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Euro

The euro (€; ISO 4217 code EUR) is the currency of twelve European Union member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain, collectively known as the Eurozone/Euroland.

The euro is the result of the most significant monetary reform in Europe since the Roman Empire. Although the euro can be seen simply as a mkiol for perfecting the Single European Market, facilitating free trade among the members of the Eurozone, it is also regarded by its founders as a key part of the project of European political integration.
Monaco, San Marino, and the Vatican City, which formerly used the French franc or the Italian lira as their currency, now use the euro as their currency and are licensed to mint their own euro coins in small amounts, even though they are not EU states. The euro is also used for payment of debt in other European non-EU jurisdictions such as Montenegro, Kosovo and Andorra.

The euro is administered by the European System of Central Banks (ESCB), composed of the European Central Bank (ECB) and the Eurozone central banks operating in member states. The ECB (headquartered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB participate in the printing, minting and distribution of notes and coins, and the operation of the Eurozone payment system.

The euro is divided into 100 cents. In the English language, the form "cent" is officially required to be used in legislation in the singular and in the plural, though the natural plural cents is recommended for use in material aimed at the general public.

All euro coins have a common side showing the denomination (value) and a national side showing an image specifically chosen by the country that issued it; the monarchies often have a picture of their reigning monarch, other countries usually have their national symbols. All the different coins can be used in all the participating member states: for example, a euro coin bearing an image of the Spanish king is legal tender not only in Spain, but also in all the other nations where the euro is in use. There are €2, €1, 50c, 20c, 10c, 5c, 2c and 1c coins, though the latter two are not generally used in Finland or the Netherlands (but are still legal tender).

Euro banknotes have a common design for each denomination on both sides. Notes are issued in the following amounts: €500, €200, €100, €50, €20, €10, and €5. Some higher denominations are not issued in some countries, though again, are legal tender.

There is a Europe-wide clearing system for large transactions, set up prior to the launch of the euro - TARGET. For retail payments, several arrangements are used and the general rule is that an intra-eurozone transfer shall cost the same as a domestic one. Credit card charging and ATM withdrawals within the eurozone also are charged as if they were domestic. Paper based payment orders, such as cheques, are still domestic based.

Transition

The euro was established by the provisions in the 1992 Maastricht Treaty on European Union that was used to establish an economic and monetary union. In order to participate in the new currency, member states had to meet strict criteria such as a budget deficit of less than three per cent of GDP, a debt ratio of less than sixty per cent of GDP, combined with low inflation and interest rates close to the EU average.

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 as follows:
13.7603 Austrian schillings (ATS)
40.3399 Belgian francs (BEF)
2.20371 Dutch gulden (NLG)
5.94573 Finnish markka (FIM)
6.55957 French francs (FRF)
1.95583 German Mark (DEM)
0.787564 Irish pounds (IEP)
1936.27 Italian lire (ITL)
40.3399 Luxembourg francs (LUF)
200.482 Portuguese escudos (PTE)
166.386 Spanish pesetas (ESP)

The above rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998, so that one ECU (European Currency Unit) 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.) These rates were set by Council Regulation 2866/98 (EC), of 31 December 1998. 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.

Greece failed to meet the criteria for joining initially, so it did not join the common currency on 1 January 1999. It was admitted two years later, on 1 January 2001, at the following exchange rate:
340.750 Greek drachmas (GRD)

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, in Council Regulation 1478/2000 (EC), of 19 June 2000.

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 in that 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 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; the mark officially ceased to be legal tender on 31 December 2001, though the exchange period lasted two months. The final date was 28 February 2002, by which all national currencies ceased to be legal tender in their respective member states. (Note that some of these dates were earlier than was originally planned.) However, even after the official date, they continued to be accepted by national central banks for several years up to forever (Austria, Germany, Ireland, Spain). The earliest coins to become non-convertible were the Portuguese escudos, which ceased to have monetary value after 31 December 2002, although banknotes do remain exchangeable until 2022.

