What is the euro?
Who are members?
Can any country join the euro?
Can you change your mind once you've joined?
How does EMU work?
Who sets monetary policy for the eurozone?
What is the role of the eurozone national central banks?
What is the role of non-participating EU central banks?
What is ESCB?
Who is responsible for euro banknotes and coins? What do they look like?
What are the plans for the changeover to euro notes and coins?
Will new stamps be produced for the eurozone?
Why did the euro initially perform so badly in the foreign exchange markets?
How are businesses within the eurozone affected by the euro?
What will the euro mean for consumers?
Will the UK join the euro?

For more questions and answers on the changeover to euro notes and coins, click here
For more questions and answers on UK & the euro, click here

The euro is the European Union's single currency, which arrived in cashless form after years of negotiations and preparation on January 1 1999 when 11 EU countries formed an Economic and Monetary Union (EMU) and irrevocably locked the exchange rates of their currencies against the euro.

Greece became the twelfth member when it joined the euro on January 1 2001.

Although the eurozone's citizens are using their own bank notes and coins, they are no longer stand-alone currencies, but subdivisions of the euro. Their value against the euro is irrevocably fixed. So 1 euro is the same as 166.386 Spanish pesetas or 6.56 French francs. There are 100 cents in a euro, sometimes called euro cents.

On January 1 2002, euro notes and coins came into circulation. The scale of the project presents a massive logistical challenge: 14.25bn new banknotes, representing E642bn and 56bn coins, weighing thousands of tonnes, will have to be minted.

Banks already conduct transactions in euros; cheques, credit transfers and direct debits can be denominated in them; equities are priced in euros; and foreign exchange dealers trade in euros.

There are seven euro notes and eight euro coins. The notes are: 500, 200, 100, 50, 20, 10, and 5 euro. The coins are: 2 euro, 1 euro, 50 euro cent, 20 euro cent, 10 euro cent, 5 euro cent, 2 euro cent, and 1 euro cent.

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Who are members?

Twelve states now make up the eurozone. They are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

Danish voters on September 28 2000 became the first European citizens to decide by popular referendum whether to adopt the euro. In the final count, 53.1 per cent voted against the euro.

The governments of UK and Sweden have decided to stay outside the euro for the time being.

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Can any country join the euro?

In order to join the euro a country must be a member of the European Union and be able to pass economic tests set out by the Maastricht Treaty.

The Treaty requires economies to have achieved certain levels of performance on inflation, public deficits and debts, exchange rates and interest rates. These targets ensure not only stable economic conditions but also a degree of convergence between participating member states which allows EMU to function smoothly.

The terms of the Treaty are that:

• Annual government deficit must not exceed 3 per cent of GDP
  
• Total outstanding government debt must not exceed 60 per cent of GDP
  
• Rate of inflation within 1.5 percentage points of the three best performing EU countries
  
• Average nominal long-term interest rate must be within 2 percentage points of the average rate in the three countries with the lowest inflation rates
  
• Exchange rate stability, meaning that for at least 2 years the currency has kept within the "normal" fluctuation margins of European Exchange Rate Mechanism (ERM)

The final judgment on whether a member state fulfils the necessary conditions for the adoption of the euro is made by the European Council.

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There is no provision in the Maastricht Treaty to give up the currency once you have joined.

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Economic and Monetary Union (EMU) is the single currency area within the European Union single market in which people, goods, services and capital move with minimal restrictions. It is intended that EMU will create the framework for economic growth and stability.

The rules, institutions and objectives of EMU are set down in the Maastricht Treaty.

Economic and Monetary Union is based on two concepts : the co-ordination of economic policies and an independent monetary institution, the ECB.

The Council of Finance Ministers (which brings together the ministers for economic affairs and finance of the member states) is responsible for defining the major principles of economic policy. It can put pressure on the participating states for them to respect their budgetary commitments. In February 2001 EU ministers asked Ireland to revise its budget as it broke ECB guidelines and was likely to trigger further rises in inflation.

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Monetary policy in the eurozone is implemented by the European Central Bank, together with member national central banks.

The ECB is independent of political and private institutions of the European Union and member states. The ECB has its own budget, independent of that of the European Community.

The ECB has three boards. The executive board consists of the president, Wim Duisenberg, and five others. They are in charge of the day-to-day running of the ECB. Members of the executive board are restricted to a maximum of one eight-year term of office.

The governing council is its most important. It consists of the six executive board members and the governors of the participating national central banks. The council currently meets fortnightly and takes all monetary policy decisions such as changes in interest rates or exchange rate policy.

The general council is made up of all EU national central bank governors, including those outside EMU (UK, Sweden and Denmark) and the President and Vice President of the ECB. The non-EMU central bank governors can participate in the consultative and co-ordinating functions of the ECB but can not take part in deciding monetary policy.

The ECB's main objective, enshrined in the Maastricht Treaty, is to maintain price stability. The medium-term target inflation rate of between 0 and 2 per cent a year has been criticised for being too strict. Some say it forces the ECB to keep interest rates so high that they stifle economic growth.

