Europe's Anchor of Stability

FRANKFURT – At less than ten years old, the euro is by all measures a young currency. Yet it has become a reality of daily life for almost 320 million people in 15 European countries. In the wake of the euro’s performance during this year’s global financial crisis, even its strongest critics cannot deny that the euro is an astounding success.

This past summer, millions of travelers avoided paying cumbersome and expensive charges to change their currency. But the advantage for trade and investment implied by the absence of foreign-exchange risks within the euro area is of greater economic importance. The common currency completes the single market for the euro area’s member states.

Since 1999, members of the European Monetary Union (EMU) have experienced a number of severe exogenous shocks: the rise in the price of a barrel of oil from around $10 to $150; the collapse of equity markets after the dot-com bubble imploded; the spreading risk of terrorism after the September 11, 2001, and two wars. Starting last summer, the breakdown of the market for US sub-prime mortgages triggered turbulence in financial markets, with no end in sight.

From past experience with national currencies, Europeans could have expected that any of these shocks would trigger a severe crisis in foreign-exchange markets. It is not difficult to imagine what would have happened during the recent financial-market crisis if the euro-area countries still had all their national currencies: immense speculation against some currencies, heavy interventions by central banks, and finally a collapse of the parity system.