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The euro is managed and administered by the [[Frankfurt]]-based [[European Central Bank]] (ECB) and the [[Eurosystem]] (composed of the [[central bank]]s 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 [[euro banknotes|notes]] and [[euro coins|coins]] in all member states, and the operation of the eurozone payment systems.
The euro is managed and administered by the [[Frankfurt]]-based [[European Central Bank]] (ECB) and the [[Eurosystem]] (composed of the [[central bank]]s 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 [[euro banknotes|notes]] and [[euro coins|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 [[Convergence criteria|certain monetary and budgetary requirements]], although not all states have done so. The United Kingdom and Denmark negotiated exemptions,<ref>{{cite web|title=The Euro |publisher=European Commission|url=http://ec.europa.eu/economy_finance/euro/index_en.htm |accessdate=29 January 2009}}</ref> while Sweden (which joined the EU in 1995, after the Maastricht Treaty was signed) 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.
The 1992 [[Maastricht Treaty]] obliges most EU member states to adopt the euro upon meeting hello whats your name hahahahahahahah i deleted stuff :P [[Convergence criteria|certain monetary and budgetary requirements]], although not all states have done so. The United Kingdom and Denmark negotiated exemptions,<ref>{{cite web|title=The Euro |publisher=European Commission|url=http://ec.europa.eu/economy_finance/euro/index_en.htm |accessdate=29 January 2009}}</ref> while Sweden (which joined the EU in 1995, after the Maastricht Treaty was signed) 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==
==Characteristics==

Revision as of 18:31, 16 November 2011

This article is about the currency. For other uses, see Euro (disambiguation).
"EUR" redirects here. For other uses, see EUR (disambiguation).

Euro
ευρώ Template:Gr icon
File:Common face of one euro coin.jpg
€1 coin
ISO 4217
Unit
PluralSee Euro linguistic issues
Symbol€‎
NicknameThe single currency[1]
Denominations
Plural
Banknotes€5, €10, €20, €50, €100, €200, €500
Coins1c, 2c, 5c, 10c, 20c, 50c, €1, €2
Demographics
Official user(s)
European Union Eurozone (17)
  •  Austria
  •  Belgium
  •  Cyprus[note 1]
  •  Estonia
  •  Finland
  •  France[note 2]
  •  Germany
  •  Greece
  •  Ireland
  •  Italy[note 3]
  •  Luxembourg
  •  Malta
  •  Netherlands[note 4]
  •  Portugal
  •  Slovakia
  •  Slovenia
  •  Spain
4 territories outside the EU
Unofficial user(s)
Issuance
Central bankEuropean Central Bank
 Websitewww.ecb.europa.eu
Printer
Several, click to
 Website
Several, click to
Mint
Several, click to
 Website
Several, click to
Valuation
Inflation2.5%, August 2011
 MethodHICP
Pegged by
10 currencies

The euro (sign: €; code: EUR) is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.[2][3] The currency is also used in a further five European countries (Montenegro, Andorra, Monaco, San Marino and Vatican City) and the disputed territory of Kosovo. It is consequently used daily by some 332 million Europeans.[4] Additionally, over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.

The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.[5][6] As of July 2011, with nearly €890 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar.[note 14] Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.[7]

The name euro was officially adopted on 16 December 1995.[8] 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. Euro coins and banknotes entered circulation on 1 January 2002.[9]

Since late 2009 the euro has been immersed in the European sovereign debt crisis which has led to the creation of the European Financial Stability Facility.

Administration

The ECB in Frankfurt, Germany, is in charge of the eurozone's monetary policy.
Main articles: European Central Bank, Maastricht Treaty, and Euro Group

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 hello whats your name hahahahahahahah i deleted stuff :P certain monetary and budgetary requirements, although not all states have done so. The United Kingdom and Denmark negotiated exemptions,[10] while Sweden (which joined the EU in 1995, after the Maastricht Treaty was signed) 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

All euro coins have a common side, and a national side chosen by the issuing bank.
Main articles: 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, and referred to as such on the common side of all cent coins). In Community legislative acts the plural forms of euro and cent are spelled without the s, notwithstanding normal English usage.[11][12] Otherwise, normal English plurals are recommended and used,[13] with many local variations such as 'centime' in France.