2 per cent is not a target; it is the highest permissible level. Ideally, the ECB wants average inflation to be lower than 2 per cent.

Gordon Brown, the UK chancellor of the exchequer, has indicated he prefers the British system under which the UK government asks the Bank of England to meet an inflation target of 2.5 per cent, with a leeway of one percentage point on either side.

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Although the ECB makes the big monetary policy decisions, the national central banks implement them in their own countries. All eurozone national central banks contribute to monetary policy decisions through membership of the ECB's governing council.

National central banks will continue to be responsible for the delivery of non-core central banking tasks which vary from country to country. For example, the Banque de France is involved in producing risk assessment for companies. Another one? Is there a non-core central banking task which they have in common.

The banks are responsible for overseeing the production and delivery of euro notes and coins in their own countries.

Interestingly, Luxembourg, which did not have a national central bank before, had to create its own central bank before entering European Monetary Union.

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What is the role of non-participating EU central banks?

National central banks of member states not participating in the euro area have a different status to eurozone central banks - they are members of the third-tier extended general council rather than the second-tier governing council.

They are allowed to participate in the consultative and co-ordinating functions of the ECB and can contribute to statistical data. Non-EMU central banks can not contribute to monetary policy for the eurozone.

They continue to conduct national monetary policies.

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This stands for European System of Central Banks and is a network made up by the ECB and all national central banks from the EU.

The Eurosystem refers to the ECB and the national central banks of the member states which have adopted the euro.

It is a complex relationship - the ECB is more powerful, yet the national central banks are also the shareholders in the ECB.

The national central banks of Member States not participating in the euro area have a different status, which permits them to conduct national monetary policies, but not to take part in deciding and implementing monetary policy for the euro area.

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Who is responsible for euro banknotes and coins? What do they look like?

Each country is responsible for printing the new banknotes at their print works and minting coins.

There are 7 euro notes and they are denominated in 500, 200, 100, 50, 20, 10 and 5 euros.

The notes will be uniform throughout the euro area; unlike coins, they will have no national side. The designs symbolise Europe's architectural heritage but do not represent any existing monuments. Pictures of windows and gateways are on the front side of each banknote, symbolising of openness and co-operation in the EU.

The reverse side of each banknote features a bridge in a historical style, a metaphor for communication among the people of Europe.

View euro notes

All notes can be used within the eurozone.

There are 8 euro coins denominated in 2 and 1 euros, then 50, 20, 10, 5, 2 and 1 cents.

Every euro coin carries a common European face. On the reverse side, each Member State will decorate the coins with their own motifs. No matter which motif is on the coins they can be used anywhere inside the 12 Member States. For example, a French citizen will be able to pay for something in Berlin using a euro coin carrying the imprint of the King of Spain.

The common European face of the coins represents a map of the European Union against a background of transverse lines to which are attached the stars of the European flag. The 1,2 and 5 cent coins put emphasis on Europe's place in the world while the 10, 20 and 50 present the Union as a gathering of nations. The 1 and 2 euro coins depict Europe without frontiers.

The final designs were agreed at the European Council meeting in Amsterdam in June 1997.

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There is some variation between eurozone members on the timing of the cut-off for legal tender of national banknotes and coins and the last date for exchanging currencies euros (see table for national timetables).

On January 1 2002, euro notes and coins entered circulation.

National notes and coins will continue to be legal tender alongside the euro for up to two months in 2002. In March 2002, national currencies will no longer be valid although you will be able to exchange old banknotes and coins for euros in national central banks.

In order to prepare for the transition to euro notes and coins, from September 1 2001, euro banknotes and coins have been made available to banks (frontloading). Although no euro banknotes will be put into circulation before January 1 2002.

Notes will become available to the public primarily through automated teller machines (ATMs) which distribute about 70 per cent of banknotes in circulation. Coins will be available in most countries in the second half of December 2001. "Starter kits" containing euro coins have been available through banks and retail outlets.

To prepare citizens for the new notes and coins the European Central Bank and the 12 eurozone national central banks are running an information campaign.

In countries outside the eurozone, commercial banks will be able to change national currencies according to national guidelines.

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Postal services will remain the responsibility of each of the national post offices. Postage stamps will continue to be produced separately by each of the postal operators, and will not be replaced with a single set of "eurozone stamps".

Harmonisation will only extend to the € symbol denoting the price of the stamp, not to the designs of the stamps.

Postal operators have begun issuing dual-currency stamps, with the price denoted both in euros and in the local currency. In Germany, for example, the first such stamps were issued in May 2000, and all German stamps have been dual currency since the start of 2001. Similarly, French stamps have been denominated in both francs and euros for the past two years.

The postal operators will withdraw old stamps in their possession at the end of 2001. The general public will have several months to use any old stamps they hold - in conjunction with new euro-denominated stamps if they wish. Any old postage stamps still left afterwards can be exchanged for new ones for some time afterwards. The exact time span varies between countries, and postal operators are likely to show some flexibility here.

