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For the kangaroo-like macropod named Euro, see wallaroo.

The euro (€; ISO 4217 code EUR) is the currency of 12 of the 25 nations that form the European Union (and some outside it). It is the result of the most significant monetary reform in Europe since the Roman Empire. Though the introduction of the euro can be seen simply as a mechanism for perfecting the Single European Market, facilitating free trade between the members of the Eurozone, the euro is also a key part of the European project of political integration.

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.

Characteristics

The euro is divided into 100 cent(s).

All euro coins have a common reverse showing the worth and a national obverse showing an image particular to the country it was issued in; the monarchies tend to have a picture of their reigning king or queen, other countries usually have their national symbols. All the different coins can be used in all the participating member states: e.g. a euro coin bearing an image of the Spanish king is legal tender not only in Spain, but also in Finland (and all the other nations where the euro is in use).

Euro banknotes have a common design for each denomination on both sides.

Pluralisation

Official practice followed in English language EU legislation is to use the words euro and cent as both singular and plural. [1] However normal usage outside of such legislation is to use the plurals euros and cents; this somewhat inconsistent position is actually endorsed by the European Commission Translation Service.

A variation of these basic terms therefore exists in the various languages of the member states: for example the Finnish term for the cent is sentti/senttiä and the Greek term is λεπτό (lepto). The plurals euros and cents are also officially used in Spanish and French. In Portugal, the plural euros is used and the words cêntimo/cêntimos are widely used instead of cent/cents. Although cent is the official term in France and Belgium, most French and French-speaking Belgian people still use the older term centime to avoid confusion with the word cent meaning hundred, and in the habit of the subdivision of a French Franc divided into 100 centimes. Likewise, in Spain céntimo is still frequently heard. In Dutch, the plural of euro is euro’s and that of cent is centen. In Irish one speaks of euro and ceint as the plurals, although the suggestion was made that a new word, such as eora (pl eoraí) or eoró (pl eorónna), be coined on analogy from the word Eoraip (Europe). In English-speaking Ireland, both euros and euro may be heard for the plural, or occasionally quid; speaking of several cent would be unusual.

Transition

The euro was established by the provisions in the 1992 Maastricht Treaty on European Union relating to establishing 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 3% of GDP, a debt ratio of less than 60% 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 rate at which the currency entered the euro) are as follows:

  • 13.7603 Austrian schilling (ATS)
  • 40.3399 Belgian franc (BEF)
  • 2.20371 Dutch guilder (NLG)
  • 5.94573 Finnish markka (FIM)
  • 6.55957 French franc (FRF)
  • 1.95583 German mark (DEM)
  • 0.787564 Irish pound (IEP)
  • 1936.27 Italian lira (ITL)
  • 40.3399 Luxembourg franc (LUF)
  • 200.482 Portuguese escudo (PTE)
  • 166.386 Spanish peseta (ESP)

The above rates were determined by the ECB based on market rates on December 31, 1998, so that 1 ECU (European Currency Unit) would equal 1 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 December 31, 1998.

Greece failed to meet the criteria for joining initially, so it did not join the common currency on January 1, 1999. It was admitted two years later, on January 1, 2001, at an exchange rate of:

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 June 19, 2000.

The currency was introduced in non-physical form (travellers' cheques, electronic transfers, banking, etc.) at midnight on January 1, 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 subdivisions of the euro; the euro thus became the successor to the older 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 January 1, 2002 and the changeover period ended on February 28, 2002.

The changeover period during which the former currencies' notes and coins were exchanged for those of the euro generally lasted two months. 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, where the mark officially ceased to be legal tender on December 31, 2001, though the exchange period lasted two months. The final date was February 28, 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 that they will continue to be accepted by national central banks for several years, and in some states for decades hence. 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 bigger banknotes such as 500 euro and 200 euro, all banknotes are legal tender throughout the Eurozone. Finland decided not to mint or circulate 1 cent and 2 cent coins, except in small numbers for collectors. All cash transactions in Finland ending in 1 or 2 cents are rounded down and 3 or 4 cents are rounded up.

Eurozone membership

Green: current Eurozone countries
Brown: non-Eurozone EU members

EU Member States

At present the member states officially participating in the Euro are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. These countries are frequently referred to as the "Eurozone" or more rarely as "Euroland".

Nations with formal agreements with the EU

Monaco, San Marino, and Vatican City also use the euro, although they are not officially euro members nor members of the EU. (They previously used currencies that were replaced by the euro.) They now mint their own coins, with their own national symbols on the reverse. These countries use the euro by virtue of agreements concluded with EU member states (Italy in the case of San Marino and Vatican City, France in the case of Monaco), approved by the Council of the European Union.

Nations without formal agreements with the EU

Andorra does not have specific euro coins, since it previously used the French franc and Spanish peseta as legal tender currency. There is no formal arrangement with the EU, but with Spain and France.

Likewise, Montenegro and Kosovo, which used to have the German mark as their currency, also adopted the euro without having entered into any legal arrangements with the EU explicitly permitting them to do so.