All circulating coins have a common side showing the denomination or value, and a map in the background. Due to the linguistic plurality of the Europe, the Latin alphabet version of euro is used (as opposed to the less common Greek or Cyrillic) and Arabic numerals (other text is used on national sides in national languages, but other text on the common side is avoided). 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.

File:2 euro coins.JPG
The common and national sides of the €2 coin

The coins are issued in €2, €1, 50c, 20c, 10c, 5c, 2c, and 1c 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).[14] This practice is discouraged by the Commission, as is the practice of certain shops to refuse to accept high value euro notes.[15]

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.[16]

The design for the euro banknotes has common designs on both sides. The design was created by the Austrian designer Robert Kalina.[17] 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. While the designs are supposed to be devoid of any identifiable characteristics, the initial designs by Robert Kalina were of specific bridges, including the Rialto and the Pont de Neuilly, and were subsequently rendered more generic; the final designs still bear very close similarities to their specific prototypes; thus they are not truly generic.[18]

Payments clearing, electronic funds transfer

Main article: Single Euro Payments Area

Capital within the EU may be transferred in any amount from one country to another. All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs.[19] This includes all member states of the EU, even those outside the eurozone providing the transactions are carried out in euro.[20] 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.[21]

Currency sign

The euro sign; logotype and handwritten.
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.[22]

Inspiration for the € symbol itself came from the Greek epsilon (Є)[note 15] – a reference to the cradle of European civilisation – and the first letter of the word Europe, crossed by two parallel lines to ‘certify’ the stability of the euro.

— European Commission[11]

The European Commission also specified a euro logo with exact proportions and foreground/background colour tones.[23] 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.[24] 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, but for texts in English the symbol (and the ISO-standard "EUR") should precede the amount.[25]

Introduction of the euro

Main article: History of the euro
Historical currencies of the European Union
Currency Code Rate[26] Fixed on Yielded
Austrian schilling ATS 13.7603 31 December 1998 1 January 1999
Belgian franc BEF 40.3399 31 December 1998 1 January 1999
Dutch guilder NLG 2.20371 31 December 1998 1 January 1999
Finnish markka FIM 5.94573 31 December 1998 1 January 1999
French franc FRF 6.55957 31 December 1998 1 January 1999
German mark DEM 1.95583 31 December 1998 1 January 1999
Irish pound IEP 0.787564 31 December 1998 1 January 1999
Italian lira ITL 1,936.27 31 December 1998 1 January 1999
Luxembourg franc LUF 40.3399 31 December 1998 1 January 1999
Portuguese escudo PTE 200.482 31 December 1998 1 January 1999
Spanish peseta ESP 166.386 31 December 1998 1 January 1999
Greek drachma GRD 340.750 19 June 2000 1 January 2001
Slovenian tolar SIT 239.640 11 July 2006 1 January 2007
Cypriot pound CYP 0.585274 10 July 2007 1 January 2008
Maltese lira MTL 0.429300 10 July 2007 1 January 2008
Slovak koruna SKK 30.1260 8 July 2008 1 January 2009
Estonian kroon EEK 15.6466 13 July 2010 1 January 2011
Latvian lats LVL 0.702804 9 July 2013 1 January 2014
Lithuanian litas LTL 3.45280 23 July 2014 1 January 2015
Croatian kuna HRK 7.53450 12 July 2022 1 January 2023

The euro was established by the provisions in the 1992 Maastricht Treaty. 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 (both of which were ultimately widely flouted after introduction), 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 Fred Arditti, Neil Dowling, Wim Duisenberg, Robert Mundell, Tommaso Padoa-Schioppa and Robert Tollison.[citation needed] (For macro-economic theory, see below.)

The name "euro" was officially adopted in Madrid on 16 December 1995.[8] Belgian Esperantist Germain Pirlot, a former teacher of French and history is credited of naming the new currency by sending a letter to then President of the European Commission, Jacques Santer, suggesting the name "euro" on 4 August 1995.[27]

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 of one euro in terms 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,[28] 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 Greek 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.[29]

The currency was introduced in non-physical form (traveller's 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 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.