Franking machines (owned or leased by companies to facilitate processing their mail) need to be adjusted to either display the euro symbol or to simply show a price without the symbol. In addition, amounts already paid onto the machines by customers need to be adjusted to reflect the conversion rates between the old currency and the euro.

In the longer term, once the transition to euro-denominated stamps is complete, the euro will not affect postal services and the issuing of stamps. However, with the euro's introduction, international price comparisons will become much easier, and postal operators are expected to come under competitive pressures.

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There are many theories.

Most commentators focus on outflows of investment capital from the eurozone. The superior rates of growth offered by the US economy in 2000 sucked money from the eurozone into US stocks and corporate bonds. European companies have also been enthusiastic sellers of euros in their bid to buy up US competitors.

These outflows more than offset the enthusiasm of foreign exchange professionals for the currency. Traders consistently bet on a rising euro and foreign exchange analysts have long been predicting a rise in the currency. However, even this support for the euro was removed, frustrated by the failure of the euro to rally.

International concern over the weakness of the euro reached a peak in September of 2000 when the world's main central banks intervened to prop up the currency. Analysts are divided over how far this action - which was later followed by several bouts of unilateral intervention by the European Central Bank - helped the currency. The euro has not fallen back to pre-intervention levels, but it has got close and never managed a sustained rally.

In addition to capital outflows, analysts argue, the euro has been undermined by the performance of the ECB. The public announcements of Europe's central bankers have frequently been contradictory, disorientating traders and fund managers. And when the ECB has appeared to speak with a common voice, the rhetoric has appeared in conflict with monetary policy. The ECB enraged financial markets on May 10 by cutting interest rates after two weeks of hawkish pronouncements by prominent central bank governors. Criticism has particularly centred on Wim Duisenberg, the president of the ECB, whose pronouncements frequently sent the euro tumbling.

By the summer of 2001, however, the euro staged a recovery, but that even that was attributed to weakness in the dollar.

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Companies operating within the eurozone have already enjoyed a reduction in many of their costs, particularly in treasury management, foreign exchange transactions and through the elimination of much foreign exchange risk.

With the conversion to euro notes and coins however, increased price transparency should trigger strong competition in some sectors so, the cost to consumers of certain goods in certain markets may have to fall. Businesses also face one-off costs in the changing of equipment and staff training.

However, critics of the euro feel that handing over control of interest rates and exchange rate policy to the ECB could mean that action is taken centrally which is inappropriate for the economies in which companies operate.

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The expectation is that consumers will be able to shop around for bargains as it becomes easier to compare prices between countries as all goods will be valued in euros.

However, there are fears that businesses will seize the opportunity to raise their prices amid the confusion arising from the changeover to euros.

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The arguments for and against are complex and often confusing, but essentially they fall into two groups. One group claims the case is pragmatic and that no matters of principle are involved; the other claims the opposite, that principle over-rides whatever other advantage there may be.

The first group say that entry is purely a question of where Britain's economic interest lies. If it can be shown that the country's material well-being will benefit, then we should go in; if not, not.

The second group says that, on the contrary, the very future of the country, its identity and its freedom to make its own decisions as a nation, are at stake, since entry will inevitably lead to a loss of British sovereignty to European institutions.

Tony Blair's Labour government belongs to the first group. It has declared that there are no political barriers to entry and that the only tests to be applied are of economic advantage. As Gordon Brown, chancellor of the exchequer, has put it, the government is pro-euro "because...we believe that - in principle - membership of the euro can bring benefits to Britain."

Brown has devised a set of five tests to apply in the process of deciding whether Britain will in fact benefit. The conditions set out in the tests will be assessed by June 2003. If the government decides they have been met it will put British entry to a referendum soon afterwards. Membership could be completed with the euro becoming Britain's currency, the government believes, within 40 months of deciding to go ahead with a referendum.

• Is there sustainable convergence between UK and the eurozone economies?
• Is there sufficient flexibility to cope with economic change?
• Will it encourage or discourage companies from investing in the UK?
• What will the impact be on the financial services industry?
• Will it be good for employment?

Clear distinctions between the pragmatists and the opponents on principle are easily muddied. For instance, critics of the government's five tests claim they are too vague to be meaningful. You could argue, they say, that the tests have already been met or, on the other hand, that they never could be.

Besides, supposedly objective economic criteria can easily be manipulated as, it is said, was the judgment on Italy's financial soundness at the time of the euro's launch. So why wait for a referendum until 2003? Why not have one now or, alternatively, rule out the whole project, now being as good a time as any for either decision.

Here we come to what is perhaps the key issue for the government. Opinion is divided, as much in business as the unions, on the political left as well as the right. Polls suggest that the UK population is divided three-to-one against entering the European currency.

Whatever its judgment of the five economic tests may be, the government will have to make a sixth judgment, on whether it dare risk defeat in a popular vote on such an important issue.

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