Although some countries are not printing the €500 and €200 banknotes, all banknotes are legal tender throughout the Eurozone. Finland decided not to mint or circulate one-cent and two-cent coins, except in small numbers for collectors. All cash transactions in Finland ending in one or two cents are rounded down and three or four cents are rounded up. Despite this convention, the one-cent and two-cent coins are still legal tender in Finland.

Countries using the euro
At present the member states officially using the euro are Austria, Belgium, Finland, France (except Pacific territories using the CFP franc), Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Overseas territories of some Eurozone countries, such as French Guiana, Réunion, Saint-Pierre et Miquelon, and Martinique, also use the euro. These countries together are frequently referred to as the "Eurozone", "Euroland" or more rarely as "Eurogroup".
Monaco, San Marino, and Vatican City previously used currencies that were replaced by the euro, and now mint their own euro coins by virtue of agreements concluded with EU member states (Italy in the case of San Marino and Vatican City, and France in the case of Monaco), on behalf of the European Community.

Andorra, Montenegro, and Kosovo also used currencies that were replaced by the euro (the French franc and Spanish peseta in the case of Andorra, and the German mark in the case of Montenegro and Kosovo). They have now adopted the euro as their de facto currencies, without having entered into any legal arrangements with the EU that explicitly permit them to do so. In October 2004, Andorra began negotiating a monetary agreement with the European Union that would allow the country to issue euro coins as Monaco, San Marino, and the Vatican City do.

Many of the foreign currencies that were pegged to European currencies are now pegged to the euro. For example, the Cape Verdean escudo used to be pegged to the Portuguese escudo, but is now pegged to the euro. Bosnia-Herzogovina uses a convertible mark which was pegged to the Deutsche mark but is now pegged to the euro. Similarly the CFP franc, CFA franc and Comorian franc, all once pegged to the French franc, are now pegged to the euro. The euro is widely accepted in Cape Verde already on an informal basis, and in November 2004, during a meeting in Portugal, the prime minister of Cape Verde considered formally adopting the euro as his country's currency. Also East Timor resumed using the Portuguese Escudo as legal tender in 1999, when the escudo was already a subdivision of the euro. There was no changeover as the USD was later introduced as sole legal tender in the territory.

Since December 2002, North Korea has switched from the dollar as its official currency for all foreign transactions to the euro. The euro has since then also replaced the dollar in large parts of the blackmarket and in shops where the dollar was used earlier.

In total, the euro is the official currency in 31 states and territories. Also, 27 states and territories that have a national currency are also pegged to the euro including fourteen West African countries including Senegal and Cameroon, three French overseas territories including French Polynesia and New Caledonia, two African island countries where the currency was formerly pegged to the Portuguese or French currency, three former Communist countries where the currency was pegged to the German mark including Macedonia. Morocco, Cyprus, Denmark, Estonia and Hungary are also pegged to the euro.

EU members outside the Eurozone
The ten newest European Union members are required by their treaties of accession to eventually use the euro, as eventual adoption of the euro was part of their accession agreements. Cyprus, Estonia, Latvia, Lithuania, Malta, Slovenia and Slovakia have already joined Denmark in the European Exchange Rate Mechanism, ERM II. The dates these ten states hope to complete the third stage of the EMU vary: 1 January 2007 for Estonia, Slovenia and Lithuania 1(since they are already part of ERM II); 1 January 2008 for Cyprus; 2008 for Latvia and Malta; 2009 for Slovakia; 2010 and later for the Czech Republic, Poland and Hungary. Estonia finalised the design for the country's coins' reverse side in late 2004.

See: • Commodity

The United Kingdom and Sweden have no plans at present to adopt the euro; however Sweden, unlike the UK and Denmark, does not have a formal opt-out from the monetary union (the third stage of EMU) and therefore must, in theory at least, convert to the euro at some point. Notwithstanding this, on 14 September 2003, a Swedish referendum was held on the euro, the result of which was a rejection of the common currency. The Swedish government has argued that such a line of action is possible since one of the requirements for Eurozone membership is a prior two-year membership of the ERM II. By simply choosing to stay outside the exchange rate mechanism, the Swedish government is provided a formal loophole avoiding the theoretical requirement of adopting the euro. Sweden's major parties continue to believe that it would be in the national interest to join.

