Archive for the ‘ECON 482’ Category

What is the Euro?

Wednesday, January 14th, 2015

What is the Euro?

The euro (€; code: EUR) was introduced to world financial markets as an accounting currency in 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US$1.1743). Physical euro coins and banknotes entered into circulation in 2002, formally replacing 12 currencies. It is the official currency of the Eurozone.  The Euro is the only significant challenger to the US dollar as the world’s main reserve currency. The share of the euro as a reserve currency has increased from 18% in 1999 to 27% in 2008. Over this period the share of the U.S. dollar fell from 71% to 64%

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, low inflation, and interest rates close to the EU average.

Countries Involved

The Eurozone is a monetary union of 19 European Union (EU) member states that have adopted the euro (€) as their common currency.  These 19 (of the 28) member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Others who have adopted the Euro:

  • The currency is also officially used by Andorra, Monaco, San Marino, and the Vatican City which have formal agreements with the EU to use the euro as their official currency and issue their own coins.
  • Kosovo and Montenegro have adopted the euro unilaterally.
  • Four overseas territories of EU members that are not themselves part of the EU (Saint Barthélemy, Saint Pierre and Miquelon, the French Southern and Antarctic Lands and Akrotiri and Dhekelia) have adopted the Euro.
  • Together this direct usage of the euro outside the EU affects nearly 3 million people. It is also gaining increasing international usage as a trading currency, in Cuba, North Korea, and Syria.

Countries Pegged to the Euro:

Note: A pegged exchange rate also known as a fixed exchange rate is a type of exchange rate system where a currency’s value is fixed against the value of another single currency. Pegging a country’s currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak economies. It prevents runaway inflation and encourages foreign investment due to its stability.

  • A total of 22 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 13 countries in mainland Africa (CFA franc), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and two Balkan countries, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark) and Macedonia (Macedonian denar).

Benefits

“The largest benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to complete previously unprofitable trades. The absence of multiple currencies also theoretically removes exchange rate risks. There have also been many studies conducted all showing that both trade and investment within the Eurozone has increased after the adoption of the Euro.”

Top EU Trading Partners: