EURO

The 'euro' (currency sign: '€'; banking code: 'EUR') is the official currency of the Eurozone (also known as the Euro Area or the Euro Land), which consists of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain, and will extend to include Cyprus and Malta from 1 January 2008. It is the single currency for more than 317 million Europeans. Including areas using currencies pegged to the euro, the euro directly affects more than 480 million people worldwide.^[1] With more than
€610 billion in circulation as of December 2006 (equivalent to US$802 billion at the exchange rates at the time), the euro surpasses the U.S. dollar in terms of combined value of cash in circulation.^[2]
The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in 2002. It replaced the former European Currency Unit (ECU) at a ratio of 1:1.
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.
While all European Union (EU) member states are eligible to join if they comply with certain monetary requirements, not all EU members have chosen to adopt the currency. All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty have pledged to adopt the euro in due course. Maastricht obliged current members to join the euro; however, the United Kingdom and Denmark negotiated exemptions from that requirement for themselves^[3]. Sweden turned down the euro in a 2003 referendum, and has circumvented the requirement to join the euro area by not meeting the membership criteria. Several small European states (The Vatican, Monaco, and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro, and Kosovo have adopted the euro unilaterally.
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Characteristics of the euro

Euro currency (coins from first issues)

Main articles: euro coins, euro banknotes

Coins and banknotes

The euro is divided into 100 'cents' (sometimes referred to as ''eurocents''). All circulating 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. Euro coins from any country may be freely used in any nation which has adopted the euro.
The euro coins are €2, €1, 50c, 20c, 10c, 5c, 2c, and 1c. In the Netherlands and Finland, where cash transactions are rounded to the nearest five cents, the two smallest denominations are no longer struck (except for collectors), though they remain legal tender there. (See also Linguistic issues concerning the euro.)
Commemorative coins with €2 face value have been issued with changes to the design of the national side of the coin — as Greece did for the 2004 Summer Olympics. These two-euro coins are legal tender throughout the Eurozone. Coins with various other denominations have been issued as well, but these are not intended for general circulation. These later coins are only legal tender in the nation which issued them.
All euro banknotes have a 'common design' for each denomination on both sides. Notes are issued in €500, €200, €100, €50, €20, €10, €5. The design for each of them has a common theme of European architecture in various artistic periods. The front (or recto) of the note features windows or gateways while the back (or verso) has bridges. Care has been taken so that the architectural examples do not represent any actual existing monument, so as not to induce jealousy and controversy in the choice of which monument should be depicted. Some of the highest denominations such as the €500 are not issued in a few countries, though they remain legal tender throughout the Eurozone.

Payments clearing, electronic funds transfer

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/debit card charging and ATM withdrawals within the Eurozone are also charged as if they were domestic. The ECB has not standardised paper-based payment orders, such as cheques; these are still domestic-based.
The ECB has set up a clearing system, TARGET, for large euro transactions.^[4]

The currency sign €

Main articles: Euro sign

The official construction of the euro sign, which was specified to be printed in PMS Yellow on a PMS Reflex Blue background

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 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.
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.^[5] 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. Often the sign is based upon the capital letter C in the respective font so that currency signs have the same width as Arabic numerals.^[6]
Placement of the currency sign varies from nation to nation. There are no official standards on where to place the euro symbol.^[7] Generally, people in the euro countries have kept the placement of their former currencies.
Another advantage to the final chosen symbol is that it is easily created on a typewriter lacking the euro sign, by typing a capital 'C', backspacing and overstriking it with the equal ('=') sign.

Economic and Monetary Union

History (1990–2007)

Main articles: Economic and Monetary Union of the European Union

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. In the Maastrict Treaty, the United Kingdom and Denmark were granted exemptions from moving to the stage of monetary union which would result in the introduction of the euro.
Economists that 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.)
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, 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.) Council Regulation 2866/98 (EC), of 31 December 1998, set these rates. 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.

