------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (January 2009)

Chris Mulhearn and Howard R Vane, _The Euro: Its Origins, Development
and Prospects_.  Cheltenham, UK: Edward Elgar, 2008.  xii + 243 pp.
£60/$115 (hardback), ISBN: 978-1-84720-051-8.

Reviewed for EH.NET by Jerry Mushin, School of Economics and Finance,
Victoria University of Wellington, New Zealand.


The establishment of the euro in 1999 was a remarkable event. The rigid
fixing of certain exchange rates, and then the replacement of a group of
existing currencies with a single currency, has rarely been undertaken
in the recent past [1], and never on the scale of the euro. It is for
this reason that predicting its effects is both difficult and
contentious. In this scholarly but accessible work, Mulhearn and Vane,
of Liverpool John Moores University, summarize the origins of the euro,
its development, and its prospects. Economic developments are placed in
their historical and political contexts and are explained using economic
theory.

The first two chapters of the book describe events from 1945 to 1999,
when the euro was introduced. The authors show that, following the end
of the Second World War, it was widely perceived that, in addition to
its economic benefits, economic integration would decrease the
likelihood of renewed conflict and destruction. There are useful
comparisons with post-1918 experience. The significance of the
establishment of the European Coal and Steel Community (1952) and the
European Economic Community (1957) and of the beginning of monetary
cooperation in Europe, including the founding the European Payments
Union (1950), are explained. It was frequently difficult to balance an
obvious loss of sovereignty and its uncertain benefits. The benefits of
decreased fluctuation of exchange rates are difficult to quantify. The
precise benefits of a common currency (decreased transactions costs,
eliminated exchange rate risk, and greater price transparency) are
particularly elusive, especially before they happen. The irrevocable
loss of monetary independence has frequently, however, been perceived as
a threat or even as a defeat.

Agreements to limit exchange rate fluctuations within a group of
European currencies were introduced in 1973 (the “Snake”) and in 1979
(the Exchange Rate Mechanism of the European Monetary System). Although,
since parity changes are possible under fixed exchange rates, these
innovations were not totally successful, they showed the benefits of
monetary integration. They also showed the benefits of a common
currency, such as the euro, under which individual national currencies
cease to exist and can no longer be devalued and revalued against each
other.

The creation of the euro area is explained in detail. This includes the
conditions for membership, as defined in the Maastricht Treaty (1991),
and the functioning of the European Central Bank. The Maastricht
conditions refer to each country’s inflation rate, level of long term
interest rates, exchange rate stability, budget deficit to GDP ratio,
and government debt to GDP ratio. The relevance of Optimum Currency Area
theory is shown.

The book includes macroeconomic information, and discussion, on the
countries that adopted the euro at (or immediately after) its inception
[2], on the eligible countries that refused to participate in the new
currency arrangement [3], on the countries that have subsequently joined
the euro zone [4], and on the countries that hope to join it [5].
The position of the UK, one of the three members of the European Union
that chose not to adopt the euro at its inception, is interesting partly
because of the size and the openness of its economy and partly because
the British government has announced five tests which would need to be
met before it would consider joining the new currency system. These
tests refer to the convergence between the business cycles in the UK and
the members of the euro zone, the degree of market flexibility
(especially labor market flexibility), the likely effects on investment,
the likely effects on the financial services industry, and the likely
effects on economic growth, stability, and employment. It has been
determined that these tests have not been satisfied.

The book includes the authors’ lengthy interviews with prominent
economists. These seven conversations, which refer to theory, applied
data, and their participants’ memories, and which fill about 40 percent
of its pages, make this book unusual. They enhance the chapters written
by Mulhearn and Vane by providing informed discussion and interpretation
of the historical record. These interviews are especially illuminating
about the causes and effects of the successive enlargements (and
proposed enlargements) of the European Union and its predecessors, and
about the political difficulties that have accompanied international
monetary changes in Europe since 1945.

The only significant weakness of this book is that there is not much
discussion of the role of the euro outside Europe. Issues include the
fixing of exchange rates to the euro, either as an individual currency
or as part of a basket, and the use of the euro as an international
reserve currency. Of much less importance is that the currency
arrangements in the European micro states that use the euro [6] are ignored.

This is an exceptionally thorough and lucid book. It is rigorous but not
mathematical. It deals with a topic of great importance, especially
since the successful introduction of the euro might encourage the
development of other monetary unions. Mulhearn and Vane analyze
historical information using economic theory and show the importance of
political constraints. Their book will be of great value to students and
to their teachers.

Notes:
1. Other examples, which both occurred in 1990, are the monetary unions
that accompanied the merger of the former People’s Democratic Republic
of Yemen and the former Arab Republic of Yemen and the incorporation
into the German Federal Republic of the former German Democratic Republic.
2. Austria, Belgium, Finland, France, Germany, Greece, Irish Republic,
Italy, Luxembourg, Netherlands, Portugal, Spain.
3. Denmark, Sweden, UK.
4. Cyprus (South) (2008), Malta (2008), Slovakia (2009), Slovenia (2007).
5. Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Romania.
6. Andorra, Monaco, San Marino, Vatican. The euro is also used in Kosovo.


Jerry Mushin’s most recent book is _Interest Rates, Prices, and the
Economy_, Scientific Publishers [India], Jodhpur, 2009.
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