Alternatives for the Policy Framework of the Euro

The euro was introduced as a ‘virtual’ currency in 1999, and completely replaced the national currencies of the 12 participating countries in early 2002. In considering policy arrangements for the euro, there is now (at the time of writing in late 2004) nearly six years of experience of the eurozone on which to draw, and to some degree experience from the preceding decade as countries sought to meet the convergence criteria for membership of the eurozone. Table 10.1 provides a summary of some key figures for the eurozone as a whole since 1999. Growth has been sluggish since 2000 and unemployment has remained high at 8 per cent or above (and with considerable variation between countries and regions). Inflation has been above (albeit not much above) the 2 per cent target for most of the time since 1999. Budget deficits have generally risen, and many countries have exceeded the 3 per cent of GDP limit under the Stability and Growth Pact,1 and the cyclically adjusted budget deficit has averaged nearly 2 per cent of GDP (and under the SGP, this figure would be zero).