Direct and indirect usage

Further information: Eurozone, International status and usage of the euro, and Enlargement of the eurozone
  Eurozone
  EU members in ERM II, without an opt-out
  EU members in ERM II, with an opt-out
  EU members obliged to adopt the euro once convergence criteria are met
  Non–EU members using the euro with a monetary agreement
  Non–EU members using the euro unilaterally

Direct usage

The euro is the sole currency of 17 EU member states: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. These countries comprise the "eurozone", 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 Montenegro and Kosovo and several European micro states (Andorra, Monaco, San Marino and the Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia). Together this direct usage of the euro outside the EU affects over 3 million people.

It is also gaining increasing international usage as a trading currency, in Cuba,[30] North Korea and Syria.[31] There are also various currencies pegged to the euro (see below). In 2009 Zimbabwe abandoned its local currency and used major currencies instead, including the euro and the United States dollar.[32]

Use as reserve currency

Since its introduction, the euro has been the second most widely held international reserve currency after the U.S. dollar. The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to 64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%). The euro inherited and built on the status of the second most important reserve currency from the Deutsche Mark. The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the International Monetary Fund[33] the total of euro held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion or €850 billion, with a share of 22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies.

The possibility of the euro becoming the first international reserve currency is now widely debated among economists.[34] Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 that it is "absolutely conceivable that the euro will replace the US dollar as reserve currency, or will be traded as an equally important reserve currency."[35] In contrast to Greenspan's 2007 assessment the euro's increase in the share of the worldwide currency reserve basket has slowed considerably since the year 2007 and since the beginning of the worldwide credit crunch related recession and sovereign debt crisis.[33]

Currencies pegged to the euro

Worldwide use of the euro and the U.S. dollar:
  Eurozone
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro within narrow band
  United States
  External adopters of the US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the US dollar within narrow band
Note that the Belarusian ruble is pegged to the Euro, Russian ruble and US$ in a currency basket.
Main article: International status and usage of the euro

Outside the eurozone, a total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, São Tomé and Príncipe signed an agreement with Portugal which will eventually tie its currency to the euro.[36]

With the exception of Bosnia (which pegged its currency against the Deutsche Mark) and Cape Verde (formerly pegged to the Portuguese escudo) all of these non-EU countries had a currency peg to the French Franc before pegging their currencies to the euro. Pegging a country's currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak economies, as the euro is seen as a stable currency, prevents runaway inflation and encourages foreign investment due to its stability.

Within the EU several currencies have a peg to the euro, in most instances as a precondition to joining the eurozone. The Bulgarian Lev was formerly pegged to the Deutsche Mark, other EU memberstates have a direct peg due to ERM II: the Danish krone, the Lithuanian litas and the Latvian lats.

In total, over 150 million people in Africa use a currency pegged to the euro, 25 million people outside the eurozone in Europe and another 500,000 people on Pacific islands.

Economics

Optimal currency area

Further information: 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 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.[37] However, even before the creation of the single currency, there were concerns over diverging economies. Before the Late-2000s recession the chances of a state leaving the euro, or the chances that the whole zone would collapse, were considered extremely slim.[38] However the Greek sovereign debt crisis led to former British foreign secretary Jack Straw claiming the Eurozone could not last in its current form.[39] Part of the problem seems to be the rules that were created when the Euro was set up. John Lanchester, writing for The New Yorker explains it thusly:

The guiding principle of the currency, which opened for business in 1999, were supposed to be a set of rules to limit a country's annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row.[40]

