EUR - Euro

The euro (currency sign: ˆ; banking code: EUR) is the official currency of the Eurozone, which consists of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain. It is the single currency for more than 317 million Europeans. Including areas using currencies pegged to the euro, the euro affects more than 480 million people worldwide. With more than ˆ610 billion in circulation as of December 2006 (equivalent to US$802 billion at the exchange rates at the time), the euro has surpassed the U.S. dollar in terms of combined value of cash in circulation.

While all EU member states are eligible to join if they comply with certain monetary requirements, the euro is not used in all of the European Union as not all EU members have adopted the currency. All nations which have recently joined the EU are pledged to adopt the euro in due course, but the United Kingdom and Denmark are under no such obligation. 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.

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 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 euro is divided into 100 cent (sometimes referred to as eurocents). All euro coins (including the ˆ2 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 ˆ2, ˆ1, 50c, 20c, 10c, 5c, 2c and 1c. The two smallest denominations are no longer struck (except for collectors) in the Netherlands or Finland, where cash transactions are rounded to the nearest five cents, but they remain legal tender there. Note that there is no plural for the European Cent, 1 cent, 2 cent and so on. A special euro currency sign (ˆ) 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.

Economic and Monetary Union History (1990-2007)

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.

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.

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. On 1 January 2007, Slovenia joined the eurozone.

A new reserve currency

The euro is widely perceived to be one of two, or perhaps three, major global reserve currencies, making inroads on the widely used U.S. dollar (USD), which has historically been used by commercial and central banks world-wide as a stable reserve on which to ensure their liquidity and facilitate international transactions. A currency is attractive for foreign transactions when it demonstrates a proven track record of stability, a well-developed financial market to dispose of the currency in, 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 member nations, economically weak new members, and serious questions regarding expansion threaten the place of the new currency.

As a new reserve currency, government sponsoring the euro do receive some substantial benefits. Since money is effectively an interest free loan to the government by the holder of the currency — foreign reserves act as subsidy to the country minting the currency.

The euro as a major international reserve currency

Main article: Reserve currency

Since its introduction, the euro has been the second most widely-held international reserve currency after the US dollar. The euro inherited this status from the German Mark, and since its introduction, has increased its standing considerably, mostly at the expense of the dollar.