Five years ago, on January 1, 2002, twelve European countries introduced the banknotes and coins of their new currency, the euro, and began withdrawing the old national currencies. It was a huge, historic step, marking the physical arrival of the euro in people’s hands and purses, and the end of the Belgian Franc, the German Mark, the Greek Drachma, the Spanish Peseta, the French Franc, the Irish Punt, the Italian Lira, the Luxembourgish Franc, the Dutch Guilder, the Austrian Schilling, the Portuguese Escudo, and the Finnish Markka. As of  2007, Slovenia became the thirteenth member of the Euro Area.

That’s an impressive list, and the introduction of the euro was a staggering achievement – there are now 11 billion bills in circulation and 68 billion coins. The majority of those were put into circulation in just a few weeks, starting on New Year’s Day, 2002, while corresponding national bills and coins were being collected.

A single currency offers huge economies of scale and opens the door to greater stability of prices, ideally at lower interest rates than previously achieved. At the same time, it eliminates exchange rate risk, for both consumers and businesses, and enhances price transparency. That means both customers and investors can choose to put their money where it makes most sense to do so, and the economy itself becomes more efficient and less wasteful. The flipside of the efficient allocation of resources is the removal of certain tools that can soften the adjustments between the countries that now have the same currency – no more fluctuating exchange rates, no differentiated interest rates to influence investment or consumption decisions, to adjust competitiveness between countries competing for business. The same money, and a single short-term interest rate for all.

As a bonus, 300 million residents and countless visitors can now travel around the 13 countries of the Euro Area with just one type of money in their pockets – no more changing money at the borders, and no more paying the fees to change it. The euro enables the European Union’s single market to start really looking like a single economic area, and Europe gains a recognizable identity in international financial markets.

With these benefits on offer, it seemed too good an opportunity to miss, and so in 1992 the timetable was set, with the final deadline for the creation of the euro set for January 1, 1999, with the cash coming into circulation three years later. Then the real work began.

The successful introduction of the euro depended upon the “convergence” of the economies of the participating countries – key features of economic performance need to be similar enough to function together with a single interest rate and fixed exchange rates. There were regular checks on progress towards achieving similar performance on inflation and interest rates, as well as stabilizing exchange rates near the point where they would be fixed. Finally, since this is how the interest rate most directly affects governments,  as well as a key area underlying the need for different interest rates in the different Member States, progress on achieving sound and sustainable public finances was measured.

Every Member State that met the “convergence criteria” would adopt the euro, and 12 nations converted their banknotes and coins to the euro in 2002.

Fatigue from the effort of getting public finances into shape in the late 1990s, followed by the recession triggered by the end of the dotcom boom, left a large number of countries struggling to meet the commitments of the Stability and Growth Pact – namely keeping annual deficits below 3% of GDP and bringing debt down towards the 60% reference value.

The strains triggered a great deal of debate over whether it was appropriate to pursue budgetary cuts in a period of recession, particularly in countries where unemployment levels were already relatively high. In the end, it was decided that some additional leeway could be given in cases where unexpectedly poor economic conditions caused budgetary problems; but also that efforts to get the finances in order in the good times would be reinforced.

Now it looks like we have reached the good times, and so the countries that experienced real budgetary difficulties are now being held to their promise to put things right before the next recession comes along. This is important because all the countries that share the euro also share a single short term interest rate – this reflects economic conditions for the Euro Area as a whole, rather then any individual country, and that means that one country’s impact on the interest rate has an effect on the entire Euro Area. Of course, the bigger the economy of that country, the bigger the impact.

But it isn’t just budgetary policy that can affect neighboring countries – the structure of the economy has a huge impact, both domestically and at the aggregate European level. The EU is pursuing its “Lisbon agenda” for reforming its markets to make them more efficient and increase growth rates, and these policies have particular resonance for Euro Area countries, as market rigidities can prevent the efficient allocation of resources and impede economic growth. More than five years into what was to be a ten-year program, there remains much to be done, even if some impressive reforms have been implemented and are beginning to bear fruit.

As for the euro itself, after five years in people’s hands, pockets and purses, it seems extremely well established. Fifty-nine percent of those polled report that they have no problems at all using the euro, and the figure is increasing year by year.

The future holds great challenges, not least the enlargement of the Euro Area to include the ten countries that joined the EU in 2004.  So the fifth anniversary of the introduction of banknotes and coins brings the first new set of coins. Almost all other EU countries have declared their ambition to adopt the euro before another five years pass. This will alter the composition of the Euro Area’s economy and make the definition of its common policies even more challenging.

But then, nobody ever said the single currency was going to be easy.  The EU has always proceeded by setting itself tough challenges and rising to meet them.  This time around, the challenges are complex and the stakes are high.  In addition, the final responsibility for the key decisions on economic policy, on the key reforms required to make things work, are in the hands of the individual Member States. It’s an EU classic – it is time to recognize the benefits of collective endeavor, above and beyond a strict interpretation of the national interest.  Time to look clearly into the future and build the Europe that we need.