Yielded currencies of the Eurozone
Currency	Abbr.	Rate	Fixed on	EMU III
Austrian schilling	ATS	13.7603	31/12/1998	1999
Belgian franc	BEF	40.3399	31/12/1998	1999
Dutch gulden	NLG	2.20371	31/12/1998	1999
Finnish mark	FIM	5.94573	31/12/1998	1999
French franc	FRF	6.55957	31/12/1998	1999
German mark	DEM	1.95583	31/12/1998	1999
Irish pound (punt)	IEP	0.787564	31/12/1998	1999
Italian lira	ITL	1936.27	31/12/1998	1999
Luxembourg franc	LUF	40.3399	31/12/1998	1999
Portuguese escudo	PTE	200.482	31/12/1998	1999
Spanish peseta	ESP	166.386	31/12/1998	1999
Greek drachma	GRD	340.750^[8]	19/06/2000	2001
Slovenian tolar	SIT	239.640^[9]	11/07/2006	2007
Cypriot pound	CYP	0.585274^[10]	10/07/2007	2008
Maltese lira	MTL	0.429300^[11]	10/07/2007	2008

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 periods ranging from several years 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.
On 1 January 2007, Slovenia joined the Eurozone.

Current Eurozone (2007)

Main articles: Eurozone

★ The euro is the sole currency in Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain. These 13 countries together are frequently referred to as the Eurozone or the euro area, or more informally "euroland" or the "eurogroup". Outside of the area covered by the map, the euro is the legal currency of the French overseas possessions of French Guiana, Réunion, Saint-Pierre et Miquelon, Guadeloupe, Martinique, Saint-Barthélemy, Saint Martin, Mayotte, and the uninhabited Clipperton Island and the French Southern and Antarctic Lands; the Portuguese autonomous regions of the Azores and Madeira; and the Spanish Canary Islands.

★ By virtue of some bilateral agreements,^[12] the European microstates of Monaco, San Marino, and Vatican City mint their own euro coins on behalf of the European Central Bank. They are, however, severely limited in the total value of coins they may issue.

★ Andorra, Montenegro and Kosovo adopted the foreign 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 Vatican City.

★ Several possessions and former colonies of EU states have currencies pegged to the euro. These are French Polynesia, New Caledonia, Wallis and Futuna (the CFP franc); Cape Verde; Morocco; the Comoros; and fourteen nations of Central and West Africa (the CFA franc). See Currencies related to the euro.

★ Although the United Kingdom does not adopt the euro as its official currency, it is accepted in some stores throughout the country. Particularly international stores in large cities, and shops in towns and villages in Northern Ireland near the border with the Republic of Ireland, where the euro is the official currency. Euro can be exchanged over the counter in all high-street banks and post offices, without the usual formalities of a 'foreign currency' deal.

Future prospects (2008–)

Main articles: Eurozone, Enlargement of the eurozone

Pre-2004 EU members

From Greece's participation in 2001 until the EU enlargement in 2004, Denmark, Sweden and the United Kingdom were the only EU member states outside the monetary union. The situation for the three older member states also looks different from that of the newer EU members; the three countries have no clear roadmap for adopting the euro:

★ Denmark negotiated a number of opt-out clauses from the Maastricht treaty after it had been rejected in a first referendum. On 28 September 2000, another referendum was held in Denmark regarding the euro resulting in a 53.2% vote against joining. However, Danish politicians have suggested that debate on abolishing the four opt-out clauses may possibly be re-opened. In addition, Denmark has pegged its krone to the euro (€1 = DKr 7.46038 ± 2.25%) as the krone remains in the ERM. Although not part of the European Union, both Greenland and the Faroe Islands use the Danish krone (the Faroes in the form of the Faroese króna), and so also fall within the ERM.

