currencies to the euro through a ‘currency basket’. In this case, the exchange rate of the national currency is linked to a fictitious exchange rate from a ‘basket’ of other currencies, such as the euro, the US dollar, and the Japanese yen. Countries that use such ‘currency baskets’ are Botswana, Jordan, Libya, Morocco, Russia, Seychelles, and Vanuatu.

The euro outside the euro area

The euro is the official currency of the euro area and it is also used widely in global currency markets. In addition, the euro is also used for various reasons as an official or de facto currency by a number of third countries and regions outside the European Union.

Certain parts of the euro area are part of the European Union even though they are not on the European continent, such as the French overseas departments of Guadeloupe, French Guyana, and Martinique in the Caribbean, and Réunion in the Indian Ocean. The Portuguese islands of Madeira and the Azores, and the Spanish Canary Islands, all in the Atlantic Ocean, are other examples.

As part of the euro area, these regions use the euro normally. However, the euro can also be found in other countries and regions which are neither part of the European Union nor the euro area.

Who else uses the euro?

Three of these have adopted the euro as their national currency: the Principality of Monaco, the Republic of San Marino, and the Vatican City State.

Previously, Monaco used the French franc while San Marino and the Vatican used the Italian lira. They were allowed by France and Italy, respectively, to issue their own coins in those currencies. They now and use the euro and have monetary agreements with the EU under which they can also produce limited quantities of euro coins with their own design on the national sides, but cannot issue euro banknotes.

The agreements, signed before the introduction of euro banknotes and coins in 2002, have been or are being renegotiated in order to correct some shortcomings in their implementation, and possibly increase the maximum volume of coins these countries are entitled to issue. The new agreement with the Vatican entered into force on 1 January 2010, while negotiations with San Marino are still ongoing. Discussions with Monaco should be launched in 2010.

Certain French overseas territories, which are not part of the European Union, use the euro as their official currency through agreements with the EU. These are the Saint-Pierre-et-Miquelon islands close to the eastern coast of Canada, and the island of Mayotte in the Indian Ocean. These territories do not issue their own coins.

Finally, some countries and territories use the euro as a de facto currency, meaning it has no legal status but is commonly used.

Andorra, an independent principality on the French-Spanish border with no former official currency, now uses the euro in this way, as it has replaced the Spanish peseta and the French franc previously in circulation. Andorra may not issue its own euro coins and banknotes though, as the negotiations on the monetary agreement with the EU have not been finalised yet.

Kosovo and Montenegro in the Balkans also use the euro as a domestic currency without any agreements with the EU, following the tradition of the German mark which had previously been the de facto currency in these areas.

Legislation

Monaco

• 1999/96/EC: Council Decision of 31 December 1998 on an agreement with Monaco
• Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco

San Marino

• 1999/97/EC: Council Decision of 31 December 1998 on an agreement with San Marino
• Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Republic of San Marino

Vatican City

• Monetary agreement between the European Union and the Vatican City State (in force since 1 January 2010 - to be published in the Official Journal of the European Union)
• 1999/98/EC: Council Decision of 31 December 1998 on an agreement with the Vatican City
• Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Vatican City State and, on its behalf, the Holy See

Saint-Pierre-et-Miquelon and Mayotte

• 1999/95/EC: Council Decision of 31 December 1998 concerning the monetary arrangements in the French territorial communities of Saint-Pierre-et-Miquelon and Mayotte

Andorra

• 2004/548/EC: Council Decision of 11 May 2004 on an agreement with the Principality of Andorra

The euro in the world

As well as serving as the currency of the euro area, the euro has a strong international presence. Currencies are the means by which wealth is stored, protected and exchanged between countries, organisations and individuals. A global currency, such as the euro, does this on a global scale. Since its introduction in 1999, it has firmly established itself as a major international currency, second only to the US dollar.

Within the euro area, the single currency, the euro, is the means by which governments, companies and individuals make and receive payments for goods and services. It is also used to store and create wealth for the future as savings and investments. However, the size, stability and strength of the euro-area economy – the world's second largest after the United States – make the euro increasingly attractive beyond its borders, too. Public and private sectors in third countries acquire and use the euro for many purposes, including for trade or as currency reserves. For this reason, today, the euro is the second most important international currency behind the US dollar. The widespread use of the euro in the international financial and monetary system demonstrates its global presence:

• The euro is increasingly used to issue government and corporate debt worldwide. At the end of 2006, the share of the euro in international debt markets was around one-third, while the US dollar accounted for 44%.
• Global banks make significant loans denominated in euro around the world.
• The euro is the second most actively traded currency in foreign exchange markets; it is a counterpart in around 40% of the daily transactions.
• The euro is extensively used for invoicing and paying in international trade, not only between the euro area and third countries but also, to a lesser extent, between third countries.
• The euro is widely used, alongside the US dollar, as an important reserve currency to hold for monetary emergencies. At the end of 2006, more than one-quarter of the global foreign exchange holdings were being held in euros, compared to 18% in 1999. Developing countries are among those which have increased their reserves in euro the most, from 18% in 1999 to around 30% in 2006.
• Several countries manage their currencies by linking them to the euro, which acts as an anchor or reference currency.

The status of the euro as a global currency, combined with the size and economic weight of the euro area, is leading international economic organisations, such as the IMF and the G8, increasingly to view the euro-area economy as one entity. This gives the European Union a stronger voice in the world.

To benefit from this stronger position, and to contribute effectively to international financial stability, the euro area is speaking with one voice more and more in important economic fora. This is done through close coordination between the euro-area Member States, as well as the European Central Bank and the European Commission during international economic meetings.