Transaction costs and risks

Most traded currencies by value
Currency distribution of global foreign exchange market turnover[41]
Currency ISO 4217
code 		Symbols Proportion of daily volume Change
(2019–2022)
April 2019 April 2022
U.S. dollar USD $, US$ 88.3% 88.5% Increase 0.2pp
Euro EUR € 32.3% 30.5% Decrease 1.8pp
Japanese yen JPY ¥, 円 16.8% 16.7% Decrease 0.1pp
Sterling GBP £ 12.8% 12.9% Increase 0.1pp
Renminbi CNY ¥, 圆 4.3% 7.0% Increase 2.7pp
Australian dollar AUD $, $A 6.8% 6.4% Decrease 0.4pp
Canadian dollar CAD $, Can$ 5.0% 6.2% Increase 1.2pp
Swiss franc CHF Fr., fr. 4.9% 5.2% Increase 0.3pp
Hong Kong dollar HKD $, HK$, 元 3.5% 2.6% Decrease 0.9pp
Singapore dollar SGD $, S$ 1.8% 2.4% Increase 0.6pp
Swedish krona SEK kr, Skr 2.0% 2.2% Increase 0.2pp
South Korean won KRW ₩, 원 2.0% 1.9% Decrease 0.1pp
Norwegian krone NOK kr, Nkr 1.8% 1.7% Decrease 0.1pp
New Zealand dollar NZD $, $NZ 2.1% 1.7% Decrease 0.4pp
Indian rupee INR ₹ 1.7% 1.6% Decrease 0.1pp
Mexican peso MXN $, Mex$ 1.7% 1.5% Decrease 0.2pp
New Taiwan dollar TWD $‎, NT$, 圓 0.9% 1.1% Increase 0.2pp
South African rand ZAR R 1.1% 1.0% Decrease 0.1pp
Brazilian real BRL R$ 1.1% 0.9% Decrease 0.2pp
Danish krone DKK kr., DKr 0.6% 0.7% Increase 0.1pp
Polish złoty PLN zł‎, Zl 0.6% 0.7% Increase 0.1pp
Thai baht THB ฿, B 0.5% 0.4% Decrease 0.1pp
Israeli new shekel ILS ₪, NIS 0.3% 0.4% Increase 0.1pp
Indonesian rupiah IDR Rp 0.4% 0.4% Steady
Czech koruna CZK Kč, CZK 0.4% 0.4% Steady
UAE dirham AED د.إ, Dh(s) 0.2% 0.4% Increase 0.2pp
Turkish lira TRY ₺, TL 1.1% 0.4% Decrease 0.7pp
Hungarian forint HUF Ft 0.4% 0.3% Decrease 0.1pp
Chilean peso CLP $, Ch$ 0.3% 0.3% Steady
Saudi riyal SAR ﷼, SRl(s) 0.2% 0.2% Steady
Philippine peso PHP ₱ 0.3% 0.2% Decrease 0.1pp
Malaysian ringgit MYR RM 0.2% 0.2% Steady
Colombian peso COP $, Col$ 0.2% 0.2% Steady
Russian ruble RUB ₽, руб 1.1% 0.2% Decrease 0.9pp
Romanian leu RON —, leu 0.1% 0.1% Steady
Peruvian sol PEN S/. 0.1% 0.1% Steady
Bahraini dinar BHD .د.ب, BD 0.0% 0.0% Steady
Bulgarian lev BGN лв., lv., lev 0.0% 0.0% Steady
Argentine peso ARS $, Arg$ 0.1% 0.0% Decrease 0.1pp
Other currencies 1.8% 2.3% Increase 0.5pp
Total: 200.0% 200.0%




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 had 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 eurozone markets.[42]

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,[43] it is independent of the pressures of national governments and has a mandate to keep inflation low. Member countries that join the euro hope to enjoy the macroeconomic stability associated with low levels of 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 national 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.

Trade

The consensus from the studies of the effect of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%.[44] On the lower bound, one study suggested an increase of 3%.[45] A recent study estimates this effect to be between 9 and 14%.[46] Nevertheless, a recent meta-analysis of all available studies suggests that the prevalence of positive estimates is caused by publication bias and that the underlying effect may be negligible.[47]

Investment

Physical investment seems to have increased by 5% in the eurozone due to the introduction.[48] Regarding foreign direct investment, a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.[49] Concerning the effect on corporate investment, there is evidence that the introduction of the euro has resulted in an increase in investment rates and that it has made it easier for firms to access financing in Europe. The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency.[50]

Inflation

The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies.[51][52] A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro. The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased.[53] It has also been suggested that the jump in small prices may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so.[54]

Exchange rate risk

One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe"[55] These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe".

Financial integration

The introduction of the euro seems to have had a strong effect on European financial integration. According to a study on this question, it has "significantly reshaped the European financial system, especially with respect to the securities markets [...] However, the real and policy barriers to integration in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has been largely integrated."[56] Specifically, the euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the eurozone. [57] On a global level, there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios, with eurozone countries lending and borrowing more between each other than with other countries.[58]

Effect on interest rates

See also: European sovereign debt crisis

The introduction of the euro has decreased the interest rates of most members countries, in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency has very significantly increased.[59] The countries whose interest rates fell most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy.[60] The effect of such low interest rates made it easier for banks within the countries in which interest rates fell and the countries themselves to borrow significant amounts (above the 3% of GDP budget deficit imposed on the eurozone initially) and increase their public deficit and levels of privately held consumer debt.[61] Following the Late-2000s financial crisis, governments in these countries found it necessary to bail out or nationalise their privately held banks in order to prevent systemic failure of the banking system.[62] This further increased the already high levels of public debt to a level the markets began to consider unsustainable, via increasing government bond interest rates, producing the ongoing 2010/11 European sovereign debt crisis.

