Euro-EUR
The euro is the legal tender of the euro zone area which is comprised of 17 nations out of total 27 member European Union (EU) states. The Institutions of European Union also use this currency. The euro zone, also commonly referred as the currency bloc/monetary union includes the countries Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
Some other European states that are not part of the euro zone such as Andorra, San Marino, Vatican City, Monaco, Kosovo and Montenegro also use euro as the official currency.
It is estimated that euro is daily used by 32 million Europeans. Worldwide, 175 million people, including 150 million people from Africa use currencies that are pegged to the euro.
According to an IMF study which was based on GDP estimates of 2008 and purchasing power parity among the various currencies, shows that the euro zone is the second largest economy of the world
Having in excess of €890 billion in circulation, the euro has the highest total value of banknotes and coins in circulation in the world. Earlier, the U.S. dollar used to be the highest circulated currency of the world.
On 16 December 1995, the name euro was officially adopted. Then on 1 January, 1999, the euro was launched to the global financial markets as an accounting currency. The euro replaced the earlier European Currency Unit (ECU) at a ratio of 1:1.
Subsequently on 1 January 2012, both Euro coins and banknotes started to circulate in countries that adopted the euro as their legal tender. Even though the euro fell soon after its issuance (within 2 months) to US$0.8565, it has traded above the US dollar since the end of 2002, touching its highest level at US$1.6038 in July 2008.
However, since late 2009, the euro has been under tremendous pressure. The euro has felt the heat following the emergence of European sovereign-debt crisis which prompted the authorities to create the European Financial Stability Facility as well as implement dome other budgetary reforms, aimed at stabilizing the currency.
Lately, weighed by widespread speculation, worsening debt crisis in Greece, and deteriorating banking sector in both Spain and Italy, the euro fell below US$1.24 for the first time in almost two years, on April 2012.
Administration
The euro is controlled and managed by the European Central Bank (ECB), located in Frankfurt along with the Europeansystem (a group composed of central bankers from euro zone countries)
Since, the ECB is a de facto central bank of the monetary union; it has the sole power to formulate the monetary policy while the Eurosystem participates in the printing, minting and distribution of notes and coins in all member nations , and the operation of the eurozone payment systems.
After the 1992 Maastricht Treaty was signed by all EU member states, it is obligatory for most EU member states to adopt the euro once they meet certain monetary and budgetary convergence criteria. However, not all EU members have accepted to adopt the euro as their official currency.
While United Kingdom and Denmark negotiated exemptions and ultimately decided not to join the euro zone, Sweden after joining the EU in 1995, turned down the euro following a 2003 referendum. Apart from these three countries, all other nations such as Lithuania and Latvia that have joined the EU since 1993 have pledged to adopt the euro in due course.
The Eurosystem
The fact that not all the EU states have agreed to adopt the euro, the European Systems of Central Banks ( ESCB) could not be considered as the monetary authority of the euro zone.
Accordingly, the “Euro system” -which does not include all national central banks (NCBs) that have not merged with the euro zone – turned into the institution accountable of those responsibilities which in theory had to be administered by the ESCB.
In line with the agreement, the most important function of the Eurosystem is to maintain price stability (in other words control inflation).
Without showing any favoritism against any member state, the Eurosystem is expected to offer support on wide-ranging economic policies in the Community and act in accordance with the principles of an open market economy.
The basic responsibilities of the Eurosystem are same as the ECB’s, which are:
- to identify and implement the monetary policy of the euro-zone;
- to manage foreign exchange operations;
- to judiciously maintain the official foreign reserves of the Member States; and
- To assist on operations related to payment systems.
Furthermore, the Eurosystem guarantees that policies followed by competent authorities are effectively implemented by member nations and various financial institutions.
The Eurosytem constantly oversees credit institutions’ functioning, ensuring the stability of the financial system.
The ECB also offers consultative role to various national authorities on matters which come under its field of expertise, especially where Community or national legislation is required.
Banknotes Issuance and Central Banks
Issuing modalities for banknotes
From 1 January 2002, the European Central bank and the national central banks (NCBs) have been jointly issuing euro banknotes. Euro banknotes do not illustrate about which central bank issued them.
Eurosystem NCBs are required to recognize euro banknotes that are under circulation but issued by other Eurosystem members and these banknotes are not repatriated. In practice, the ECB’s banknotes are put into circulation by the NCBs, thus incurring matching liabilities vis-à-vis the ECB.
