Happy birthday dear euro...

1 January marked the first anniversary of the introduction of the hard currency euro. Paul Gosling considers how the adoption of a common European currency has settled in

The euro would be, said the cynics, an absolute failure. Consumers would reject it, traders would be confused, software would fail and inflation would go through the roof. The reality has been rather more prosaic.

�It�s been a remarkably uneventful year,� suggests Professor John Driffell, research fellow at the Centre for Economic Policy Research. �The main thing is that none of the predicted disasters has taken place. It�s been a bit of a non-event. There were a lot of expectations that the introduction would be associated with price increases, but that has probably been a flash in the pan. It was a success that the European Central Bank managed to introduce notes and coins without major problems. And there was a surprise that they were taken up so quickly in member states.

�There is a little bit of evidence of price discrepancies within euro land. There is persistently higher inflation in Spain than average, and in Ireland, which could stir up problems in the future.�

It would be unwise to dismiss these regional stresses as simply little local difficulties. Greece appears to be the most unhappy country within the eurozone. There is a widespread perception that traders used the introduction of the euro to disguise significant price hikes. According to the Greek Institute of Consumer Protection, prices rose on average by 10% on the adoption of the euro. This discontent led to a highly effective one day shopping boycott in September, some nine months into the life of the currency.

Ireland, Italy and the Netherlands have all had similar consumer �euro-resistance� movements, claiming the currency was associated with big price rises. This has been even more strongly marked in Germany, whose economy and financial system is the most influential in the eurozone. Many consumers resent the loss of the old deutschmark - 48% in one poll. Traders in a town in northern Germany have even taken the remarkable step recently of trying to create a new �deutschmark trading area�.

These incidents can perhaps be discounted as the inevitable and minor fall-out of a profound economic event. Of more significance to the wider economy is the value of the euro. A year before it was launched as a hard currency, the euro was introduced for electronic use and, since then, it has dropped in value from almost $1.20 to its continued position trading roughly at parity with the dollar. Both the dollar and pound are widely regarded as trading above value against the euro.

Professor Driffell argues that the weakness of the euro should not be seen as a disability for the eurozone: member countries, especially in the manufacturing sector, have benefited. Conversely, many manufacturers in the UK have argued strongly for British entry into the euro to overcome their trading handicap.

But there remains continued concern over the fiscal policies of eurozone member states, which could just possibly be disastrous for the single currency. This has led to a crisis over the European stability pact, now widely known as the �stupidity pact� after it was dismissed as a �stupid� policy by the President of the European Commission, Romano Prodi. With the eurozone�s largest economy of Germany breaching the stability pact�s rules, accompanied by Portugal and, very nearly, France, Italy and Greece, it has lost credibility.

Eurozone finance ministers have given member states until 2006 to bring their fiscal deficits under contro - meaning that the tightest application of the rules moves into place at exactly the moment when the eurozone could be in for its first round of major expansion. Poland plans to adopt the currency in 2006, many other accession countries are considering using that date too, and some commentators believe this may be the first realistic opportunity for the UK to join.

Addressing criticisms

The Commission is now proposing steps to address underlying criticisms of the pact, moving towards the UK�s policy of balancing budgets over the term of an economic cycle rather than annually. Member states would be required to reduce structural deficits by at least half a percent of GDP per year. The larger countries are only likely to support the move if it is clear that they will be allowed to go into deficit during a recession, to assist them in moving back to economic growth.

It is unfair, argues Professor Driffell, to put the blame for this crisis - and crisis is certainly no exaggeration - on the euro. It would have happened equally under the rules governing the fixed exchange rates which preceded the euro, he claims.

The stability pact has been robustly defended by Wim Duisenberg, President of the European Central Bank. �There is a strong consensus within the Governing Council [of the bank] that the principle of budgetary discipline enshrined in the [Maastricht] Treaty and the stability and growth pact are indispensable for Economic and Monetary Union and that the stability and growth pact has been successful in promoting sound public finances and fiscal convergence, as well as in supporting the return to price stability,� he said in November. �Moreover, the pact is in the interest of the member states,� added Duisenberg in an implicit side-swipe at Prodi.

Difficulties with the stability pact are providing strength to critics of the euro, especially those in the UK which has yet to decide whether to join the currency. Professor Ann Robinson of Bournemouth University - formerly director-general of the National Association of Pension Funds and head of the policy unit at the Institute of Directors - has been a long and vocal opponent of the euro. She believes that her forecasts of trouble are proving accurate.

�It�s been a bit of a struggle for economic management, trying to fit all these countries into one currency,� asserts Professor Robinson. �What I predicted as a potential difficulty, the budget deficits, has proved to be the problem. There is no machinery which is available to national governments which is available to the European Central Bank to control the economy.

�The serious issue is whether you can have one currency for all these countries. My view is that you need a relatively homogenous economy to have one currency, or you need a government which spends a lot of money smoothing out the un-homogeneity. The UK spends a lot on Scotland and other areas which are different, and it is the same in the United States and Canada. You need to spend money on asymmetric aspects of the economy. It has been suggested this needs to be 7%-8% of GDP and Europe is not spending anything like this on it. At the moment there are countries such as Ireland where you probably need a higher rate of interest and others like Germany where you need a lower rate. For the moment, for Britain, I can�t see any reason for joining.�

It might have been expected that the euro�s implementation would lead to a consensus on its effectiveness. Instead, it is clear that the political divisions are as strong as ever. That consensus could yet take years to emerge.

Paul Gosling is contributing news editor of accounting & business and is a specialist public sector journalist.