Price convergence

The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed. Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s.[63][64] Other studies have found evidence of price convergence,[65][66] in particular for cars.[67] A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear, slowing down substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009).[68]

Tourism

A study suggests that the introduction of the euro has had a positive effect on the amount of tourist travel within the EMU, with an increase of 6.5%.[69]

European sovereign debt crisis

Main article: European sovereign debt crisis

Following the US financial crisis in 2008 fears of a sovereign debt crisis developed in 2009 among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010.[70][71] This included euro zone members Greece,[72] Ireland and Portugal and also some EU countries outside the area.[73] Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected by the sovereign debt crisis as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.[74][75] To be included in the eurozone, the countries had to fulfill certain convergence criteria, but the meaningfulness of such criteria were diminished by the fact they have not been applied to different countries with the same strictness.[76]

Exchange rates

Euro-US Dollar exchange rate, 1999–2011
Euro-Japanese Yen exchange rate, 1999–2011
Euro-Swiss Franc exchange rate, 1999–2011
See also: Exchange rate, Floating exchange rate, Exchange rate regime, Foreign exchange market, and Reserve currency

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 implies a central bank cannot maintain interest rate and exchange rate targets simultaneously, unless there are capital controls, 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.

Against other major currencies

The euro is one of the major reserve currencies together with the US dollar, Japanese yen, Pound sterling and Swiss franc. After its introduction on 4 January 1999 its exchange rate against the other major currencies fell reaching its lowest exchange rates in 2000 (25 Oct vs the US Dollar, 26 Oct vs Japanese Yen, 3 May vs Pound Sterling). Afterwards it regained and its exchange rate reached its historical highest point in 2008 (15 July vs US Dollar, 23 July vs Japanese Yen, 29 Dec vs Pound Sterling). With the advent of the current global financial crisis the euro initially fell, only to regain later. Despite pressure due to the European sovereign debt crisis the euro remained stable.[77] The euro's exchange rate index - measured against currencies of the bloc's major trading partners - is trading almost two percent higher on the year, approximately at the same level as it was before the crisis kicked off in 2007.[78]

Current EUR exchange rates
From Google Finance: AUD CAD CHF CNY GBP HKD JPY USD RUB CNY TWD
From Yahoo! Finance: AUD CAD CHF CNY GBP HKD JPY USD RUB CNY TWD
From XE.com: AUD CAD CHF CNY GBP HKD JPY USD RUB CNY TWD
From OANDA: AUD CAD CHF CNY GBP HKD JPY USD RUB CNY TWD

Linguistic issues

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.[79] This may contradict normal rules for word formation in some languages; e.g., those where there is no eu diphthong. Bulgaria has negotiated an exception; euro in the Cyrillic alphabet is spelled as eвро (evro) and not eуро (euro) in all official documents.[80] Official practice for English-language EU legislation is to use the words euro and cent as both singular and plural[81] although the European Commission's Directorate-General for Translation states that the plural forms euros and cents should be used in English.[82]

Alloys

The euro 1 and 2 coins are two-toned. The "gold" is an alloy, 75% copper, 20% zinc and 5% nickel. The "silver" is cupronickel, 75% copper, 25% nickel.[83] The 10, 20 and 50-cent coins are a proprietary alloy known as "Nordic gold", consisting of 89% copper, 5% aluminium, 5% zinc and 1% tin.[84] The 1, 2 and 5-cent coins are copper-coated steel fourrées.[83]

No constituent metal is toxic to human beings. The copper alloys make the coinage antimicrobial. The nickel alloy could cause contact dermatitis in sensitive people, but this condition could only be a problem if a 1 or 2 euro is worn next to the skin for an extended period, perhaps as jewelry. The alloys are hypoallergenic.

