Euro Explained

For other uses see Euro (disambiguation).

The euro (currency sign: ; currency code: EUR) is the official currency of 16 out of 27 member states of the European Union (EU). The states, known collectively as the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries, with and without formal agreements and is consequently used daily by some 327 million Europeans.[1]

, with more than €751 billion in circulation[2] (the equivalent of about US$ 953 billion[3]), the euro is the currency with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar.[4] Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone is the second largest economy in the world.[5]

The name euro was officially adopted on 16 December 1995.[6] The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Physical coins and banknotes entered circulation on 1 January 2002.

Administration

See main article: European Central Bank and Maastricht Treaty. The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banks of the Eurozone countries). As an independent central bank, the ECB has sole authority to set monetary policy. The Eurosystem participates in the printing, minting and distribution of notes and coins in all member states, and the operation of the Eurozone payment systems.

The 1992 Maastricht Treaty obliges most EU member states to adopt the euro upon meeting certain monetary and budgetary requirements, however, not all states have done so. The United Kingdom and Denmark negotiated exemptions,[7] while Sweden turned down the euro in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in due course.

Characteristics

Coins and banknotes

See main article: euro coins and euro banknotes.

The euro is divided into 100 cents (sometimes referred to as euro-cents, especially when distinguishing them from other currencies). In official contexts the plural forms of euro and cent are spelt without the s, notwithstanding normal English usage.[8] Otherwise, normal English plurals are recommended and used.[9]

All circulating coins have a common side showing the denomination or value, and a map in the background. For the denominations except the 1-, 2- and 5-cent coins that map only showed the 15 member states which were members when the euro was introduced. Beginning in 2007 or 2008 (depending on the country) the old map is being replaced by a map of Europe also showing countries outside the Union like Norway. The 1-, 2- and 5-cent coins, however, keep their old design, showing a geographical map of Europe with the 15 member states of 2002 raised somewhat above the rest of the map. All common sides were designed by Luc Luycx. The coins also have a national side showing an image specifically chosen by the country that issued the coin. Euro coins from any member state may be freely used in any nation which has adopted the euro.

The coins are issued in €2, €1, 50-cent, 20-cent, 10-cent, 5-cent, 2-cent, and 1-cent denominations. In order to avoid the use of the two smallest coins, some cash transactions are rounded to the nearest five cents in the Netherlands (by voluntary agreement) and in Finland (by law).[10]

Commemorative coins with €2 face value have been issued with changes to the design of the national side of the coin. These include both commonly issued coins, such as the €2 commemorative coin for the fiftieth anniversary of the signing of the Treaty of Rome, and nationally issued coins, such as the coin to commemorate the 2004 Summer Olympics issued by Greece. These coins are legal tender throughout the Eurozone. Collector’s coins with various other denominations have been issued as well, but these are not intended for general circulation, and they are legal tender only in the member state that issued them.[11]

The design for the euro banknotes have common designs on both sides. The design was created by Robert Kalina.[12] Notes are issued in €500, €200, €100, €50, €20, €10, €5. Each banknote has its own colour and is dedicated to an artistic period of European architecture. The front of the note features windows or gateways while the back has bridges. Care has been taken so that the architectural examples do not represent any actual existing monument, so as not to induce jealousy or controversy in the choice of monuments. Some of the highest denominations such as the €500 are not issued in all countries, though they remain legal tender throughout the Eurozone.

Payments clearing, electronic funds transfer

All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs.[13] This includes all member States of the EU, even those outside the Eurozone providing the transactions are carried out in euro.[14] Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic, however paper-based payment orders, like cheques, have not been standardised so these are still domestic-based. The ECB has also set up a clearing system, TARGET, for large euro transactions.[15]

Currency sign

See main article: Euro sign. A special euro currency sign (€) was designed after a public survey had narrowed the original ten proposals down to two. The European Commission then chose the design created by the Belgian Alain Billiet. The official story of the design history of the euro sign is disputed by Arthur Eisenmenger, a former chief graphic designer for the EEC, who claims to have created it as a generic symbol of Europe.[16]

The European Commission also specified a euro logo with exact proportions and foreground/background colour tones.[17] While the Commission intended the logo to be a prescribed glyph shape, font designers made it clear that they intended to design their own variants instead.[18] Typewriters lacking the euro sign can create it by typing a capital 'C', backspacing and overstriking it with the equal ('=') sign. Placement of the currency sign relative to the numeric amount varies from nation to nation, and there is no official recommendation on the issue.[19]

The introduction of the euro

See main article: introduction of the euro.