A number of third countries and regions are even more closely linked to the euro. The stable monetary system behind the euro makes it an attractive 'anchor' currency for them, particularly for those that have special institutional arrangements with the EU, such as preferential trade agreements. By linking their currency to the euro they bring more certainty and stability to their national economies.

The euro is also widely used in third countries and regions neighbouring the euro area, for example in South-eastern Europe, while some other countries – Monaco, San Marino and the Vatican City – use the euro as their official currency by virtue of specific monetary agreements with the EU, and may issue their own euro coins within certain quantitative limits.

What is ERM II?

The Exchange Rate Mechanism (ERM II) was set up on 1 January 1999 as a successor to ERM to ensure that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market, and to help non euro-area countries prepare themselves for participation in the euro area. The convergence criterion on exchange rate stability requires participation in ERM II.

Within the euro area, there is only one currency – the euro – but there are EU countries outside the euro area with their own currencies, and avoiding excessive fluctuations in their exchange rates with the euro or misalignments helps the smooth operation of the single market. It is ERM II that provides the framework to manage the exchange rates between EU currencies, and ensures stability.

Participation in ERM II is voluntary although, as one of the convergence criteria for entry to the euro area, a country must participate in the mechanism without severe tensions for at least two years before it can qualify to adopt the euro.

How does ERM II work?

In ERM II, the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits. ERM II entry is based on an agreement between the ministers and central bank governors of the non-euro area Member State and the euro-area Member States, and the European Central Bank (ECB). It covers the following:

• A central exchange rate between the euro and the country's currency is agreed. The currency is then allowed to fluctuate by up to 15% above or below this central rate.
• When necessary, the currency is supported by intervention (buying or selling) to keep the exchange rate against the euro within the ±15% fluctuation band. Interventions are coordinated by the ECB and the central bank of the non-euro area Member State.
• Non-euro area Member States within ERM II can decide to maintain a narrower fluctuation band, but this decision has no impact on the official ±15% fluctuation margin, unless there is agreement on this by ERM II stakeholders.
• The General Council of the ECB monitors the operation of ERM II and ensures co-ordination of monetary- and exchange-rate policies. The General Council also administers the intervention mechanisms together with the Member State’s central bank.

A measure of sustainable economic convergence

When a Member State enters the euro area, its central bank becomes part of the Eurosystem made up of the national central banks of the euro area and the ECB, which conducts monetary policy in the euro area independently from national governments.

The consequence of this is that euro-area Member States can no longer have recourse to currency appreciation or depreciation to manage their economies and respond to economic shocks. For example, they can no longer devalue their currency to slow imports and encourage exports. Instead, they must use budgetary and structural policies to manage their economies prudently.

ERM II mimics these conditions thereby helping non-euro area Member States to prepare for them. Successful participation in ERM II for at least two years is considered as confirmation of the sustainability of economic convergence and that the Member State can play a full role in the euro-area economy. It also provides an indication of the appropriate conversion rate that should be applied when the Member State qualifies and its currency is irrevocably fixed.

EU currencies included in the Exchange Rate Mechanism (ERM II)

Denmark: the Danish kroner joined ERM II on 1 January 1999, and observes a central rate of 7.46038 to the euro with a narrow fluctuation band of ±2.25%.

Greece: the Greek drachma joined ERM II on 1 January 1999, and observed a central rate of 353.109 to the euro with a standard fluctuation band of ±15%. On 17 January 2000, the central rate was revalued to 340.750. The Greek drachma left ERM II when Greece adopted the euro on 1 January 2001.

Estonia: the Estonian kroon joined ERM II on 28 June 2004, and observes a central rate of 15.6466 to the euro with a standard fluctuation band of ±15%.

Lithuania: the Lithuanian litas joined ERM II on 28 June 2004, and observes a central rate of 3.45280 to the euro with a standard fluctuation band of ±15%.

Slovenia: the Slovenian tolar joined ERM II on 28 June 2004, and observed a central rate of 239.640 to the euro with a fluctuation band of ±15% (. The tolar left ERM II when Slovenia adopted the euro on 1 January 2007.

Cyprus: the Cyprus pound joined ERM II on 2 May 2005, and observed a central rate of 0.585274 to the euro with a fluctuation band of ±15% (). The Cyprus pound left ERM II when the country adopted the euro on 1 January 2008.

Latvia: the Latvian lats joined ERM II on 2 May 2005, and observes a central rate of 0.702804 to the euro with a fluctuation band of ±15%, but Latvia unilaterally maintains a 1% fluctuation band around the central rate.

Malta: the Maltese lira joined ERM II on 2 May 2005, and observed a central rate of 0.429300 to the euro with a fluctuation band of ±15%, but Malta unilaterally maintained the exchange rate of the lira at the central rate without fluctuation . The Maltese lira left ERM II when the country adopted the euro on 1 January 2008.

Slovakia: the Slovak koruna joined ERM II on 28 November 2005 ), and observed a central rate of 38.4550 to the euro until 19 March 2007 when it was revalued to 35.4424 ( 29 May 2008, it was again revalued to 30.1260 , while maintaining the standard fluctuation band of ±15%. The Slovak koruna left ERM II when the country adopted the euro on 1 January 2009.

Converting to the euro

The Treaty lays out the procedures and timing for deciding on a conversion rate from a national currency to the euro. How the conversion rate is applied is also of great importance to make sure people have trust in the new, single currency, and to ensure the continuity of contracts and other legal instruments.