★ Sweden: According to the 1995 accession treaty, approved by referendum, Sweden is required to join the euro and therefore must 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 56% against adopting the common currency versus 42% in favour. The Swedish government has argued that staying outside the euro is legal 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 requirement of adopting the euro. Some of Sweden's major parties continue to believe that it would be in the national interest to join, but they have all pledged to abide by the result of the referendum for the time being and show no interest in raising the issue. An optimistic timetable is to hold a new referendum in 2012 and adopt the euro in 2015. A faster timetable is unlikely, while a slower one is more than likely. Prior to the September 2006 parliamentary elections, all major parties agreed not to raise the question before the following parliamentary elections (to be held in September 2010). The parties seem to agree that Sweden wouldn't adopt the euro until after a second referendum.

★ The United Kingdom has an opt-out from eurozone membership under the Maastricht treaty and is not obligated to join the euro. While the government is in favour of membership provided the economic conditions are right (requiring that "five economic tests" be met), the general population remain opposed and the question has never been put to referendum. The United Kingdom was forced to withdraw the pound sterling from the ERM (the precursor to ERM II) on Black Wednesday (16 September, 1992) following pressure from currency speculators, and the pound is not part of ERM II.

Post-2004 EU members

As of 2007, 11 new EU member states had a currency other than the euro; however, all of these countries are required by their Accession Treaties to join the euro.
Some of the following countries have already joined the European Exchange Rate Mechanism, ERM II. They and the others have set themselves the goal of joining the euro (EMU III) as follows:

Currency	Abbr.	Rate	Conv goal
Cypriot pound	CYP	0.585274	01/01/2008
Maltese lira	MTL	0.429300	01/01/2008
Slovak koruna	SKK	35.4424^[13]	01/01/2009
Lithuanian litas	LTL	3.45280	01/01/2010
Bulgarian lev	BGN	1.95583^[14]	01/01/2010
Estonian kroon	EEK	15.6466	01/01/2010
Latvian lats	LVL	0.702804	2011–
Hungarian forint	HUF	—	2013
Polish złoty	PLN	—	01/01/2012
Czech koruna	CZK	—	01/01/2012
Romanian leu	RON	—	01/01/2014

★ 1 January 2008 for Cyprus and Malta - Approved by the Ecofin and conversion rate fixed on 10 July 2007 ^[15]

★ 1 January 2009 for Slovakia^[16]

★ 1 January 2010 for Estonia ^[17], Lithuania,^[18], and Bulgaria^[19].

★ 2011 or later for Hungary, Latvia,^[20] Poland, the Czech Republic, and Romania
Too high an inflation rate postponed the entry of Lithuania and Estonia as planned on 1 January 2007. Some of these currencies do not float against the euro, and a subset of those were unilaterally pegged to the euro before joining ERM II. See European Exchange Rate Mechanism, currencies related to the euro, and individual currency articles for more details.
Originally, the Czech Republic aimed for entry into the ERM II in 2008 or 2009, but the current government has officially dropped the 2010 target date, saying it will clearly not meet the economic criteria. The new goal is 2012.^[21]
Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia have already finalised the design for their respective coins' obverse sides.

Public opinion on the euro

Although the failure of the European Constitution to be ratified would have no direct impact on the status of the euro, some debate regarding the euro arose after the negative outcome of the French and Dutch referendums in mid 2005.

★ Corresponding to the Flash Eurobarometer 2006^[22] a clear majority (62%) of Austrians had the view that ''The euro is good for us, it strengthens our position for the future'', only a marginal minority (24%) believe the euro ''rather weakens the country''.

★ According to the Flash Eurobarometer 2006^[22] a plurality (46%) of Germans had the opinion ''The euro is good for us, it strengthens our position for the future'', whereas a minority (44%) believe the euro ''rather weakens the country''.