The euro was established by the provisions in the 1992 Maastricht Treaty. In order to participate in the currency, member states are meant to meet strict criteria such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. In the Maastricht Treaty, the United Kingdom and Denmark were granted exemptions per their request from moving to the stage of monetary union which would result in the introduction of the euro.

Economists who helped create or contributed to the euro include Robert Mundell, Wim Duisenberg, Robert Tollison, Neil Dowling, Fred Arditti and Tommaso Padoa-Schioppa. (For macro-economic theory, see below.) The name euro was devised on 4 August 1995 by Germain Pirlot, a Belgian esperantist and ex-teacher of French and history,[20] and officially adopted in Madrid on 16 December 1995.[6]

Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The definitive values in euro of these subdivisions (which represent the exchange rates at which the currency entered the euro) are shown at right.

The rates were determined by the Council of the European Union,[21] based on a recommendation from the European Commission based on the market rates on 31 December 1998. They were set so that one European Currency Unit (ECU) would equal one euro. The European Currency Unit was an accounting unit used by the EU, based on the currencies of the member states; it was not a currency in its own right. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day.

The procedure used to fix the irrevocable conversion rate between the drachma and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced, the conversion rate for the Greek drachma was fixed several months beforehand.[22]

The currency was introduced in non-physical form (travellers' cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently. Their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new euro notes and coins were introduced on 1 January 2002.

The changeover period during which the former currencies' notes and coins were exchanged for those of the euro lasted about two months, until 28 February 2002. The official date on which the national currencies ceased to be legal tender varied from member state to member state. The earliest date was in Germany where the mark officially ceased to be legal tender on 31 December 2001, though the exchange period lasted for two months more. Even after the old currencies ceased to be legal tender, they continued to be accepted by national central banks for periods ranging from several years to forever. The latter being the case in Austria, Germany, Ireland, and Spain. The earliest coins to become non-convertible were the Portuguese escudos, which ceased to have monetary value after 31 December 2002, although banknotes remain exchangeable until 2022.

Usage

See also: Eurozone, International status and usage of the euro and Enlargement of the eurozone. The euro is the sole currency of 16 EU member states: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. These countries comprise the "Eurozone" or "Euro Area", some 326 million people in total.

With all but two of the remaining EU members obliged to join, together with future members of the EU, the enlargement of the eurozone is set to continue further. Outside the EU, the euro is also the sole currency of several European micro states and Kosovo and Montenegro.

It is also gaining increasing international usage as a trading currency, in Cuba,[23] North Korea and Syria.[24] Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The euro inherited this status from the German mark, and since its introduction, it has increased its standing, mostly at the expense of the dollar. The increase of 4.4% in 2002 is due to the introduction of euro banknotes and coins in January 2002.

The possibility of the euro's becoming the first international reserve currency is now widely debated among economists.[25] Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 that the euro could indeed replace the U.S. dollar as the world's primary reserve currency. He said it is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."[26]

Economics

Optimal currency area

See main article: Optimum currency area. In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert A. Mundell: the stationary expectations model and the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euro.[27]

Transaction costs and risks

The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g. credit cards, debit cards and cash machine withdrawals).

The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies have traditionally fluctuated a great deal, particularly the Mediterranean nations.

Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Eurozone.

Price parity

Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease because of the 'law of one price'. Differences in prices can trigger arbitrage, i.e. speculative trade in a commodity across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific markets.[28]

Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a tax (seigniorage) and theoretically discourages investment, it is generally viewed as undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures. Some countries have successfully contained them by establishing largely independent central banks. One such bank was the Bundesbank in Germany; as the European Central Bank is modelled on the Bundesbank,[29] it is independent of the pressures of national governments and has a mandate to keep inflationary pressures low. Member countries that join the bank commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels of expected inflation. The ECB (unlike the Federal Reserve in the United States of America) does not have a second objective to sustain growth and employment.

Many national and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in legacy currencies. While increased liquidity may lower the nominal interest rate on the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role. A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate.