These liabilities carry interest at the main refinancing rate of the ECB. While the ECB issues 8% of the banknotes, the remaining 92% of the euro banknotes are issued by the NCBs in proportion to their respective shares in the capital key of the ECB,calculated using national share of European Union population and national share of European Union GDP, evenly weighted.
Features of Banknotes and Coins
The euro can be subdivided in 100 cents (also known as euro cents, typically when distinguishing them from different currencies, and referred to as such on the common side of all cent coins). In Community legislative acts, no “s” is used in plural forms of both euro and cents, although normal English usage does require adding that alphabet. Nevertheless, normal English plurals are used including many local variations such as ‘centime’ in France or centimos in Spain.
All the coins under circulation have a common side illustrating the denomination or value, and a map in the backdrop. As euro zone is the multilingual area, the Latin alphabet version of euro is used instead less common Greek or Cyrillic and Arabic numerals. (Some other text is used on national sides in national languages, but other text on the common side is avoided).
Barring the denominations of 1-, 2- and 5-cent coins, the map on the euro only shows the 15 member states that opted to join the monetary union since its inception.
From the start of 2007 or 2008 (depending on the country) the old map depicted on the coin is replaced by a map of Europe –which also shows countries outside the European Union like Norway.
However, 1-, 2- and 5-cents, have continued to depict the old design, illustrating a geographical map of Europe with the 15 member states of 2002 raised a bit above the rest of the map.
Luc Luycx designed all the common sides. The coins also include national sides, carrying an image specifically selected by the member state that issued the coin. Euro coins issued by any member state may be freely circulated in any nation which has adopted the euro.
The denominations of coins include: €2, €1, 50c, 20c, 10c, 5c, 2c, and 1c denominations. However, 1c and 2c are no more commonly used. Accordingly, in a move aimed at avoiding the use of the two smallest coins, some cash transactions are rounded to the nearest five cents in the Netherlands (by voluntary agreement) and in Finland (by law).
However, the Commission is against these unilateral abandoning practices. Besides coins, certain shops also refuse to accept high value euro notes.
Commemorative coins having €2 face value have been issued with some modifications to the design of the national side of the coin. These comprise both commonly issued coins, such as the €2 which is a commemorative coin depicting fiftieth anniversary of the signing of the Treaty of Rome, and nationally issued coins, such as the coin to commemorate the 2004 Summer Olympics issued by Greece.
Throughout the euro zone, these coins are accepted as the legal tender. In addition, collector’s coins with numerous other denominations have been issued, but these are not meant for general circulation, and they are legal tender only within the geographical boundary of the member state that issued them.
The blueprint for the euro banknotes has common designs on both sides. The design was drawn by a noted Austrian designer Robert Kalina. The denominations in banknotes include: €500, €200, €100, €50, €20, €10, €5. Each banknote shows a distinct color and is dedicated to a creative epoch of European architecture. The front side of the note shows windows or gateways while the back includes bridges, signifying links between countries and with the future.
Although the designs were intended to be devoid of any identifiable characteristics, the initial designs by Robert Kalina portrayed particular bridges, which included the Rialto and the Pont de Neuilly, and were later designed in more generic way; the concluding designs still bear very close resemblance to their specific prototypes; as a result they are not really generic. The monuments appeared very similar enough to different national monuments to gratify everyone.
Payments clearing, electronic funds transfer
Within the EU, any amount of Capital can be transferred from one member state to another. Accordingly, all intra-EU transfers in euro are considered as domestic transactions and only carry costs that corresponds domestic transfer costs.
This facility is applicable in all member states of the EU. Even credit/debit card charging and ATM withdrawals within the euro zone are considered as local transactions. However, paper-based payment orders, like pay-orders /checks, have not been standardized, hence these are still domestic-based. The ECB has introduced a clearing system, called as TARGET, for large euro transactions.
Currency Sign
The currency sign for the euro was decided after many deliberations. A special euro currency sign (€) was chosen after a public survey which had narrowed the original ten proposals down to two.
Subsequently, The European Commission selected the design made by a Belgian graphic designer, Alain Billiet. Nevertheless, the actual story with regard to the design of euro sign is disputed by Arthur Eisenmenger, a former chief graphic designer for the EEC. Eisenmenger claims that he was the one who have created it as a standard symbol of Europe.
The idea for the € symbol itself originated from the Greek epsilon (Є)– a reference to the cradle of European civilization – and the initial letter of the word Europe, traversed by two parallel lines to ‘certify’ the firmness and stability of the euro.
European Commission
The European Commission also laid down lots of emphasis on euro logo. The commission specified exact proportions and foreground/background color tones. While the Commission wanted the logo to be a prescribed glyph shape, font designers had some other ideas. They (font designers) were inclined on their own variants.