The Commission and the European Central Bank issue regular convergence reports for those Member States which have not yet adopted the euro – except Denmark and the United Kingdom. Reports are produced at least once every two years, or at the request of a Member State seeking entry to the euro area.

Based on a proposal from the Commission, the Council, after consulting the European Parliament and discussions at the level of heads of state and government, approves the Member State’s entry to the euro area. The conversion rate is then adopted by the Council, on the basis of a Commission proposal and after consulting the European Central Bank, and thereby becomes irrevocably fixed.

The irrevocable conversion rate is usually set at the central rate observed by the national currency within the Exchange Rate Mechanism (ERM II). Participation in ERM II for at least two years without severe tensions is one of the preconditions a Member State must meet for adopting the euro. It therefore provides the best reference for the fixing of the conversion rate.

Conversion and rounding rules

The way the conversion rates must be expressed and applied is laid down in a Council Regulation (1103/97), the aim of which is to ensure fairness and continuity of contracts and other legal instruments ('legal certainty') during the changeover. It sets out the specific conversion and rounding rules to be respected:

• Introduction of the euro may not alter the terms of legal instruments, for example mortgage agreements for house purchases or sales agreements between companies. This ensures continuity in all financial transactions.
• The conversion rate from national currency to the euro is expressed with 6 significant figures – not to be confused with 6 decimal points – for example SIT 239.640 equals €1. When conversions are made, it is prohibited to round or truncate the conversion rate. This ensures the exactness of conversion operations.
• Once the conversion from the national currency has been made, then the euro amount can be rounded up or down to the nearest euro cent: if the number in the third decimal place is less than 5, the second decimal remains unchanged (for example, €1.264 becomes €1.26); but if the third decimal is 5 or above, then the second decimal must be rounded up, for example €1.265 becomes €1.27.
• National law can bring more detail to rules on rounding as long as this leads to a higher degree of accuracy. For example, some groups of services that are sold in units, such as the telephone, electricity or fuel, may require greater precision. In this case, their unit price could be expressed in three or four decimal places and rounding to the nearest cent may only take place on the total amount.
• Bilateral conversion rates between national currency units are not defined and cannot be used since this may lead to inaccuracies. To convert from one national currency into another, the national currency must first be converted into euro. The resulting amount will be rounded to at least three decimals and then converted into the other national currency.

Fixed euro conversion rates

Euro-area Member State	Old national currency	Conversion rate to €1
Belgium	Belgian franc (BEF)	40.3399
Germany	German mark (DEM)	1.95583
Ireland	Irish pound (punt) (IEP)	0.787564
Greece	Greek drachma (GRD)	340.750
Spain	Spanish peseta (ESP)	166.386
France	French franc (FRF)	6.55957
Italy	Italian lira (ITL)	1936.27
Cyprus	Cyprus pound	0.585274
Luxembourg	Luxembourg franc (LUF)	40.3399
Malta	Maltese lira (MTL)	0.429300
The Netherlands	Dutch guilder (NLG)	2.20371
Austria	Austrian schilling (ATS)	13.7603
Portugal	Portugese escudo (PTE)	200.482
Slovenia	Slovenian tolar (SIT)	239.640
Slovakia	Slovak koruna (SKK)	30.1260
Finland	Finnish markka (FIM)	5.94573

Scenarios for adopting the euro

Changing a whole economy from one currency to another is a complex process that requires careful preparations at many levels of society. One decision to be made is how the euro will be introduced: each EU country must choose among three possible scenarios the one which best meets its needs.

In the preparations for the introduction of the euro in 1999, Member States applied the ‘Madrid scenario’, so-called because it was agreed at the European Council meeting in Madrid in 1995.

The Madrid scenario set the legal framework and the timetable for the adoption of the euro, which involved a gradual changeover during a three-year transitional period:

• On 31 December 1998, the euro conversion rates for the national currencies of the Member States adopting the euro were irrevocably fixed.
• On 1 January 1999, the euro became the official currency of the participating countries. The national currency units became 'sub-units' of the euro, and national banknotes and coins remained in circulation. Consumers saw dual price displays in euro and the national currency units, e.g. in shops and on bank account statements, but euro cash was yet to be made available. Governments, financial institutions and companies began operating in euro, e.g. for wholesale transactions and for issuing debt. The euro was in widespread use as ‘book money’ and as a unit of account.
• Euro banknotes and coins were first introduced in the euro-area countries on 1 January 2002 (€-day), three years after the euro was launched. During a short period of dual circulation when both euro and national cash were legal tender, the latter was progressively withdrawn from circulation, mainly collected by shops and banks. The dual circulation period came to an end on 28 February – or even before in some countries – so that from 1 March 2002 only euro banknotes and coins were accepted for payment in the euro area.

New members, new scenarios: the 'big bang' scenario

Establishing the euro area involved launching a totally new currency. For Member States that will join the euro area later, the situation is different, as the euro already exists. This facilitates the changeover process as new entrants can rely on the support and experience of euro-area members. They can also choose to implement the changeover in different ways. Two alternative scenarios to the Madrid scenario have therefore been introduced in the EU legal framework:

• The big bang scenario: there is no transitional period. Euro banknotes and coins enter use on the same day as the euro officially becomes the country’s new currency. As in the Madrid scenario, national banknotes and coins can still be used for payments during a dual circulation period of up to six months.
• The big bang scenario with phasing-out: this variant of the big bang scenario allows for a phasing-out period of up to one year during which certain new legal instruments, such as contracts, may still refer to the national currency unit. This scenario preserves the advantages of the big bang approach – namely, a swift introduction of the euro – while allowing some leeway in phasing out the national currency, which can be useful for the conversion of complex systems, such as IT systems. However, it is only recommended as a fall-back solution should difficulties in the implementation of the normal big bang scenario emerge at a late stage in the proceedings.