UK eurosceptics believe that the single currency is merely a stepping stone to the formation of a unified European superstate, and that removing Britain's ability to set its own interest rates will have detrimental effects on its economy. The contrary view is that, since intra-European exports make up 60% of the UK's total, it eases the Single Market by removing currency risk. An interesting parallel can be seen in the 19th century discussions concerning the possibility of the UK joining the Latin Monetary Union [1]. The UK government has set five economic tests that must be passed before it can recommend that the UK join the euro. It assessed these tests in October 1997 and June 2003, and decided on both occasions that they had not all been passed. All three main political parties in the UK have promised to hold a referendum before joining the euro, and opinion polls consistently report a majority of the public to be opposed to joining the euro.

Denmark negotiated a number of opt-out clauses from the Maastricht treaty after it had been rejected in a first referendum (namely, Denmark attained an opt-out from joint defence, common currency, judicial cooperation, and European citizenship). The modified treaty was then accepted in another referendum one year after the first one. In 2000, another referendum was held in Denmark regarding the euro; once more, the population decided to stay outside the eurozone for now. However, Danish politicians have suggested that debate on abolishing the four opt-out clauses may be re-opened in late 2005 or early 2006. In addition, Denmark has pegged its krone to the euro (€1 = DKr7.460,38 ± 2.25%), something which Sweden has not done.

Removal of exchange rate risk
One of the most important benefits of the euro will be lowered exchange rate risks, which will make it easier to invest across borders. The risks of changes in the value of respective currencies has always made it risky for companies or individuals to invest or even import/export outside their own currency zone. Profits could be quickly eliminated as a result of exchange rate fluctuations. As a result, most investors and importers/exporters have to either accept the risk or "hedge" their bets, resulting in further costs on the financial markets. Consequently, it is less appealing to invest outside one’s own currency zone. The Eurozone greatly increases the potentially "exchange-risk free" investment area. Since Europe’s economy is heavily dependent on intra-European exports, the benefits of this effect can hardly be overstated. This is particularly important for countries whose currencies have traditionally fluctuated a great deal such as the Mediterranean nations.

Euro exchange rate

Against the U.S. dollar
After the introduction of the euro, its exchange rate against other currencies, especially the US dollar, declined heavily. At its introduction in 1999, the euro was traded at USD1.18; on 26 October 2000, it fell to an all time low of $0.8228 per euro. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to nearly $0.96. It declined again, although less than previously, reaching a low of $0.8344 on 6 July 2001 before commencing a steady appreciation. In the wake of U.S. corporate scandals, the two currencies reached parity on 15 July 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further.

On 23 May 2003, the euro surpassed its initial ($1.18=€1.00) trading value for the first time. At the end of 2004, it had reached a peak of $1.3668 per euro (€0.7316 per $) as the US dollar fell against all major currencies. At that time, some analysts expected the dollar to continue to fall, a few even suggesting $1.60 per euro by the end of 2005, fuelled by the so called twin deficit of the US accounts. However, the dollar recovered in 2005, rising to $1.18 per euro (€0.85 per $) in July 2005 (and stable throughout the second half of 2005). The fast increase in US interest rates during 2005 had much to do with this trend.

See also

• Foreign Exchange Market
• Foreign Exchange Options
• Currency
• Exchange Rate
• Currency Future
• Futures Contract

• Summary Measures of the Foreign Exchange Value of the Dollar
• Forex and Commodities Futures and Options. What to know before you trade
• Online Forex Trading is Quickly Becoming a Booming Business
• Earning Money From Forex

This article is licensed under the GNU Free Documentation License.
It uses material from the Wikipedia article "Euro".