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The European Union and Euro
  April 2007

In 1992, the EU decided to adopt economic and monetary union (EMU). This resulted in the introduction of a single European currency, managed by a European Central Bank (ECB). The ECB was set up in 1998, with its headquarters in Frankfurt. The ECB is responsible for framing and implementing the EU's monetary policy, which includes managing the euro, the EU's single currency.

1 January 1999 saw the irrevocable fixing of exchange rates and the introduction of the single currency on foreign-exchange markets and for electronic payments. This required each of the 11 eurozone countries to link its national currency to the euro at an irrevocably fixed exchange rate, while both meeting and maintaining a set of economic criteria (as from 1 January 2001, Greece, the 12th eurozone country, also joined the EMU, linking its drachma to the euro). Thereafter, until 31 December 2001, the EU applied the principle of "no compulsion-no-prohibition", meaning that monetary transactions in the currencies of the countries that had joined the EMU could be conducted in any of their individual national currency units, or the euro, at the choice of the individual or company.

On 1 January 2002, euro notes and coins were introduced in the Member States, gradually replacing the old national currencies ("legacy" currencies). On 28 February 2002 the transitional stage of dual circulation of the legacy currencies and the euro came to an end.

Thus, the euro ("") became a reality on 1 January 2002, when euro notes and coins replaced national currencies in 12 of the 15 countries of the EU, namely, Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Currently, these 12 make up the eurozone; their central banks, together with the ECB, comprise the euro-system.

One of the ECB's main tasks is to ensure price stability in the eurozone, seeing to it that the euro's purchasing power is not eroded by inflation. The ECB attempts to keep the yearly increase in consumer prices under 2%, controlling money supply and monitoring price trends.

The population of the 12 Member States within the eurozone is about 311,000,000. Beyond its economic impact, the euro is seen by many to have a significant political impact. The introduction of the euro has considerably eliminated the inefficiencies resulting from businesses and consumers having to operate in several disparate national currencies within the Single Market. The efficiency gains have come about due to lower transaction costs and increased competitive pressures through enhanced price transparency. Hong Kong businesses trading in several eurozone countries will be only too aware of the advantages of having to deal - both with other businesses and cross-border customers - in only one single currency.

The UK and Denmark have an "opt-out" Protocol under the EU Treaty, which grants them the right to decide, at a later date, whether to join the eurozone. Sweden is also entitled to join. All three will need to meet the so-called convergence criteria. These include achievement of a high degree of price stability, sound public finance and exchange rate stability.

All 10 new Member States (namely, those which joined on 1 May 2004) are committed to adopting the euro as soon as practicable. At least three - Estonia, Lithuania and Slovenia - are hoping to switch to the single currency on 1 January 2007. A second wave, comprising Cyprus, Malta and Latvia, is aiming for 1 January 2008. Slovakia has set a target of 2009, and both the Czech Republic and Hungary, 2010. Poland's position is more vague - although it had committed itself to adopting the euro, Warsaw has not yet presented a hoped-for timetable.