See also

Notes

  1. ^ Except northern Cyprus that uses Turkish lira
  2. ^ Including overseas departments
  3. ^ Except Campione d'Italia that uses Swiss franc.
  4. ^ Only the European part of the country is part of the EU and uses the euro. The Caribbean Netherlands introduced the United States Dollar in 2011. Curaçao, Sint Maarten and Aruba have their own currencies, which are pegged to the dollar.
  5. ^ "By monetary agreement between France (acting for the EC) and Monaco". Retrieved 30 May 2010.
  6. ^ "By monetary agreement between Italy (acting for the EC) and San Marino". Retrieved 30 May 2010.
  7. ^ "By monetary agreement between Italy (acting for the EC) and Vatican City". Retrieved 30 May 2010.
  8. ^ "By the third protocol to the Cyprus adhesion Treaty to EU and British local ordinance" (PDF). Retrieved 17 July 2011.
  9. ^ "By agreement of the EU Council". Retrieved 30 May 2010.
  10. ^ "The monetary agreement, the road space adapted to micro-economic". Retrieved 6 September 2011.
  11. ^ "By UNMIK administration direction 1999/2". Unmikonline.org. Retrieved 30 May 2010.
  12. ^ By an internal act (references missing) See also Montenegro and the euro
  13. ^ Alongside Zimbabwean dollar (suspended indefinitely from 12 April 2009), US$, Pound Sterling, South African rand and Botswana pula
  14. ^ As of 30 October 2009:
    Total EUR currency (coins and banknotes) in circulation 771.5 (banknotes) + 21.032 (coins) =792.53 billion EUR * 1.48 (exchange rate) = 1,080 billion USD
    Total USD currency (coins and banknotes) in circulation 859 billion USD
  15. ^ In the quotation, the epsilon is actually represented with the Cyrillic capital letter Ukrainian ye (Є, U+0404) instead of the technically more appropriate Greek lunate epsilon symbol (ϵ, U+03F5).

References

  1. ^ Official documents and legislation refer to the euro as "the single currency".
    "Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro". Official Journal L 162, 19 June 1997 P. 0001 – 0003. European Communities. 19 June 1997. Retrieved 1 April 2009.
    This term is sometimes adopted by the media (Google hits for the phrase)
  2. ^ Rosenberg, Matt (23 May 2010). "Euro Countries: 22 Countries use the Euro as their Official Currency". About.com. Retrieved 27 December 2010.
  3. ^ "EU ministers back Estonia bid to join euro". BBC News. 8 June 2010. Retrieved 19 July 2010.
  4. ^ "Total population as of 1 January". Epp.eurostat.ec.europa.eu. 11 March 2011. Retrieved 17 July 2011.
  5. ^ "Triennial Central Bank Survey 2007" (PDF). BIS. 19 December 2007. Retrieved 25 July 2009.
  6. ^ Aristovnik, Aleksander; Čeč, Tanja (30 March 2009). "Compositional Analysis Of Foreign Currency Reserves In The 1999–2007 Period. The Euro vs. The Dollar As Leading Reserve Currency" (PDF). Munich Personal RePEc Archive, Paper No. 14350. Retrieved 27 December 2010. {{cite web}}: Check date values in: |year= / |date= mismatch (help)
  7. ^ "Report for Selected Country Groups and Subjects". Imf.org. 14 September 2006. Retrieved 5 January 2009. "Report for Selected Countries and Subjects". Imf.org. 14 September 2006. Retrieved 5 January 2009. "Report for Selected Country Groups and Subjects". Imf.org. 14 September 2006. Retrieved 5 January 2009.
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  28. ^ by means of Council Regulation 2866/98 (EC) of 31 December 1998.
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  31. ^ "US row leads Syria to snub dollar". BBC News. 14 February 2006. Retrieved 2 January 2008.
  32. ^ "Zimbabwe: A Critical Review of Sterp". 17 April 2009. Retrieved 30 April 2009.
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Further reading

  • Baldwin, Richard; Wyplosz, Charles (2004). The Economics of European Integration. New York: McGraw Hill. ISBN 0077103947.
  • Buti, Marco; Deroose, Servaas; Gaspar, Vitor; Nogueira Martins, João (2010). The Euro. Cambridge: Cambridge University Press. ISBN 9789279098420.
  • Jordan, Helmuth (2010). "Fehlschlag Euro". Dorrance Publishing.
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