Pegs to pre-euro currencies

  • Bulgaria and Estonia had their currencies pegged to the German mark.
  • Cape Verde's currency was pegged to the Portuguese escudo.
  • The Lithuanian litas (LTL) was pegged to the US dollar until February 2, 2002.
  • Bosnia and Herzegovina's currency, the "convertible mark", was pegged to the German mark.
  • The CFA and CFP francs, used in former French colonies, were pegged to the French franc.

All of these currencies are now pegged to the euro.

The euro can also be found on other continents as well as Europe. European national territories outside of Europe proper also use the euro.

The euro can be found in Africa in the Spanish enclaves of Ceuta and Melilla as well as the Canary Islands off the coast of Africa.

The French overseas departments of Guadeloupe, Martinique, and St. Pierre and Miquelon are a part of North America. French Guiana and Inini is a part of South America, and Réunion and Mayotte in the Indian Ocean are a part of Africa as well. Thus the euro is used on four of the world's seven continents.

Non eurozone EU members

Denmark and the United Kingdom got special derogations in the original Maastricht Treaty of the European Union. Both countries are not legally required to join the euro unless their governments decide otherwise, either by parliamentary vote or referendum.

Denmark

In Denmark a referendum on joining the euro was held on September 28, 2000, resulting in a 53.2% vote against joining. It is uncertain if a new referendum will be held in the near future.

Note: should Denmark join the euro, Greenland, which is not part of the EU, but of Denmark, would have to hold a separate referendum to decide whether it wants to switch to the euro. The outcome of this possibility is uncertain, as current trends seem to favour independence from Denmark.

United Kingdom

The British government under prime minister Tony Blair has committed itself to a triple-approval procedure before joining the euro, involving approval by the Cabinet, Parliament, and the British electorate in a referendum.

Unlike other European countries, where the euro is seen as an essential building block in a more politically integrated Europe, in the United Kingdom the possible benefits of eurozone membership are seen as principally economic, and an assessment of British membership based on five economic tests was published on June 9, 2003 by Chancellor of the Exchequer Gordon Brown.

Though maintaining the Government's positive view on the euro, the report came out against membership for the moment, because of the fact that four out of the five tests were not passed.

Chancellor Brown stated [2] in June 2003 that the best exchange rate for the UK to join the single currency would be around 73 pence per euro (a value which the euro had never reached). This rate has not been formalised as an official condition of entry.

Opinion polls in the UK show an increasing majority of the British public to be against joining the euro. They perceive loss of political and economic sovereignty, and a referendum in the near future has been ruled out until at least after next general election.

If Britain were to join the euro, it is unclear what would happen in its overseas territories which use the British Pound Sterling.

Sweden

Sweden does not have any derogation by any protocol or threaty. Nevertheless, Sweden decided in 1997 not to join the euro from the beginning, and has not made any effort to fulfill the required criteria for a stable exchange rate.

A recent referendum on the euro on September 14, 2003, showed that a majority of Swedes opposed the euro, with the following figures: Yes 41.8%, No 56.1%. Consequently, the decision has been postponed for at least nine years, as Prime Minister Göran Persson wants the results of the referendum to be respected until at least 2012.

Other EU members

The ten member states that joined the Union on 1 May 2004 should be adopting the euro as soon as appropriate guidelines are met, although this is unlikely before 2007-2008 at the earliest, with some states joining earlier than others. For these new member states, the single currency was "part of the package" of European Union membership – unlike the UK and Denmark, there is no "opt out" permitted.

As of 1 May 2004, the ten National Central Banks (NCBs) of the member countries are party to the second European Exchange Rate Mechanism (ERM II) [3], and will be joining Denmark when they participate in the mechanism (the UK and Sweden are not in ERM II).

Showing the ability to move towards full economic and monetary union is one requisite of "good membership". The ECB and European Commission produce reports every two years analysing the economic and other conditions of non-Eurozone EU members, reporting on their suitability for joining the euro. The first to include the 10 new members will be in October of 2004 [4].

Effects of a single currency

Having a single currency is expected to increase the economic interdependency of and the ease of trade between the EU members that have adopted the euro. This, in theory, should be beneficial for citizens of the euro area, as increases in trade are historically one of the main driving forces of economic growth. Moreover, this would fit with the long-term purpose of a unified market within the European Union.

A major benefit is the removal of bank currency transaction charges that previously was a significant cost to both individuals and businesses when changing from one currency to another. Conversely, banks will suffer a significant reduction in profits with the loss of this income.

A second effect of the common European currency is that differences in prices – in particular in price levels – will decrease. Differences in prices can trigger arbitrage, e.g. trade between countries, which will equalise prices across the euro area. Often this will also result in increased competition between companies, which should help to contain inflation and which therefore will be beneficial to consumers.

Some economists are concerned about the possible dangers of adopting a single currency for a large and diverse area. Because the Eurozone has a single monetary policy, set by the ECB, it cannot be fine-tuned for the economic situation in each individual country. Public investment and fiscal policy in each country is thus the only way in which economic changes can be introduced specific to each region or nation.