★ A poll by Stern magazine released 1 June 2005 found that 56% of Germans would favour a return to the Deutsche Mark.^[24]

★ In contrast to Germany, a poll in Austria on 7 June 2005 showed overwhelming support for the euro as 73% of the sample said they preferred to keep the common currency with only 21% in favour of returning to the old currency, the Österreichischer Schilling.^[25]

★ Members of the Northern League, a northern Italian separatist political party, have discussed calling a referendum to return Italy to the lira.^[26]

★ Members of the right-wing Movement for France political party have proposed holding a referendum to return France to the franc.^[27]

★ Soon after these suggestions were made, the European Commission issued a statement denying any possibility of this, stating "the euro is here to stay".
More recently, in April 2006, after the Italian elections, the subject once again came up. Again, the EU strongly rejected this, calling the suggestion "impossible".
Opposition to the euro may also come from those that otherwise support the European Union, such as the "No" campaign, under the slogan "Europe Yes. Euro No",^[28] in the United Kingdom, that lasted from 2000 to 2004.^[29]

Economics of the euro

Optimal currency areas

The euro-sign light sculpture outside the European Central Bank in Frankfurt

Economists typically cite four criteria, often called the optimum currency area (OCA) criteria, to evaluate the value of switching to a single currency. There are three economic criteria (labour and capital mobility, product diversification, and openness) and one political criterion (fiscal transfers). Since establishing a single currency over a region necessitates surrendering the ability to tailor monetary policy to local conditions, these four characteristics measure the ability of the economy to smooth local economic movements in the absence of monetary policy.

★ Robert A. Mundell formulated the idea that perfect capital and labour mobility would mitigate the adverse consequences of asymmetric shocks in a currency area. While capital is quite mobile in the Eurozone, labour mobility is relatively low, especially when compared to the U.S. and Japan.

★ Peter Kenen formulated the idea that widely diversified production and export structures that are similar between the areas that form the currency area lower the effect and probability of asymmetric shocks. The Eurozone scores quite well on this criterion, and monetary integration seems to further improve the diversification of production structures.

★ Ronald McKinnon formulated the idea that areas which are very open to trade and trade heavily with each other form an optimum currency area. This is because the high trade intensity will lower the significance of the distinction between domestic and foreign goods as competition will equalise the prices of most goods, independently of exchange rates. The Eurozone members trade heavily with each other (intra-European trade is greater than international trade), and all evidence so far seems to indicate that the monetary union has at least doubled trade between members.

★ The term "fiscal transfers" refers to the transfer of money between areas. Regions that are economically worse off or suffer from negative economic shocks receive money, creating a counter cyclical effect that lowers the price, wage, and unemployment differentials between regions. Theoretically, Europe has no-bail out clause in the Stability and Growth Pact, meaning that fiscal transfers are not allowed, but it's impossible to know what will happen in practice.
So while Europe scores well on some of the measures characterising an OCA, it has lower labour mobility than the United States and similarly cannot rely on Fiscal federalism to smooth out regional economic disturbances.

Transaction costs and risks

The most obvious benefit of adopting a single currency is removing from trade the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. On the consumer side, 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 looking to invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. The reduction in risk 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 between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. Similarly, price transparency across borders should help consumers find lower cost goods or services. In reality, the effects of the euro over the level of the prices in Europe are disputable. Many citizens cite the strong perceived increase in prices in the years after the introduction of the euro, although numerous empirical studies have failed to find much real evidence of this. [1] It is speculated that the reason for this perception is that the prices of small, everyday items were rounded up significantly. For example, a cup of coffee that once cost two German Mark might now cost €1.50 or even €2.00—a 50–100% increase, although wages in many countries have also increased. At the same time, a large appliance or rent payment rounded up to the next obvious euro level would be a negligible proportional increase. The fact that the prices people see every day were affected more strongly might explain why so many people perceive the "euro effect" as being significant, while official studies—which look at the breadth of expenditures, in proportion—would downplay it.

Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a highly regressive 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, it is independent of the pressures of national governments and has a mandate to keep inflationary pressures low. Member countries join the bank to credibly 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.
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.