The choice of which changeover scenario to adopt is taken by the future euro-area country, which will inform the EU institutions of their choice, and will also decide on the duration of any transitional or phasing-out periods, and the duration of dual circulation, within the limits set by the EU.

Who can join and when?

All Member States of the European Union, except Denmark and the United Kingdom, are required to adopt the euro and join the euro area. To do this they must meet certain conditions known as 'convergence criteria'.

Last update: 3 July 2009

All EU Member States are part of Economic and Monetary Union, which means they coordinate their economic policies for the benefit of the EU as a whole. However, not all EU Member States are in the euro area – only those having adopted the euro are members of the euro area.

Of the Member States outside the euro area, Denmark and the United Kingdom have 'opt-outs' from joining for reasons of economic sovereignty. These two countries can join in the future if they so wish.

Sweden is not yet in the euro area, as it has not made the necessary changes to its central bank legislation and it does not meet the convergence criterion related to participation in the Exchange Rate Mechanism (ERM II). However, under the Treaty, Sweden is required to adopt the euro.

The remaining non-participating Member States acceded to the Union in 2004 and 2007, after the euro was launched. At the time of their accession, they did not meet the conditions for entry to the euro area, therefore their Treaties of Accession allow them time to make the necessary adjustments – they are Member States with a 'derogation', as is Sweden. These Member States have committed to joining the euro area as soon as they fulfil the entry conditions. When this is the case, the 'derogation' is 'abrogated' by a decision of the Council, and the Member State concerned adopts the euro.

National target dates for adoption of the euro

Estonia	01.01.2011
Poland	01.01.2012
Romania	01.01.2015

Bulgaria, Czech Republic, Hungary, Latvia, and Lithuania do not currently have a target date for adoption of the euro.

Why are there conditions for entry to the euro area?

The process of building Europe is one of progressive integration. The single market for goods, services, capital and labour, launched in 1986, was a major step in this direction. Economic and Monetary Union and the euro take economic integration even further, and to join the euro area Member States must fulfil certain economic and legal conditions.

Adopting the single currency is a crucial step in a Member State's economy. Its exchange rate is irrevocably fixed and monetary policy is transferred to the hands of the European Central Bank, which conducts it independently for the entire euro area. The economic entry conditions are designed to ensure that a Member State's economy is sufficiently prepared for adoption of the single currency and can integrate smoothly into the monetary regime of the euro area without risk of disruption for the Member State or the euro area as a whole. In short, the economic entry criteria are intended to ensure economic convergence – they are known as the 'convergence criteria' (or 'Maastricht criteria') and were agreed by the EU Member States in 1991 as part of the preparations for introduction of the euro.

In addition to meeting the economic convergence criteria, a euro-area candidate country must make changes to national laws and rules, notably governing its national central bank and other monetary issues, in order to make them compatible with the Treaty. In particular, national central banks must be independent, such that the monetary policy decided by the European Central Bank is also independent.

The Member States which were the first to adopt the euro in 1999 had to meet all these conditions. The same entry criteria apply to all countries which have since adopted the euro and all those that will in the future.

What are the convergence criteria?

The convergence criteria are formally defined as a set of macroeconomic indicators which measure:

• Price stability, to show inflation is controlled;
• Soundness and sustainability of public finances, through limits on government borrowing and national debt to avoid excessive deficit;
• Exchange-rate stability, through participation in the Exchange Rate Mechanism (ERM II) for at least two years without strong deviations from the ERM II central rate;
• Long-term interest rates, to assess the durability of the convergence achieved by fulfilling the other criteria.

The exchange-rate stability criterion is chosen to demonstrate that a Member State can manage its economy without recourse to excessive currency fluctuations, which mimics the conditions when the Member State joins the euro area and its control of monetary policy passes to the European Central Bank (ECB). It also provides an indication of the appropriate conversion rate that should be applied when the Member State qualifies and its currency is irrevocably fixed.

The five convergence criteria

What is measured:	Price stability	Sound public finances	Sustainable public finances	Durability of convergence	Exchange rate stability
How it is measured:	Consumer price inflation rate	Government deficit as % of GDP	Government debt as % of GDP	Long-term interest rate	Deviation from a central rate
Convergence criteria:	Not more than 1.5 percentage points above the rate of the three best performing Member States	Reference value: not more than 3%	Reference value: not more than 60%	Not more than 2 percentage points above the rate of the three best performing Member States in terms of price stability	Participation in ERM II for at least 2 years without severe tensions

Who decides if the convergence criteria are met?

According to the Treaty, at least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank assess the progress made by the euro-area candidate countries and publish their conclusions in respective convergence reports.

On the basis of its assessment, the Commission submits a proposal to the Council which, having consulted the European Parliament, and after discussion in the Council, a meeting among the heads of state or government decides whether the country fulfils the necessary conditions and may adopt the euro. If the decision is favourable, the Council abrogates the derogation and, based on a Commission proposal, having consulted the ECB, adopts the conversion rate at which the national currency will be replaced by the euro, which thereby becomes irrevocably fixed.

What is the euro area?

The euro area consists of those Member States of the European Union that have adopted the euro as their currency. Today, around 329 million citizens in 16 countries live in the euro area, and this number will increase as future enlargements of the euro area continue to spread the benefits of the single currency more widely in the European Union.

All European Union Member States are part of Economic and Monetary Union (EMU) and coordinate their economic policy-making to support the economic aims of the EU. However, a number of Member States have taken a step further by replacing their national currencies with the single currency – the euro. These Member States form the euro area.