Exchange rates

Year! rowspan=13
colspan=2 style="background:#ececec; line-height:1.1em;"Lowest ↓rowspan=13colspan=2 style="background:#ececec; line-height:1.1em;"Highest ↑
bgcolor=#ececec style="line-height: 1.1em"Datebgcolor=#ececec style="line-height: 1.1em"Ratebgcolor=#ececec style="line-height: 1.1em"Datebgcolor=#ececec style="line-height: 1.1em"Rate
199903 Dec$1.001505 Jan$1.1790
200026 Oct$0.825206 Jan$1.0388
200106 Jul$0.838405 Jan$0.9545
200228 Jan$0.857831 Dec$1.0487
200308 Jan$1.037731 Dec$1.2630
200414 May$1.180228 Dec$1.3633
200515 Nov$1.166703 Jan$1.3507
200602 Jan$1.182605 Dec$1.3331
200712 Jan$1.289327 Nov$1.4874
200827 Oct$1.246015 Jul$1.5990
200905 Mar$1.2555 02 Jan$1.3866
Source: Euro exchange rates in USD, ECB

Flexible exchange rates

The ECB targets interest rates rather than exchange rates and in general does not intervene on the foreign exchange rate markets, because of the implications of the Mundell-Fleming Model which suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously because increasing the money supply results in a depreciation of the currency. In the years following the Single European Act, the EU has liberalised its capital markets, and as the ECB has chosen monetary autonomy, the exchange rate regime of the euro is flexible, or floating. This explains why the exchange rate of the euro vis-à-vis other currencies is characterised by strong fluctuations. Most notable are the fluctuations of the euro versus the U.S. dollar, another free-floating currency. However this focus on the dollar-euro parity is partly subjective. It is taken as a reference because the euro competes with the dollar's role as reserve currency. The effect of this selective reference is misleading, as it gives observers the impression that a rise in the value of the euro versus the dollar is the effect of increased global strength of the euro, while it may be the effect of an intrinsic weakening of the dollar itself.

Against other major currencies

After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. From an introduction at US$1.18/€, the euro fell to a low of $0.8228/€ by 26 October 2000. After the appearance of the coins and notes on 1 January 2002 and the replacement of all national currencies, the euro then began steadily appreciating, and soon regained parity with the U.S. dollar, on 15 July 2002. Since December 2002, the euro has not again fallen below parity with the U.S. dollar but instead began an ascendency. On 23 May 2003, the euro surpassed its initial ($1.18) trading value for the first time. At the end of 2004, it reached $1.3668 (€0.7316/$) as the U.S. dollar fell against all major currencies. Against the U.S. dollar, the euro temporarily weakened in 2005, falling to $1.18 (€0.85/$) in July 2005, and was stable throughout the third quarter of 2005. In November 2005 the euro again began to rise steadily against the U.S. dollar, hitting one record high after another. On 15 July 2008, the euro rose to an all-time high of $1.5990 (€0.6254/$). In a reversal, in August 2008 the euro began to drop against the U.S. dollar. In just two weeks the euro fell from its peak to $1.48 and by late October it reached a two and a half year low below $1.25.[30] On 29 December 2008, the pound sterling fell to an all-time low of £0.97855 (€1.0219/£) against the euro.[31]

Currencies pegged to the euro

See main article: Currencies related to the euro.

Several non-EU currencies that were pegged to a European currency are now pegged to the euro: the Cape Verdean escudo, the Bosnia and Herzegovina convertible mark, the CFP franc, the CFA franc and the Comorian franc.

In total, the euro is the official currency in 16 countries inside the European Union, and 5 countries/territories outside the European Union. Several other EU members will ultimately join the euro. In addition, 23 states and territories have currencies that are directly pegged to the euro including 14 countries in mainland Africa, 2 African island countries, 3 French Pacific territories and another Balkan country, Bosnia and Herzegovina.

Though the United Kingdom is not in the Eurozone, many high-street banks report that as much as 90% of their international trade is conducted in euro. It is common therefore for them to use the euro as their 'core' currency on international business systems, only converting to Sterling for local accountancy purposes.[32]

Linguistic issues

See main article: Linguistic issues concerning the euro. The formal titles of the currency are "euro" for the major unit and "cent" for the minor (one hundredth) unit and for official use in most Eurozone languages; according to the ECB, all languages should use the same spelling for the nominative singular.[33] This may contradict normal rules for word formation in some languages, e.g. those where there is no eu diphthong. For English texts the European Commission's Directorate-General for Translation recommends that the plural forms 'euros' and 'cents' should be used when appropriate.[34]