A new reserve currency

The euro is widely perceived to be a major global reserve currency, sharing that status with the U.S. dollar (USD), albeit to a lesser degree. The U.S. dollar continues to enjoy its status as the primary reserve of most commercial and central banks worldwide.
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, has increased its standing somewhat, mostly at the expense of the dollar. The possibility for the euro to become the first international reserve currency in the near future is now widely debated among economists. There has been some suggestion that the recent weakness of the US dollar might encourage various parties to increase their reserves in euro at the expense of the dollar, but as the table below indicates, this does not yet seem to be a major trend.
A currency is attractive for international transactions when it demonstrates a proven track record of stability, a well-developed financial market to trade the currency, and proven acceptability to others. While the euro has made substantial progress toward achieving these features, there are a few challenges that undermine the ascension of the euro as a major reserve currency. Persistent excessive budget deficits of some member nations, economically weak new members, conservatism of financial markets, and inertia or path dependency are all important factors keeping the euro as a junior international currency to the U.S. dollar. However, at the same time, the USD has increasingly suffered from a double deficit and consequently has its own concerns.
As the euro becomes a new reserve currency, Eurozone governments will enjoy substantial benefits. Since money is effectively an interest-free loan to the issuing government by the holder of the currency—foreign reserves act as a subsidy to the country minting the currency (see Seigniorage). However, reserve status also holds risks, as the currency may become overvalued, hurting European exporters, and potentially exposing the European economy to influence by external actors who hold large quantities of euros.

Criticism

Some European nationalist parties oppose the euro as part of a more general opposition to the principle of a European union. A significant group of these include the members of the Independence and Democracy bloc in the European Parliament. Additionally the Green Party of England and Wales is opposed for anti-globalisation reasons but the rest of the European Green Party bloc in the European Parliament do not share their stances.
In their view, the countries that participate in the EMU have surrendered their sovereign abilities to conduct monetary policy. The European Central Bank is required to pursue a policy that might be at odds with national interests and there is no guarantee of extra-national assistance from their more fortunate neighbours should local conditions necessitate some sort of economic stimulus package. Many critics of the EMU believe the benefits to joining the organisation are outweighed by the loss of sovereignty over local policy that accompanies membership.
The euro is underpinned by the Stability and Growth Pact, which is designed to ensure even fiscal policy across the Eurozone. The SGP has been criticised for removing the ability of national governments to stimulate their own economies to a certain extent, in the only way left to them now that monetary policy is determined supranationally. The failure of some member states to observe the SGP, and its inherent problems have led to minor reforms, and further reforms are likely.

Euro exchange rate

Flexible exchange rates

Exchange rate US-Dollar/Euro from 1999 to present (ECB reference exchange rates)^[30]
Year	Date	Lowest	Date	Highest
1999	03 Dec	1.0015	05 Jan	1.1790
2000	26 Oct	0.8252	06 Jan	1.0388
2001	06 Jul	0.8384	05 Jan	0.9545
2002	28 Jan	0.8578	31 Dec	1.0487
2003	08 Jan	1.0377	31 Dec	1.2630
2004	14 May	1.1802	28 Dec	1.3633
2005	15 Nov	1.1667	03 Jan	1.3507
2006	02 Jan	1.1826	05 Dec	1.3331
2007	12 Jan	1.2893	24 Jul	1.3833

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 European authorities expect the euro to compete with the dollar. 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

Exchange rate evolution of the euro compared to USD, JPY and GBP. Exchange rate at start is put to 1.