When the euro was first introduced in 1999 – as 'book' money –, the euro area was made up of 11 of the then 15 EU Member States. Greece joined in 2001, just one year before the cash changeover, followed by Slovenia in 2007, Cyprus and Malta in 2008, and Slovakia in 2009. Today, the euro area numbers 16 EU Member States.

Of the Member States outside the euro area, Denmark and the United Kingdom have 'opt-outs' from joining laid down in Protocols annexed to the Treaty, although they can join in the future if they so wish. Sweden has not yet qualified to be part of the euro area.

The remaining non-euro area Member States are among those which acceded to the Union in 2004 and 2007, after the euro was launched. At the time of their accession, they did not meet the necessary conditions for entry to the euro area, but have committed to joining as and when they meet them – they are Member States with a 'derogation', such as Sweden.

Monaco, San Marino and the Vatican City have adopted the euro as their national currency by virtue of specific monetary agreements with the EU, and may issue their own euro coins within certain limits. However, as they are not EU Member States, they are not part of the euro area.

Governing the euro area

By adopting the euro, the economies of the euro-area members become more integrated. This economic integration must be managed properly to realise the full benefits of the single currency. Therefore, the euro area is also distinguished from other parts of the EU by its economic management – in particular, monetary and economic policy-making.

• Monetary policy in the euro area is in the hands of the independent Eurosystem, comprising the European Central Bank (ECB), which is based in Frankfurt, Germany, and the national central banks of the euro-area Member States. Through its Governing Council, the ECB defines the monetary policy for the whole euro area – a single monetary authority with a single monetary policy and the primary objective to maintain price stability.
• Within the euro area, economic policy remains largely the responsibility of the Member States, but national governments must coordinate their respective economic policies in order to attain the common objectives of stability, growth and employment. Coordination is achieved through a number of structures and instruments, the Stability and Growth Pact (SGP) being a central one. The SGP contains agreed rules for fiscal discipline, such as limits on government deficits and on national debt, which must be respected by all EU Member States, although only euro-area countries are subject to sanction – financial or otherwise – in the event of non-compliance.

Who’s already in?

	Euro area Member States
	Member States which have not yet adopted the euro (derogation)
	Member States with an opt-out

Euro-area Member States	Non-euro area Member States	Member States with an opt-out
Belgium	Bulgaria	Denmark
Germany	Czech Republic	United Kingdom
Ireland	Estonia
Greece	Latvia
Spain	Lithuania
France	Hungary
Italy	Poland
Cyprus	Romania
Luxembourg	Sweden
Malta
The Netherlands
Austria
Portugal
Slovenia
Slovakia
Finland

Who does what in EMU

The management of Economic and Monetary Union involves many actors with different responsibilities. As well as the governments and central banks of the Member States, the Council, the European Commission, the European Parliament and the European Central Bank all have roles to fulfil. The management of EMU involves three main areas of macroeconomic policy-making: monetary policy, fiscal policy and economic policy coordination.

Who runs monetary policy?

The European System of Central Banks (ESCB) unites the national central banks (NCBs) of all EU Member States and the European Central Bank (ECB). Within the ESCB, the Eurosystem combines all euro-area NCBs and the ECB. Decisions on euro-area monetary policy are taken independently by the ECB’s Governing Council, which comprises the governors of the euro-area NCBs and the members of the ECB’s Executive Board. Member States outside the euro area coordinate their monetary policy with the ECB.

How is fiscal policy coordinated?

The cornerstone of fiscal policy coordination under EMU is the Stability and Growth Pact (SGP), the implementation of which involves different actors and a number of procedures:

• Member States run their fiscal policies within the limits on government deficit and debt laid down in the Stability and Growth Pact (SGP) – 3% and 60% of GDP, respectively. Euro-area Member States report their compliance to the SGP by submitting regular ‘stability programmes’, whilst non-euro-area Member States submit ‘convergence programmes’. These programmes include the medium-term budgetary objectives of each Member State and the measures foreseen to attain the objectives of the programme. They are submitted to the Council and the Commission and run for four years, but are revised annually.
• The European Commission monitors compliance with the SGP by making assessments of the Member States’ stability and convergence programmes. The Council, acting on Commission proposals, issues opinions to Member States and, if necessary, can invite them to strengthen their programme.
• The Council monitors the implementation of the programmes and, to prevent an excessive deficit situation where a Member State would be in breach of the SGP limits or significantly deviating from its medium-term objective, it can recommend adjustment measures. This is known as the 'early-warning procedure'.
• If the budgetary divergence of a Member State worsens and that Member State is found to be exceeding the SGP limits, the Council, following a Commission proposal, can start an excessive deficit procedure against the Member State in question. This requires prompt corrective actions from the Member State with, as a last resort, financial penalties in the case of euro-area Member States.
• The Council may decide to abrogate the sanctions if the Member State is found to be making significant progress along the path of correction, or if the decision on the existence of an excessive deficit is itself abrogated.

How is economic policy-making coordinated?

The Broad Economic Policy Guidelines (BEPG) are the principal instrument for economic policy coordination in the EU. They are based on the annual cycle of economic policy discussions between the European institutions and Member States. These discussions result in the European Commission recommending BEPG for each Member State and the EU as a whole, which are adopted by the Council. The BEPG are updated annually and cover the coming three years.

The Commission monitors implementation of the guidelines in each Member State and produces regular implementation reports. In the event of non-compliance, the Council can issue non-binding recommendations for corrective action to individual Member States.

