Euro
The euro (currency sign: €; banking code: EUR) is the official currency of the European Union member states of Austria, Belgium, Cyprus,[1] Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain, also known as the eurozone. It is the single currency for more than 300 million people in Europe.
© Image courtesy of Bank of Latvia.
The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in most of the above countries in 2002. Slovenia joined the eurozone on 1 January 2007, Malta and Cyprus a year later, and Slovakia on 1 January 2009. All EU member states are eligible to join if they comply with certain monetary requirements, and eventual use of the euro is mandatory for all new EU member states.
The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the European System of Central Banks (ESCB) (composed of the central banks of its member states). As an independent central bank, the ECB has sole authority to set monetary policy. The ESCB participates in the printing, minting and distribution of notes and coins in all member states, and the operation of the eurozone payment systems.
Characteristics of the euro
Coins and banknotes
The euro is divided into 100 cents (sometimes referred to as eurocents). All euro coins (including the €2 commemorative coins) have a common side showing the denomination (value) with the EU-countries in the background and a national side showing an image specifically chosen by the country that issued the coin. All coins can be used in all member states.
The euro coins are €2, €1, 50c, 20c, 10c, 5c, 2c and 1c (known as tinies for their small size), though the latter two are not minted in Finland or the Netherlands (but are still legal tender). Many shop owners in the eurozone prefer having all their prices end in 0 or 5 Cents, so that 1c and 2c coins are not needed.
All euro banknotes have a common design for each denomination on both sides. Notes are issued in €500, €200, €100, €50, €20, €10, €5. Some of the higher denominations, such as €500 and €200, are not issued in a few countries, though are legal tender.
The ECB has set up a clearing system for large euro transactions (TARGET). All intra-eurozone transfers shall cost the same as a domestic one. This is true for retail payments, although several ECB payment methods can be used. Credit card charging and ATM withdrawals within the eurozone are also charged as if they were domestic. The ECB hasn't standardized paper based payment orders, such as cheques; these are still domestic-based.
The currency 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 final design. The eventual winner was a design allegedly created by a team of four experts who have not been officially named. 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.
The glyph is (according to the European Commission) "a combination of the Greek epsilon, as a sign of the weight of European civilization; an E for Europe; and the parallel lines crossing through standing for the stability of the euro".
The European Commission also specified a euro logo with exact proportions and foreground/background colour tones.[2] Although some font designers simply copied the exact shape of this logo as the euro sign in their fonts, most designed their own variants, often based upon the capital letter C in the respective font so that currency signs have the same width as Arabic numerals.[3]
Placement of the currency sign varies from nation to nation. While the official recommendation is to place it before the number (contravening the general ISO recommendation to place unit symbol after the number), people in many countries have kept the placement of their former currencies.
Economic and monetary union
History (1990-2006)
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 their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average.
Economists that helped create or contributed to the euro include Robert Mundell, Wim Duisenberg, Robert Tollison, Neil Dowling and Tommaso Padoa-Schioppa. (For macro-economic theory, see below.)
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.
| Currency | Abbr. | Rate | Fixed on |
|---|---|---|---|
| Austrian schilling | ATS | 13.7603 | 31/12/1998 |
| Belgian franc | BEF | 40.3399 | 31/12/1998 |
| Dutch gulden | NLG | 2.20371 | 31/12/1998 |
| Finnish mark | FIM | 5.94573 | 31/12/1998 |
| French franc | FRF | 6.55957 | 31/12/1998 |
| German mark | DEM | 1.95583 | 31/12/1998 |
| Irish pound | IEP | 0.787564 | 31/12/1998 |
| Italian lira | ITL | 1936.27 | 31/12/1998 |
| Luxembourg franc | LUF | 40.3399 | 31/12/1998 |
| Portuguese escudo | PTE | 200.482 | 31/12/1998 |
| Spanish peseta | ESP | 166.386 | 31/12/1998 |
| Greek drachma | GRD | 340.750[4] | 19/06/2000 |
The 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.