Green: in Jan-1999: €1 = $1.18 ; in Aug-2007: €1 = $1.37

Red: in Jan-1999: €1 = ¥133 ; in Aug-2007: €1 = ¥162

Blue: in Jan-1999: €1 = £0.71 ; in Aug-2007: €1 = £0.67

After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. At its introduction in 1999, the euro was traded at 1.18 US$/€, but by October 26, 2000, it had fallen to an all-time low of 0.8228 $/€. The euro then began to recover, rising to nearly $0.96 by the beginning of 2001, but declined again (although less than previously), reaching a low of $0.8344 on July 6, 2001. This decrease might have to do with the psychological effect of its physical non-existence until 2002 as the fundamental facts did not justify the euro's fall. After the appearance of the coins and notes and the replacement of all national currencies, the euro then began steadily appreciating, and reached parity with the U.S. dollar on July 15, 2002. Since December 2002, the euro has not fallen below parity with the U.S. dollar. Since November 2003, it has remained above $1.15 and since August 2006 it did not fall under $1.25 but broke an all time high in July 2007 topping $1.38. To put this record high into perspective, $1.38 equates to an increase of only $0.20 from the euro's initial trading price of $1.18, compared to the loss of about $0.35 when it hit its record low. A similar increase would result in an exchange rate of $1.53 for one euro. Additionally, considering the time since its introduction being 8 and a half years, an increase of $0.20 seems to be fairly moderate. Taking into account all these factors, there is no immediate psychological barrier for a further increasing euro.
On 23 May 2003, the euro surpassed its initial ($1.18) trading value for the first time. At the end of 2004, it reached a peak of $1.3668 (0.7316 €/$) as the U.S. dollar fell against all major currencies, fuelled by the so-called twin deficit of the US accounts. Although the US trade imbalances are heavily tilted against East Asia rather than Europe, East Asia's reluctance to let their currencies rise has led to the euro rising in its place. But the dollar recovered in 2005, rising to $1.18 (0.85 €/$) in July 2005, and was stable throughout the second half of 2005. The steep increase in U.S. interest rates during 2005 had much to do with this trend. By early December 2006, the dollar had fallen below €0.75, hitting a low of 0.7495 €/$ (1.3340 $/€), slightly more than 3 cents above its record low, set in late 2004. On July 24, 2007, the dollar fell to an all-time low at $1.3833 against the euro.^[31]
However this is still not the deepest fall of the value of the dollar, as it was worth only 1.34 German mark on 18 April 1995, one of euro's predecessors. As the euro value is 1.95583 German mark this would be an exchange rate of $1.46 for €1.

★ 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

Currencies pegged to the euro

Main articles: Currencies related to the euro

Comparison of worldwide use of the U.S. dollar and 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 13 states inside the European Union, and 5 states/territories outside the European Union. In addition, 25 states and territories have currencies that are directly pegged to the euro including 14 countries in mainland Africa, 5 EU members that will ultimately join the euro, 3 French Pacific territories, 2 African island countries and another Balkan country, Bosnia and Herzegovina.

International role of the euro

While at the end of last year the value of dollar bank notes in circulation was surpassed by that of euro bank notes, the value of dollars circulating outside the U.S. was about four to six times as great as the value of euro bank notes outside the euro zone.
Additionally, the euro's role in foreign-exchange markets has been slipping. Its share in daily security settlements fell to about 39% during 2006 from about 41% previously. At the same time, the dollar share was broadly stable at 92.5%, confirming that currency's dominant role. (The sum of the currency percentage shares is 200 percentage points as both currencies involved in the settlement of a foreign-exchange trade are counted individually.)
In the United Kingdom, although not a member of 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]

Name and linguistic issues

Main articles: Linguistic issues concerning the euro

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 therefore currently not supported by the ECB. Similarly happens in Malta with "ewro" from "Ewropa" for "euro"
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.