Who’s who in EMU

• European Council: reunites the heads of state and government of the EU Member States, who set the main policy orientations.
• The Council of the European Union (the 'Council'): comprises representatives of Member State governments. It is the EU’s main decision-making body. ECOFIN is the Council of the European Union in its configuration of ministers of economy and finance. The Council coordinates economic policy-making and takes decisions on the operations of the Stability and Growth Pact and the application of the Treaty. It also decides whether a Member State may adopt the euro.
• Eurogroup: an informal grouping of ministers of economics and finance of the euro area, who meet to discuss matters of common concern for the euro-area countries, thus contributing to economic policy coordination.
• European Commission: monitors performance and compliance with the Treaty and the Stability and Growth Pact, and makes assessments and recommendations to the Council on decisions to be taken.
• European Central Bank: the central bank for the euro area, which sets monetary policy, with price stability as its primary objective. The ECB is part of the Eurosystem, which unites the central banks of those Member States which have adopted the euro, and is responsible for implementing monetary policy. The Eurosystem assumes the tasks of the ESCB (European System of Central Banks) as long as there are EU Member States outside the euro area.

How Economic and Monetary Union works

Economic and Monetary Union is not an end in itself. It is an instrument to further the objectives of the European Union and improve the lives of citizens in the Member States.

The operations and management of EMU are designed to support sustainable economic growth and high employment through appropriate economic and monetary policy-making. This involves three main economic activities:

• Implementing an effective monetary policy for the euro area with the objective of price stability
• Coordinating economic policies in Member States
• Ensuring the smooth operation of the single market

Why are these activities important?

Monetary policy involves influencing interest rates and exchange rates to benefit a country’s economy. This is achieved through a central bank controlling the supply of money in the economy. However, if each EU Member State operated its own monetary policy, then the single market would be much less effective, trade could be disrupted and the benefits would be fewer.

For this reason, under EMU, monetary policy is closely coordinated, and within the euro area it is centralised and independent.

Member State governments control other economic policy areas. These include fiscal policy that concerns government budgets, tax policies that determine how income is raised, and structural policies that determine pension systems, labour- and capital-market regulations. However, EMU brings more economic integration, and the euro area even more so. As a consequence, economic policy-making becomes a matter of common concern to all Member States. To ensure the smooth operation of the EU economy as a whole, it is important that Member States coordinate their economic policies with the common objective of stability and growth.

As well as bringing the benefits of economic stability, EMU and the single currency also support a more effective single market which benefits citizens and enterprises. If national economic policies act to discourage the free movement of goods, services, capital and labour, then these benefits, including jobs and growth, would be reduced. Therefore, economic policy-making in the Member States should act to support the single market.

The Treaty defines the instruments for managing EMU. These instruments cover the three main economic activities described above.

Monetary policy

Monetary policy for the euro area is managed through the European Central Bank and the national central banks of the euro-area Member States, which together make up the Eurosystem. Decisions on monetary policy in the euro area can only be taken by the Governing Council of the ECB, which comprises the governors of the national central banks of the euro-area Member States and the members of the ECB’s Executive Board. These decisions are made free from outside influence.

The Treaty lays down the ECB’s mission which is to ensure price stability within the euro area. The ECB aims to keep price inflation in the euro area below but close to 2% over the medium term. This 2% inflation target is considered optimal for promoting growth and employment.

The Stability and Growth Pact

Economic policy-making in Member States is coordinated in the Council. The Stability and Growth Pact (SGP), laid down in the Treaty, is a central element of this coordination. Adopted by the Council in 1997 and later revised in 2005, the SGP helps enforce fiscal discipline within EMU and ensure sound and sustainable public finances.

The SGP requires government deficits and debt to be less than 3% and 60% of GDP, respectively. Exceeding these limits can result in an excessive deficit procedure requiring the Member State to take corrective action. The euro-area countries can also be subject to financial penalties as a last resort. This constitutes the 'corrective arm' of the SGP. There are circumstances where excessive deficits are considered exceptional and temporary, such as when they result from a severe economic downturn or are due to the major impact of an unusual event outside government's control.

The SGP also has a 'preventive arm' which aims to avoid excessive deficit procedures and achieve fiscal consolidation through medium-term budgetary objectives. These are set by each Member State according to its particular economic situation and prospects, but cannot exceed 1% of GDP for euro-area Member States and those which participate in the exchange rate mechanism (ERM II), with a 0.5% of GDP budgetary correction towards the objective to be made each year. The preventive arm has no sanctions for those Member States which fail to meet their objectives, but rather counts on peer pressure to encourage governments to stick to the path towards sustainable budgets.

The Broad Economic Policy Guidelines

Wider coordination is achieved through economic policy discussions between Member States and EU institutions. This policy coordination is consolidated into the Broad Economic Policy Guidelines (BEPG) which are adopted by the EU Council on the basis of a Commission recommendation.

The BEPG are non-binding guidelines for the Community and each Member State aimed at promoting macroeconomic stability, sustainable finances, structural reform and the smooth functioning of EMU. The BEPG set the standard against which national and European economic policy-making can be measured.

An international currency

The myriad benefits of the euro in the global economy arise from the size of the euro area, the integration of its economy, as well as its clear, joint commitment to sound economic policies. This makes the euro an attractive currency for other countries and trading blocs in the global economy. The euro is now the second most important world currency after the US dollar.

Supporting international trade

As the world’s largest trading power, with an open economy and a stable currency, the euro area is an attractive destination for other trading nations. Third-country companies are therefore increasingly willing to do business in euro. This means that when euro-area firms export or import goods they can invoice and pay in euro – reducing their costs and the risk of losses caused by global currency fluctuations. Thus, overall, the euro facilitates and encourages trade with the rest of the world.