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. However, even after the official date, they continued to be accepted by national central banks for several years up to forever 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.
Current eurozone
- The euro is the sole currency in Austria, Cyprus, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. These 16 countries together are frequently referred to as the eurozone or the euro area, or more informally 'Euroland' or the 'Eurogroup'. The euro is also legal currency in the eurozone overseas territories of French Guiana, Réunion, Saint-Pierre et Miquelon, Guadeloupe, Martinique and Mayotte.
- By virtue of some bilateral agreements the European microstates of Monaco, San Marino, and Vatican City mint their own euro coins on behalf of the European Central Bank.
- Andorra, Montenegro and Kosovo adopted the euro as their legal currency for movement of capital and payments without participation in the ESCB or the right to mint coins. Andorra is in the process of entering a monetary agreement similar to Monaco, San Marino, and the Vatican City.
| Currency | Abbr. | Rate | Fixed in |
|---|---|---|---|
| Slovenian tolar | SIT | 239.640 | 2006-07-11 |
| Currency | Abbr. | Rate | Conv goal |
| Cypriot pound | CYP | 0.585274 | 2008-01-01 |
| Estonian kroon | EEK | 15.6466 | 2008-01-01 |
| Latvian lats | LVL | 0.702804 | 2008-01-01 |
| Maltese lira | MTL | — | 2008-01-01 |
| Bulgarian lev | BGN | — | 2009-01-01 |
| Slovak koruna | SKK | — | 2009-01-01 |
| Lithuanian litas | LTL | 3.4528 | 2009-01-01 |
| Czech koruna | CZK | — | 2010- |
| Hungarian forint | HUF | — | 2010- |
| Polish zloty | PLN | — | 2011- |
| Romanian leu | RON | — | 2011- |
- 1 January 2007 for Slovenia. Date confirmed and finalised by the European Commission, conversion rate 239.640. The final exchange rate was fixed on 2006-07-11.
- 1 January 2008 for Cyprus, Estonia, Latvia and Malta
- 1 January 2009 for Bulgaria, Slovakia and Lithuania
- 1 January 2010 for the Czech Republic.
- 2011 or later for Hungary, Poland and Romania
Too high an inflation rate postponed the entry of Lithuania as planned on 1 January 2007.
Estonia, Latvia, Lithuania, Malta, Slovakia and Slovenia have already finalised the design for the country's coins' obverse side.
Bulgaria and Romania entered the EU on January 1, 2007.
Euro exchange rate
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, being the fact that a central bank can not maintain an interest rate target and an exchange rate target simultaneously, as increasing the money supply would result in a depreciation of the currency. In the years following the Single European Act, the EU has liberalized its capital markets, and as the ECB has chosen for 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 characterized by strong fluctuations. Most notable are the fluctuations of the euro vs. the US dollar, another freely floating currency. However this focus on the dollar-euro parity is partly subjective. It is taken as a reference because the European authorities expect the euro to compete with the dollar. The effect of this selective reference is misleading, as it give to the observers the impression that a rise in the value of the euro vs the dollar is the effect of an 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, especially the US dollar, declined heavily. At its introduction in 1999, the euro was traded at US$1.18; 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. 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, 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 dollar) 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.
By mid-2006, the euro had risen to $1.28.
- Current and historical exchange rates against 29 other currencies (European Central Bank)
- Current dollar/euro exchange rates (BBC)
- Historical exchange rate from 1971 until now
- Currency Converter
Currencies pegged to the euro
There are a number of foreign currencies that were pegged to a European currency and are now currencies related to the euro: the Cape Verdean escudo, the Bosnia and Herzegovina convertible mark, the Bulgarian lev, the CFP franc, the CFA franc and the Comorian franc.
