by Michael W. Klein
March/April 1998

On January 1, 1999, eleven nations in Europe plan to begin a process of replacing their national currencies with the Euro. The adoption of the Euro is unprecedented; never before have so many countries surrendered their national monies for a common currency at a single stroke. In this way, the launching of the Euro means that European countries will be entering uncharted waters. But, as the author points out, European Monetary Union is the latest stage in a historical process that began in the wake of the collapse of the Bretton Woods system in the early 1970s and has progressed in fits and starts since that time.

The discussion briefly reviews the events leading up to the adoption of the European Monetary System in March of 1979 and the associated Exchange Rate Mechanism. It goes on to describe the requirements of the Maastricht Treaty and to review the costs and benefits of a common currency. The author also considers the importance of European Monetary Union (EMU) from a U.S. perspective: If it promotes growth in Europe, he notes, then it will be beneficial for the United States as well, since we benefit from a strong Europe. He cautions, however, that the economic viability of the Euro depends on a smooth transition. And should EMU fail, adverse political complications could follow, whatever the economic consequences.

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