European ministers met yesterday to celebrate 10 years of the European Central Bank, established after EU leaders met in Brussels and decided to launch economic and monetary union. It set 11 countries on the path to introduce the euro in January 1999 and was history in the making.
Ten years on, has that bold and ambitious decision paid off? The European Economic and Monetary Union (EMU) has certainly confounded its strongest critics and discredited dire predictions of a break-up. The euro is here to stay and, judging by extensive analysis, seems an overwhelming success.
Today, the eurozone stretches from Finland to Cyprus, its 15 members soon to become 16 with the addition of Slovakia. With a population of 320 million, EMU is the largest market in the developed world and the euro an international currency that is second only to the US dollar.
The monetary policy of the European Central Bank, backed by a framework that encourages budgetary discipline, has delivered sustained price stability, with inflation averaging just over 2 percent annually, notwithstanding the recent resurgence caused by soaring global energy and food prices. In turn, interest rates have been kept remarkably low.
What to make, then, of the claims that the euro has increased prices? It is certainly hard to square this perception with EMU's decade of record low inflation. Clearly, a few abuses that occurred around the 2002 changeover left a lasting impression, particularly where they concerned everyday purchases.
But in reality, price increases during the year of the currency changeover amounted to just 0.1 to 0.3 percentage points.
The simultaneous rise in house and oil prices probably reinforced a psychological link between the euro and high prices, though it is worth remembering that the euro-dollar exchange rate has largely shielded the eurozone from the full effect of oil hikes. In dollars the price of oil increased five-fold in five years, but nowhere near as much in euros.