Foreign appeal

The euro is also attractive to foreign governments as a reserve currency because of its strength and the confidence it inspires. In this way, they can spread the risks to their foreign exchange reserves by holding euro as well as US dollars and other currencies.

This is of benefit to the euro-area economy because widespread holdings and a high demand for euro encourages third countries to price their exports in euro – thus reducing costs to euro-area members because there are no exchange rate costs.

In addition, since the euro is in demand internationally, government borrowing by euro-area members on international markets is less expensive because there is more competition to accept euro in debt repayment.

The share of the euro in global foreign exchange reserves has risen from 18% in 1999 to over 25% in 2007. The most significant increase can be found in developing countries, where holdings are now close to 29%, from 18% held in 1999.

One currency with one voice

The international financial institutions, such as the International Monetary Fund (IMF), the World Bank and the Organisation for Economic Co-operation and Development (OECD), increasingly view the euro-area economy as a whole when dealing with macroeconomic matters.

They do this because the strength of the euro, the size of the euro area as a trading bloc, and the coordination of policy-making within the euro area, all mean that what happens in the euro area has growing spillover effects on the world economy.

This growing impact on the world economy is matched by a growing influence of the euro area within these international financial institutions. This gives the European Union a stronger voice in the world.

The euro area: key indicators (2006)

	Euro area	EU-27	US	Japan
Population (millions)	317	494	300	128
GDP (in € trillions calculated at purchasing power parity)	8.4	11.9	11.2	3.5
Share of world GDP (% at PPP)	14.6	21.0	19.7	6.3
Exports(* ) (goods and services as % of GDP)	21.7	14.3	10.8	16.8
Imports(* ) (goods and services as % of GDP)	20.9	15.0	16.6	15.3

(* ) Excluding intra-EU trade

Single financial market

Financial markets deal with the flow of capital and are vital to an open market economy because an efficient financial market provides for better use of capital. The introduction of the euro in 1999 provided major impetus to the integration of financial markets in Europe, thus making them more efficient and competitive, and reducing the costs of cross-border money transfers in euro.

A financial market is where savers and borrowers interact. Savers, such as individual citizens or companies, deposit their savings with a ‘financial intermediary’ such as a bank or pension fund. These financial intermediaries, who consolidate the savings of many depositors, then lend money to borrowers. Borrowers come in all sizes: they may be small, such as a family taking a mortgage for a new house; or large, such as a multinational company borrowing to invest in a new production plant. Borrowers pay interest on their loans, which is returned to the savers through the financial intermediaries as interest or dividends on their deposits.

Small may be efficient

Before the introduction of the euro, financial markets were largely national. Saving and lending was done mainly within the borders of a Member State. The country’s savers would lend to the country’s borrowers through nationally based banks and pension funds. However, the efficiency of nationally based financial markets was limited because the investment opportunities on offer, and the amount of competition between financial intermediaries (banks and other financial institutions) were also more limited.

Bigger is more efficient

The more integrated financial markets are, the more efficient the allocation of capital is because investments opportunities and competition are also greater, and capital can move around to where it can be used most efficiently.

The introduction of the euro in 1999 proved to be a powerful catalyst to the integration of financial markets and the creation of a much larger, more efficient single financial market, which brings many economic benefits:

• A single financial market allows individual citizens and companies to invest throughout the euro area to obtain the best return on their savings. It creates opportunities to borrow from across the euro area, seeking out the lowest cost for their loan. Investors can also spread risks more widely.
• The costs of financial intermediation, such as bank charges, are lower. In the euro area there are more banks and investment funds and thus there is more competition between them. Lower costs encourage more capital flows.
• More capital is available to borrowers at a lower cost because there are more sources of capital. This makes the money they borrow cheaper and better tailored to the needs of the borrower.
• Because borrowing is cheaper this makes more capital available for further lending. This encourages citizens and companies to borrow more to invest – which creates more economic growth and more employment, and benefits the EU economy as a whole.

Building the single financial market

The single currency was a key step towards the creation of the single financial market. Its introduction immediately removed some obstacles to free capital flows – namely the costs associated with exchanging different currencies. Previously, these costs were a barrier to cross-border investments – today they no longer exist in the euro area.

Backed by the Commission's Financial Services Action Plan – also launched in 1999 – the euro has resulted in a rapid expansion and integration of European bond and money markets. Since the introduction of the euro, cross-border bank deposits have increased, the yields on government bonds have converged, and the interest rates on retail loans, taken out by individual citizens, have also converged.

But harmonisation of the structures and regulations of the financial market sector is also needed to ensure the remaining barriers are removed and efficiency is promoted. For example, barriers arising from different IT systems must be removed through common technical standards; legal issues for company mergers and takeovers must be resolved to enable consolidation among the financial intermediaries; and regulatory issues on how national markets operate must be harmonised to ensure full integration. The White Paper on Financial Services Policy (2005-2010), adopted by the Commission in December 2005, aims to achieve a fully integrated, open, inclusive and efficient EU financial market which completes the single market and contributes to improve EU competitiveness as part of the Lisbon reform process.

The Single Euro Payments Area

An important aspect of the single financial market is payments, which daily affect cross-border transactions of citizens and business. The costs of sending money in euro to another euro-area country have already been slashed by as much as 90% since the introduction of the euro and EU rules on cross-border euro payments in 2001.