Others point out that the Eurozone is similar in size and population to the United States, which has a single currency and a single monetary policy set by the Federal Reserve. However, the individual states that make up the USA have less regional autonomy and a more homogeneous economy than the nations of the EU. Of particular concern is the notion that the economies of the EU may not all be 'in sync' – each may be at a different stage in the boom and bust cycle, or just be experiencing different inflationary pressures. Labour mobility is also higher in the United States than across the Eurozone.

It can also be argued that the single currency works for the USA because the dollar is a hegemonic currency. Before the euro, 80% of the world's currency reserves were held in US dollars. This gives the US economy a huge subsidy in that reserve dollars are invested in US institutions or foreign institutions under US control. This subsidy helps cushion the effects of a possible strong dollar hurting certain regions of the USA.

If the euro were to become either a hegemonic currency replacing the dollar or a co-hegemonic currency equal in reserve status to the dollar, some of the subsidy the USA gains would be transfered to the EU and help balance out some of the problems of the present heterogeneous economic structure still in place.

It has been said that the euro would add great liquidity to the financial markets in Europe. Governments and companies can now borrow money in euro instead of their local currency, and this allegedly would allow access to many more sources of funds. Other economists consider that the potential strength of Euroland would be in the coherent efforts of a virtual greater super-economy, in which it is now potentially easier to create stronger financial associations, rather than in the mere sum of single liquidities.

A final and possibly decisive effect is on the pricing of oil. Euroland consumes more imported oil than the United States. This would mean that more euros than US dollars would flow into the OPEC nations, except that oil is priced by those nations in US dollars only. There have been frequent discussions at OPEC about pricing oil in euros, which would have various effects, among them, requiring nations to hold stores of euros to buy oil, rather than the US dollars that they hold now. This would be a transfer of a 'float' that presently subsidises the United States to subsidise the European Union instead. Venezuela under Hugo Chávez has been a vocal proponent of this scheme, despite selling most of its own oil to the United States.

The huge deficit structure of the US economy relies heavily on the dollar's hegemonic reserve status as a means of securing US debts and deficits. Without this status, the dollar and the US economy would experience what many Latin American countries experienced during the 1980s. As long as the US dollar was not threatened, the US economy was in no danger of collapse. The individual European currencies offered no threat to the dollar's hegemonic position. In the opinion of some economists, however, the euro does pose a threat and the US economy is in danger of collapse if its deficits continue to rise.

Euro exchange rate

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 worth USD $1.18; by late 2000 it had fallen to below $0.85. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to $0.95. It declined again, finally reaching a low of below $0.84 in July 2001. The currency then began to recover against the U.S. dollar. In the wake of U.S. corporate scandals, the two currencies reached parity on July 15, 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further. There is speculation that this strength relative to the dollar might encourage the use of the euro as an alternative reserve currency. On May 23, 2003, the euro surpassed its initial trading value for the first time as it again hit $1.18, and in February 2004 the euro even climbed above $1.29, the highest exchange rate since its introduction. Part of the euro's strength is thought to be due to more attractive interest rates in Europe than in the United States. The expensive euro has been feared to be hurting European exports, yet no evidence of this has been verified.

The euro's climb from its lows began shortly after it was introduced as a cash currency. In the time between 1999 and 2002, euro-skeptics tried to imply the weak euro was a sign that the euro experiment was doomed to fail. But it can also be said the its weakness in this period was low confidence in a currency that did not exist in "real" form. Once the euro became "real" in the sense of existing in the form of cash, the confidence in the euro rose and the reality that it was here to stay helped increase its value.

Euro symbol

The international three-letter code (according to ISO standard ISO 4217) for the euro is EUR. A special euro currency symbol (€) was also designed. After a public survey had narrowed the original ten proposals down to just two, it was then up to the European Commission to choose the final design. The eventual winner had been designed by Arthur Eisenmenger and was inspired by the Greek letter epsilon (ε), as well as being a stylised version of the letter "E".

The euro is represented in the Unicode character set (code point U+20AC or decimal 8364) as well as in updated versions of the traditional Latin character sets. Western nations should switch from ISO 8859-1 (Latin 1) to ISO 8859-15 (Latin 9) or Unicode in order to represent this character. ISO 8859-16 represents this character also.

The European Commission originally specified the euro character to have exact proportions, not varying from font to font. By this specification, the euro would effectively be a logo, unlike designable characters such as the letters or other currency symbols like the dollar and pound signs. Keeping it to exact measurements would have made it rather broad in comparison to other symbols and digits in most fonts and would sometimes have resulted in layout problems. For these reasons, most type designers have ignored the commission and designed their own variants for each font instead, often based upon the capital letter C in the respective font. The illustration at the top of this article is of the official, invariant symbol.

Economists who helped realise the euro

Economist Robert Mundell is sometimes referred to as the father of the euro.

See also

Banks (eurosystem)

Links to the national central banks:

Banks (European System of Central Banks (ESCB) - non eurozone)

Articles

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