European monetary union - Short chronology 1999 - 2008

1 January 1999

Stage Three of Economic and Monetary Union (EMU) begins with the introduction of the euro as the single currency in 11 EU member states – initially only as scriptural money. The European Central Bank (ECB) and the national central banks of these 11 countries work together in the Eurosystem. The Governing Council of the ECB assumes responsibility for the single monetary policy in the euro area.

1999 - 2001

Weak external value of the euro (euro – US dollar exchange rate: EUR1 = USD 1.1789 on 4 January 1999; EUR1 € = USD 0.8252 on 26 October 2000). This boosts exports from the euro area but threatens confidence in the new currency. The ECB places its trust in a recovery of the euro’s external value given internal price stability; it intervenes in favour of the euro only in September-November 2000.

8 April 1999

Given receding inflation risks (risk of deflation) the Governing Council lowers the key interest rate (interest rate for main refinancing operations) from 3% to 2.5%.

26 September 1999

Gold agreement between the ECB and 14 EU national European central banks. In order not to encourage a decline in the price of gold, the sale of gold is limited to a total of 2000 t in the next five years. In a further agreement (8 March 2004, somewhat altered composition, total quantity to be sold 2,500 t up to 2009), the Bundesbank is granted an option to sell (600 t). However, pursuing a confidence-building gold reserve policy, the Bundesbank sells only 35.5 t between 1999 and 2004, and only 15.9 t between 2004 and 2007 – solely for the purpose of minting gold commemorative coins.

4 November 1999 - 6 October 2000

Given rising price risks in the medium term, the Governing council raises the key interest rate in several stages from 2.5% to 4.75%. The Governing Council is accused of placing the large, weak-growth economies (such as Germany) at a disadvantage by raising interest rates, whereas it was said to have favoured them previously with its policy of lowering them.

23-24 March 2000

In Lisbon, the European Council (Heads of State or Government) adopt the “Lisbon strategy”; structural reforms in the member states with the aim of transforming the EU into “the most competitive and dynamic knowledge-based economy in the world” in the next ten years. Following mixed results following an interim assessment, the European Council, on 22-23 March 2005, calls for a renewal of the strategy. The ECB is interested in the Lisbon strategy since structural reforms (wage flexibility, mobility of the production factors) would effectively support the single, price-stability-oriented monetary policy.

1 January 2001

Greece introduces the euro.

11 May 2001 -6 June 2003

Given receding inflation risks and slower economic growth, the Governing Council lowers the key interest rate in stages from 4.75% to 2% and leaves this rate on hold until December 2005. In doing so, the Governing Council had to defend itself against contrasting accusations. Some critics accused the Governing Council of putting too much money into circulation – raising inflation and asset prices – whereas others claimed it was being too hesitant in stimulating economic activity.

17 September 2001

In a concerted action with other central banks – above all, the Fed – the Governing Council lowers the key interest rate from 4.25% to 3.75%. This early interest rate cut is designed to forestall any adverse economic effects of the terrorist attacks on the USA on 11 September 2001.

1 January 2002

The euro is introduced in cash form. This functions smoothly, but there begins a debate on the perceived hike in prices accompanying the changeover.

Spring 2002 - 2008

The euro-dollar exchange rate is on a rising trend. The Governing Council – which is committed to price stability, not to an exchange rate target – does not put a brake on this rise which is hitting exports. The Eurosystem is subjected to political attacks (from competitively weaker countries) on the stability objective and its independence.

21 March 2003

In Brussels, the European Council adopts a new voting system for the ECB Governing Council for the eventuality that the number of national central bank governors exceeds 15. The governors of the national central banks are allocated to groups according to gross domestic product and the size of the financial sector of the member states and rotation of voting rights within each group; rotation can be suspended if the number of governors does not exceed 18.

8 May 2003

The Governing Council reviews its monetary policy strategy. It defines the price stability objective (inflation below, but close to 2%) and the role of the monetary analysis in interest rate policy decisions. Monetary developments indicate the medium to long-term risks to price stability. The real economic factors indicate the short to medium-term risks to price stability; the monetary risk assessment (strategy pillar 2) serves as a cross-check for the real economic risk analysis (pillar 1). The strategy review was also a response to the heated public debate – almost from the outset –on the allegedly deflationary character of the price stability objective and the usefulness of the Governing Council’s “two-pillar strategy”.

22-23 March 2005

The European Council approves the ECOFIN Council’s (economics and finance ministers’) proposal on the reform of the Stability and Growth Pact. The reform broadens the fiscal policy leeway available to the euro countries. The medium-term budgetary objective is no longer defined uniformly (balanced budget) but is set taking account of country-specific economic considerations.  The grounds justifying an overshooting of the 3% deficit ceiling become much broader in scope. The reform was ECOFIN’s response to the fact that several member countries had been overshooting the ceiling for a number of years (Germany since 2002, for example); stricter compliance with the Pact by these countries in the interests of price stability would have been the Eurosystem’s preferred alternative.

1 December 2005 - 8 June 2007

Given increasing inflation risks and accelerating growth rates in the euro area, the Governing Council raises the key interest rate in several stages from 2% to 4%. The interest rate hikes are accompanied by accusations by politicians (in competitively weaker countries, not so much in Germany) and academic commentators that the ECB is doing too little for growth and the reduction of unemployment.

1 January 2007

Slovenia introduces the euro.

Summer 2007 - January 2008

Faced with the financial crisis spilling over from the USA, the Eurosystem makes additional liquidity available to the banks. In order not to put price stability at risk, the Governing Council – in contrast to the Fed in the USA – does not lower central bank interest rates, however.

19 November 2007

The central banks of the Eurosystem launch the large-value payment system TARGET 2: a joint system with standard features in which individual interbank payments and the monetary policy operations of the Eurosystem are settled via a single platform. TARGET 2 replaces the decentralised TARGET system operated by the Eurosystem, which was set up in January 1999 – a network of individual different national payment systems.

13 December 2007

Treaty of Lisbon signed by the Heads of State or Government of the EU member states to reform the EU following the failed ratification of the constitutional treaty for Europe. The provisions on EMU remain largely unchanged from those of the Maastricht Treaty (1992). Thanks to the influence exercised, in particular, by the ECB and the Bundesbank, price stability is retained as an objective of the EU (not only as the primary objective of the Eurosystem).

1 January 2008

Malta and Cyprus introduce the euro. The number of national central bank governors on the Governing Council therefore rises to 15.

28 January 2008

The European banking industry starts to phase in the Single Euro Payments Area (SEPA) for cashless retail payments, the concept of which is promoted by the Eurosystem and actively supported operationally, in particular, by the Bundesbank. Cross-border euro payments are treated as domestic payments, the payments instruments (pan-European SEPA transfer, debit and card payments) are being standardised – initially, from January, the transfers.

8 October 2008 - 15 January 2009

The Governing Council of the ECB lowers its key interest rate in four stages from 4.25% to 2.0%, by 75 basis points on 4 December alone. In addition to the ECB, the central banks of the United States, the United Kingdom, Canada, Sweden, Switzerland and China reduce their key interest rates in a coordinated move on 8 October. Background: significant slowdown in economic activity (particularly due to the financial crisis), falling commodity prices and inflation expectations as well as slowing monetary expansion all indicate receding inflationary risks in the medium term; there is now more leeway for interest rate cuts to stabilise the economy.