These rules make the costs of making a payment in euro to an account in another Member State the same as the costs of a domestic transaction. This has applied to payment card transactions and withdrawals from ATMs since 1 July 2002, and to credit transfers since 1 July 2003.

The Single Euro Payments Area (SEPA), initially planned for 2010, is a further step in the same direction. An initiative of the European banking industry, it aims to further facilitate electronic payments across the euro area by making them as easy, safe and efficient as if they were done within one Member State and subject to identical charges. Citizens will benefit from faster and more secure transfers between bank accounts anywhere in the euro area, and will be able to use their bank debit card when shopping abroad as they would at home. The Commission has helped the development of SEPA by preparing the necessary legal framework in the form of a Directive on Payment Services.

Economic stability and growth

Economic stability is desirable because it encourages economic growth that brings prosperity and employment, and is one of the main objectives enshrined in the management of Economic and Monetary Union and the euro.

Under Economic and Monetary Union (EMU), EU Member States closely coordinate their economic policies with the overall objective of maintaining economic stability. At the same time, the European Central Bank (ECB) conducts an independent monetary policy with the objective of maintaining low inflation in the euro area (below but close to 2%). Economic stability and low inflation create the necessary conditions for sustainable long-term growth, which benefits the euro-area Member States and their citizens.

Sound and sustainable public finances

Under Economic and Monetary Union, Member States must keep their government and debt deficits under specified limits (3% and 60% of GDP, respectively), according to the Treaty and the rules set out in the Stability and Growth Pact. These limits are also one of the convergence criteria a country must meet before it qualifies to adopt the euro. The aim is to ensure sound and sustainable public finances in the Member States of the EU and the euro area.

Sound public finance means that Member States live within their means and do not build up excessive debts that will burden future generations of taxpayers. In theory, governments could borrow heavily to invest and boost economic growth today. However, this is a short-term measure as debt repayments would harm economic growth in the future.

The commitment to sound and sustainable public finances is a commitment to ensuring economic growth and employment over the longer term. It also helps ensure that both today's and tomorrow's citizens are provided for fairly – for example, through adequate healthcare provision and pensions.

Better government budgeting

As with consumers and companies, governments and their electorates – their citizens – also benefit greatly from economic stability. Low inflation in a strong, well-managed euro area makes government borrowing less expensive. This means that interest repayments on national debt, which can be substantial, are reduced. This releases large amounts of taxpayers’ money, previously used to repay the interest, for other purposes depending on national priorities; for example, for tax cuts, new public infrastructure, or welfare systems. In addition, economic stability allows governments to plan national finances, expenditure and revenues with more certainty.

More resistance to external shocks

Economic stability also makes the euro area more resilient to so-called external economic 'shocks', i.e. sudden economic changes that may arise outside the euro area and disrupt national economies, such as worldwide oil price rises or turbulence on global currency markets. The size and strength of the euro area make it better able to absorb such external shocks without job losses and lower growth.

More cohesion

Economic stability benefits society, in particular social cohesion and the less well-off. Volatile changes in inflation and interest rates increase the gap between the richer and poorer groups and regions, as those with more wealth have more opportunities to protect themselves. With stable inflation and interest rates, the less well-off are better protected against the erosion of their wealth, their savings and their purchasing power.

Business benefits

The single currency benefits business in many ways, in addition to cutting costs and risk. It encourages investments and brings more certainty to business planning – thus allowing businesses to be more effective overall.

More cross-border trade

A direct benefit of the euro is that, within the euro area, there is no need for businesses to work in different currencies. A company can buy and sell throughout this area, paying and being paid in euro.

Previously, when doing business in another EU Member State, a company would need to take account of the risk of fluctuating exchange rates – i.e. the stated foreign currency amount on the invoice might change in value before being paid. This meant either export prices were higher, or companies were discouraged from exporting within the single market. This risk has now gone, as have the costs associated with exchanging different currencies. Before the euro, these exchange costs were estimated at €20 to 25 billion per year in the EU (as much as 0.3% to 0.4% of GDP) – much of it incurred as companies transferred goods, people and capital around Europe. With the euro, these costs have disappeared in the euro area, and this money is now available for more productive investment.

With no exchange risks and costs, cross-border trade within the euro area is encouraged. Not only can companies sell into a much larger ‘home market’, but they can also find new suppliers offering better services or lower costs – a development that is helped by the growth of e-commerce over the internet. Trade within the euro area is estimated to have increased between 4% and 10% since the introduction of the single currency.

Better borrowing, better planning, more investment

Before the euro, volatile interest rates meant unpredictable costs. With the euro, inflation has come down to a low and stable level, which also means low and stable interest rates. Firms can borrow more and more cheaply and can invest more confidently in the long term.

Long-term investment is further encouraged by the sound and prudent management of Economic and Monetary Union, which builds trust in the economy of the euro area and reduces uncertainty about the future. Companies can invest more in growth and new technologies rather than saving money in reserve in case of an economic downturn.

Better access to capital

The euro gives a large boost to the integration of financial markets across the euro area. Investors, such as banks, are no longer limited to local markets. Capital can flow more easily because exchange rate risks have disappeared and because financial market rules are being progressively harmonised – allowing investors to move capital to those parts of the euro area where it can be used most effectively.

More international trade

The euro is a strong international currency backed by the commitment of the euro-area Member States and the firm and visible management of monetary policy by the European Central Bank. The euro area is also a large and open trading bloc. This makes doing business in euro an attractive proposition for other trading nations, which can access a large market using one currency. Euro-area companies also benefit because they can export and import in the global economy while paying, and being paid, in euro – reducing the risk of losses caused by global currency fluctuations.