Further reading

External links

Official websites

Other

Notes and References

  1. Web site: What is EMU?. Eurodesigncontest.eu. 23 November 2008.
  2. Web site: Banknotes and coins circulation. 1 January 2009. the European Central Bank. 16 December 2008.
  3. Converted at exchange rate for 2008-11-28 of EUR 1 = USD 1.2694 - Web site: Historic exchange rates. 1 January 2009.
  4. Web site: Atkins. Ralph. Euro notes cash in to overtake dollar. Financial Times. 2006-12-27. 4 May 2007.
  5. Web site: Report for Selected Country Groups and Subjects. Imf.org. 2006-09-14. 5 January 2009.
    Web site: Report for Selected Countries and Subjects. Imf.org. 2006-09-14. 5 January 2009. ;Web site: Report for Selected Country Groups and Subjects. Imf.org. 2006-09-14. 5 January 2009.
  6. Web site: Madrid European Council (12/95): Conclusions. European Parliament. 14 February 2009.
  7. Web site: The Euro. Economic and Financial Affairs. 29 January 2009.
  8. Web site: How to use the euro name and symbol. 16 November 2008. European Commission. European Commission.
    Web site: spelling of the words "euro" and "cent" In official community languages as used in community legislative acts. 26 November 2008. European Commission. PDF.
  9. Web site: English Style Guide: A handbook for authors and translators in the European Commission. 16 November 2008. European Commission Directorate-General for Translation. PDF.
    Web site: Interinstitutional style guide, 7.3.3. Rules for expressing monetary units. 16 November 2008. European Union.
  10. Web site: European Commission. Euro cash: five and familiar. . January 2007. 26 January 2009.
  11. Web site: Commission communication: The introduction of euro banknotes and coins one year after COM(2002) 747. 26 January 2009. European Commission. . 15 February 2003.
  12. http://www.ecb.int/euro/changeover/2002/photos/html/image12.en.html Robert Kalina, designer of the euro banknotes, at work at the Oesterreichische Nationalbank in Vienna.
  13. Web site: Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border payments in euro. EUR-lex - European Communities, Publications office, Official Journal L 344, 28/12/2001 P. 0013 - 0016. 26 December 2008.
  14. Web site: Cross border payments in the EU, Euro Information, The Official Treasury Euro Resource. United Kingdom Treasury. 26 December 2008.
  15. Web site: TARGET. the European Central Bank. 25 October 2007.
  16. Web site: Inventor who coined euro sign fights for recognition. The Observer. Guardian Unlimited. Kate. Connolly. Berlin. 2001-12-23.
  17. Web site: The €uro: Our Currency. europa.eu. 25 October 2007.
  18. Jürgen. Siebert. The Euro: From Logo to Letter. Font Magazine. 2. 2002.
  19. Web site: Frequently Asked Questions. europa.eu. 25 October 2007.
  20. News: Germain Pirlot 'uitvinder' van de euro. De Zeewacht. Dutch. 2007-02-16. 2009-02-14.
  21. by means of Council Regulation 2866/98 (EC) of 31 December 1998.
  22. by Council Regulation 1478/2000 (EC) of 19 June 2000.
  23. News: Cuba to adopt Euro in foreign trade. BBC News. 1998-11-08. 2008-01-02.
  24. News: US row leads Syria to snub dollar. BBC News. 2006-02-14. 2008-01-02.
  25. Web site: Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency?. PDF.
  26. Web site: Reuters. Euro could replace dollar as top currency - Greenspan. dmy. 17 September 2007.
  27. A Plan for a European Currency, 1973 by Mundell
  28. Web site: Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market. Nber.org. 5 January 2009.
  29. Book: de Haan, Jakob. The History of the Bundesbank: Lessons for the European Central Bank. 2000. Routledge. London. 978-0-415-21723-1.
  30. http://www.ecb.eu/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html ECB official rates against the U.S. dollar
  31. http://www.ecb.eu/stats/exchange/eurofxref/html/eurofxref-graph-gbp.en.html ECB official rates against the British pound
  32. Web site: Nina. Koeppen. Euro's Role Slips in World Markets. The Wall Street Journal. 26 June 2007. 8 August 2007.
  33. Web site: European Central Bank, Covergence report May 2007. PDF. The euro is the single currency of the Member States that have adopted it. To make this singleness apparent, Community law requires a single spelling of the word “euro” in the nominative singular case in all Community and national legislative provisions, taking into account the existence of different alphabets.. 29 December 2008.
  34. For example, see European Commission, Directorate General for Translation: English Style Guide section 20.8 "The euro. Like 'pound', 'dollar' or any other currency name in English, the word 'euro' is written in lower case with no initial capital and, where appropriate, takes the plural 's' (as does 'cent')." European Commission Directorate-General for Translation - English Style Guide.