How is the Euro Experiment Working?

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How is the Euro Experiment Working?

Those who are strongly in favour of the single currency would not agree with the word 'experiment' used in the title. The participating countries have locked their currencies together forever. As far as they are concerned, this is not an experiment!

One of the big advantages of the single currency is the stability it creates between the participants. Their currencies are now locked together and so firms who export within the single currency area know exactly what the exchange rate will be forever. Unfortunately, the euro has not been so stable against other currencies.

One euro was worth about £0.72 on 1st January 1999. By the end of May it was worth only £0.64, a drop of over 8%. Its value bobbed up and down after that, but the general trend was still downwards. It hit a low of £0.57 at the end of April 2000, a fall of 22% since its introduction. It has had its ups and downs since with various crisis periods. As of October 2015 a pound gets you around 1 Euro 40 cents which dropped further after the UK voted to leave the EU (Brexit) in June 2016. The story is the same but worse against the dollar (24% drop) and the Japanese yen (27% drop). The issue of the future of the euro is covered at the end of this Learn-It.

How is the Euro Experiment Working?

The problem for many economists is the lack of credibility of the European Central Bank (ECB). Unlike Britain's Monetary Policy Committee (MPC), which has became very credible within three years because of its excellent record on inflation; the ECB is felt not to have performed so well. It sets its own inflation target (in the UK, the MPC has to follow a target set by the Chancellor) and many feel that it is too deflationary. Their target is 2% and under. The MPC has a target of 2.5% ±1.5%, so an inflation figure below 1% is felt to be as bad as an inflation figure that is over 4%. This is much more balanced and much less deflationary. Euroland or the 'Euro Zone', which consists of 19 out of 28 EU member countries that use the euro, have had a mixed record since the 2008 and continues to flirt with crisis.

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