Notes

1. Number is a sum of 'estimated' populations (as stated in their respective articles) of: all Eurozone members; all users of euro not part of Eurozone (whether officially agreed upon or not); all areas which use a currency pegged to the euro, and only the euro.
2. Euro notes cash in to overtake dollar
3. The €uro: Our Currency
4. TARGET
5. http://ec.europa.eu/economy_finance/euro/notes_and_coins/symbol_en.htm
6. Jürgen Siebert, The Euro: From Logo to Letter, ''Font'' Magazine, Issue 2, 2002.
7. http://www.delidn.ec.europa.eu/en/references/references_5.htm#Q12
8. 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.
9. The final exchange rate was agreed on 11 July 2006. However, this rate was not formally effective until the tolar was succeeded by the euro on 1 January 2007.
10. The final exchange rate was agreed on 10 July 2007. However, this rate will not be formally effective until the pound is succeeded by the euro on 1 January 2008.
11. The final exchange rate was agreed on 10 July 2007. However, this rate will not be formally effective until the lira is succeeded by the euro on 1 January 2008.
12. Agreements on monetary relations (Monaco, San Marino, the Vatican and Andorra)
13. The central rate of the Slovak koruna was 38.4550 before 17 March 2007. See Slovak koruna for details.
14. Bulgaria is not officially part of ERM II as of 7 January 2007. But as the Bulgarian lev exchange rate is fixed to the rate of German mark (and thus to the euro) country is included in the list.
15. The European Commission hails approval of the adoption of the euro in Cyprus and Malta
16. Government approved the National Euro Changeover Plan Bank of Slovakia, 2005-07-07
17. Alcohol and tobacco tax to rise in Estonia next year
18. Adoption of the euro in Lithuania Bank of Lithuania, retrieved: 2007-02-03
19. Agreement between the Council of Ministers and the Bulgarian National Bank on the introduction of the Euro in the Republic of Bulgaria
20. Latvia might adopt Euro between 2010 and 2012 - Minister, ''Forbes'', 2006-12-04, accessed on 2007-01-01
21. Finance Ministry sees 2012 as realistic for euro adoption
22. European Commission (Hrsg.): ''The eurozone, 5 years after the introduction of euro coins and banknotes. Analytical report.'' November 2006 S 30: Overall perception of the adoption of the euro, 2006
23. European Commission (Hrsg.): ''The eurozone, 5 years after the introduction of euro coins and banknotes. Analytical report.'' November 2006 S 30: Overall perception of the adoption of the euro, 2006
24. 56 Prozent der Deutschen wollen die Mark zurück
25. vienna.at
26. Italians consider trashing euro, returning to lira John Phillips
27. http://news.scotsman.com/international.cfm?id=664902005
28. ''Anti-euro campaign launched'', BBC news, 2000-09-04
29. ''Euro no campaign halted'', Guardian Unlimited, 2004-03-24
30. http://www.ecb.eu/stats/exchange/eurofxref/html/index.en.html ECB: Euro foreign exchange reference rates
31. ECB official rates against the dollar from ecb.eu
32.
Euro's Role Slips in World Markets

References

★ Baldwin, Richard and Charles Wyplosz, ''The Economics of European Integration'', New York: McGraw Hill, 2004.

★ European Commission, ''High Level Task Force on Skills and Mobility - Final Report'', 14 December 2001.

External links

★ European Central Bank Official Site

★ The Euro: Our Currency Official EU Site

★ Dollar/Euro-Chart

★ Europedia: Guide to European policies and legislation

★ Euro banknote validation with PHP

★ Purchasing power of the Euro abroad - Federal Statistical Office Germany

★ The of the European Commission's Directorate-General for Translation. See section 20.7 for the recommendation that in all non-legal texts, "especially documents intended for the general public, use the natural plurals 'euros' and 'cents'."

★ EU warning for euro hopefuls, BBC news story about EU report to would-be Eurozone members

★ www.eurobilltracker.com Follow the Euro Banknotes during their journey!

★ The Euro- Information Website FAQ

Articles

★ Come back, euro - all is forgiven

★ A critical view on "Britain and the Euro" (article from 2002)

★ A critical view on "inflationary euro"

★ European Monetary Union and the euro

★ EU and EMU information including coin and banknote images

★ Britain and European Monetary Union

★ (Il-Kunsill Nazzjonali ta' l-Ilsien Malti including "The plural of ewro is ewro" as well as a discussion on what the words for "euro" and "cent" should be in Maltese)

★ The euro and standardisation (Michael Everson; including "The plural of euro is euros!" as well as a discussion on what the words for "euro" and "cent" should be in Irish)

★ A brief commentary by one of the economists instrumental in creating the euro

★ Introduction to the euro

★ The euro page from the Economist (many articles require a subscription)

★ The euro and the History of Previous Currency Unions, ''YoursDaily.com''

★ The Euro and Its Antecedents by Jerry Mushin, Victoria University of Wellington

Books

★ Jay H. Levin, A Guide to the Euro (Houghton Mifflin Company, 2002)

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