In total, the euro is the official currency in 15 states and territories outside the European Union. In addition, 22 states and territories have a national currency that are directly pegged to the euro including fourteen West African countries, three French Pacific territories, two African island countries and three Balkan countries.
Consequences
Despite the euro's rise in US dollar-denominated value, as well as those of other major and minor currencies, the US trade deficits continue to rise. Economic theory would suggest that a fall in the dollar and a rise in the euro should lead to an increase in US exports and a decline in US imports, as the former becomes cheaper and the latter more expensive. However, this depends to some extent on how currency costs are passed down the supply chain. Furthermore, the declining dollar makes foreign investment in the US cheaper (although also reducing the return), so that continuing foreign investment may underpin the dollar to some extent.
The role of the US dollar as the world's de facto reserve currency helps support both the US dollar and the US budget deficit — but it depends on the continued willingness of foreigners to finance both. Central banks and others finance the budget by acquiring newly-issued, dollar-denominated US government bonds, which they need to acquire dollars for. If at some point foreigners become unwilling to accept new bonds at the prevailing interest rate (perhaps because the falling dollar is reducing the bonds' value too much), the dollar will fall even more — or the US will have to raise interest rates, which would reduce economic growth.
The euro is emerging as a possible alternative reserve currency; Saddam Hussein's Iraq switched its currency reserves from US dollars to euros in 2000. Moves by central banks with major reserve currency holdings such as those of India, China or OPEC countries to switch the currency they trade in from US dollars to euros, may further reinforce the US dollar's decline. In 2004, the Bank for International Settlements reported the proportion of bank deposits held in Euros rising to 20%, from 12% in 2001, and it is continuously rising. The falling dollar also raises returns for US investors from investing in foreign stocks, encouraging a switch which further depresses the dollar.
The rise in the euro should dampen eurozone exports, but there is little sign of this happening yet. The main reason is that the currencies of the eurozone's major world-wide customers are also seeing their currencies rise relative to the US dollar. As the current account deficits continue to rise and the US plans no austerity measures to curb foreign imports and increase exports, the situation may cause the US dollar to lose its position as a hegemonic currency replaced by either the euro or the euro and a basket of currencies.
Name and linguistic issues
Several linguistic issues have arisen in relation to the spelling of the words euro and cent in the many languages of the member states of the European Union, as well as in relation to grammar and the formation of plurals. The official spelling of the euro according to the ECB, as it appears (in capitals) on the banknotes, is "euro" in the Latin script and "ευρω" in the Greek script. The proposed official spelling by the ECB in the Cyrillic script is "еуро". However, the new EU member Bulgaria proposes "евро", the spelling that is currently used in Bulgaria. "Eвро", as well as "evro", although official spellings in some countries using the euro, are currently not supported by the ECB. Also not supported is the spelling used in Malta, where "ewro" derives from "Ewropa".
In each country except Greece, which uses λεπτό (lepto, singular) and λεπτά (lepta, plural) on its coins, the form "cent" is officially required to be used in legislation in both the singular and in the plural. Immutable word formations have been encouraged by the European Commission in usage with official EU legislation (originally in order to ensure uniform presentation on the banknotes), but the unofficial practice concerning the mutability (or not) of the words differs between the member states and their languages. The subject has led to much debate and controversy.
Trivia
- On 1 January 2002, the first purchase involving euros occurred on Réunion when officials bought a bag of lychees at a market.
- Although there have been other currencies predating the euro that were specifically designed in similar ways (different sizes, colours, and ridges) to aid the visually impaired, the introduction of the euro constitutes the first time that authorities have consulted associations representing the blind before, rather than after, the release of the currency.
Footnotes
- ↑ Only the southern part of the island is part of the European Union and uses the euro.
- ↑ http://europa.eu.int/comm/economy_finance/euro/notes_and_coins/symbol_en.htm
- ↑ http://www.fontshop.com/features/fontmag/002/02_euro/
- ↑ 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, with a Greek drachma (GRD) exchange rate of 340.750.