With Britain and Sweden making their minds up on membership and economic stagnation posing a major challenge, 2003 will be a key year for the euro, writes Cliff Taylor, Economics Editor
On this day last year Europe was braced for the introduction of euro notes and coins, a massive logistical exercise that went off remarkably smoothly. That said, the aftermath saw profiteering by businesses in certain sectors, who took advantage of the changeover to push up prices, a fact acknowledged over the past couple of days by Mr Wim Duisenberg, the president of the European Central Bank (ECB).
Over the next year, however, the euro project faces even more important hurdles. Britain and Sweden face key decisions on membership, while policymakers in euro-zone economies face a formidable challenge in charting a path back to economic growth. It would be overstating it to say that it will be a "make or break year" for the euro - but not much.
The objectives of creating the euro were both political and economic. Politically, the currency was launched in 1999 as a significant step in European integration. Economically the rationale was to create a zone of growth and monetary stability - with the euro offering advantages for trade and consumers.
The economic advantages are now being called into question by critics of the project - and in turn this will have implications for the big political decisions to be made on membership this year in Britain and Sweden.
The difficulties of implementing a "one-size-fits-all" monetary policy are increasingly obvious: Germany, for example, would have benefited from lower interest rates over the past year, while - up to recently at least - the Irish economy needed much higher borrowing costs.
Meanwhile, the growth prospects for the euro zone are relatively poor in the short term. Most forecasters expect growth of less than 2 per cent in the single currency area next year. Germany, which accounts for 40 per cent of the euro-zone economy, is facing particular difficulties, growing by just 0.5 per cent this year and with forecasters expecting growth of around 1 per cent next year.
If war in Iraq were to send oil prices upwards for a sustained period, then a recession in Germany would be quite possible next year. Ironically, having fretted about euro weakness in its early years, policymakers will now be worried that a sharp rise against the dollar could put further downward pressure on growth next year by hurting exporters.
However, forecasters are - as ever - divided on the likely trend of the currency.
Euro critics say that the introduction of the single currency has contributed to the poor performance of the euro-zone economy over the past couple of years. Interest rates have been inappropriate, they argue, and the Stability and Growth Pact - the rules governing budget policy in the euro zone - have not allowed countries to respond to slow growth by spending more.
Early next year the EU member states are due to consider Commission proposals to make the pact more flexible, while at the same time clamping down on those who break the rules. The proposals are that states with relatively low debt levels could borrow more, and that the economic cycle should be taken into account when determining whether states are staying within exchequer borrowing guidelines.
This latter change could have some difficulties in implementation, centring around how to calculate cyclically adjusted government budget deficits.
The European Central Bank (ECB) is also to consider the guidelines it uses to set monetary policy, which could open the way for somewhat lower interest rates. Arguably, the ECB has been too slow to cut interest rates this year, only finally relenting with a half-point cut shortly before Christmas.
The poor economic outlook in Germany is also focusing attention on one other key factor - the need for economic reform in Europe's biggest economy. German business is calling for major changes to employment rules and to business regulation to make the economy more competitive.
The trade unions, on the other hand, are resisting such moves, recently opposing measures to extend shop opening hours at weekend.
"What Germany really needs is a Margaret Thatcher," was the verdict of the leading US economist Prof Paul Krugman, in an interview over the weekend.
The poor performance of the German economy comes at a bad time for single currency enthusiasts, as two key political decisions must be made this year and will be influenced by perceptions of the euro-zone's economic performance.
In September, the Swedish people are due to vote on whether to join the euro, with opinion polls indicating the vote will be close. Meanwhile in Britain the Blair government is due to pronounce by June 7th on whether the five economic tests for British membership of the euro zone have been met.
These tests revolve around a judgment about whether the euro would be good for the British economy. If the tests are met, a date for a referendum vote on British membership is expected to be set.
Already the PR battle is getting into full swing, with the latest salvo coming this weekend as Mr Bill Morris, leader of the powerful TGWU union, warned against membership as he argued it would restrict Britain's ability to invest in public services.
So a key year approaches for the single currency. If the euro economy picks up towards the middle of the year - and there are signs that economic management of the euro zone is improving - then the chances of Britain and Sweden opting for membership will increase.
But if a prolonged period of slow euro-zone economic growth is in prospect and policymakers appear powerless to do anything about it, then the attractions of joining the club for the potential new members may not be compelling.