Typewriters requiring euro sign can show it by typing a capital ‘C’, backspacing and over -striking it with the equal (‘=’) sign.
Placement of the currency sign relative to the numeric amount varies from nation to nation, but for texts in English the symbol (and the ISO -standard “EUR”) should come first before the amount.
Introduction of the euro
The euro was introduced by the provisions in the 1992 Maastricht Treaty. In order to adopt this currency in their respective countries, member states are meant to fulfill 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 ( however, both of which these requirements have been widely flouted after introduction), low inflation, and interest rates near to an EU average. According to the Maastricht Treaty, the United Kingdom and Denmark were granted special exemtions.
Economists who helped forming or contributed to the euro consist of Fred Arditti, Neil Dowling, Wim Duisenberg, Robert Mundell, Tommaso Padoa-Schioppa and Robert Tollison
The name “euro” was formally announced in Madrid on 16 December 1995. The credit for insisting this name (euro) goes to Belgian EsperantistGermain Pirlot, a former teacher of French and history. He sent a letter to then President of the European Commission, Jacques Santer, proposing the name “euro” on 4 August 1995.
Due to differences in national conventions for rounding and important digits, every single conversion between the national currencies had to be carried out using a method of triangulation via the euro.
The rates were decided by the Council of the European Union, following a recommendation from the European Commission- which was in turn based on the market rates on 31 December 1998. They were set so that one European Currency Unit (ECU) would be equivalent to one euro. The European Currency Unit was an accounting unit employed by the EU, based on the currencies of the member states; it was not a currency in its own right.
Earlier, the Council could not be set the rate because the ECU depended on the closing exchange rate of the non-euro currencies (primarily the pound sterling) that day.
The method used to decide the unalterable conversion rate between the Greek drachma and the euro was dissimilar, given that the euro by then was already two years old. Whereas the conversion rates for the first eleven currencies were determined only few hours before the euro was launched, the conversion rate for the Greek drachma was determined several months in advance.
The currency was issued in non-physical form, that is, through traveler’s checks, electronic transfers, banking, etc. at midnight on 1 January 1999, when the national currencies of countries adopting the euro, ceased to subsist independently.
Their exchange rates were determined at fixed rates against each other. The euro as a result became the successor to the European Currency Unit (ECU). The notes and coins for the previous currencies, nevertheless, continued to be used as legal tender until new euro notes and coins were issued on 1 January 2002.
The transition phase during which the older currencies’ notes and coins were exchanged for those of the euro lasted around two months, until 28 February 2002. However, the official date on which the national currencies completely stopped circulating in the financial system, varied from member state to member state.
Germany was the first country where former currency (mark) ceased from the monetary system even though it took 2 months for a changeover. Mark officially exited its legal tender status on 31 December 2001. Even after the old currencies ceased to be legal tender, they continued to be acknowledged by national central banks for periods ranging from quite a few years to everlastingly (the latter in Austria, Germany, Ireland and Spain).
The earliest coins recorded to turn into non-convertible -coins were the Portuguese escudos, which ceased to have monetary value after 31 December 2002, while banknotes remain exchangeable until 2022.
Direct and Indirect Usage
The euro is the sole legal tender of 17 member states of the EU, forming the euro zone. At last estimates, some 326 million people were part of these 17 countries.
With all but two of the remaining EU members expected to merge, together with future members of the EU, the enlargement of the euro zone is set to go on. Outside the EU, the euro is also the legal tender of Montenegro and Kosovo and several European micro states such as Andorra, Monaco, San Marino and the Vatican City alongside three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia). Currently, over 3 million people directly use the euro as their official currency.
Euro is also gaining significant acceptability as an international trading currency in markets such as Cuba, North Korea and Syria. There are also several currencies pegged to the euro. In 2009 Zimbabwe stopped using its local currency Zimbabwean dollar) and used major currencies instead, including the euro and the United States dollar.
Use as reserve currency
Since its acceptance as the legal tender, the euro has been the second most extensively held international reserve currency following the US dollar. The share of the euro as a reserve currency has climbed up from 18% in 1999 to 27% in 2008.
On the other hand, during this period the share of the US dollar dropped from 71% to 64% and the Yen’s share fell from 6.4% to 3.3%. The euro inherited and built on the position of the Deutsche Mark as the second most widely held reserve currency. While the euro remains underweight as a reserve currency in industrialized economies, its stays overweight in emerging and developing economies: as data provided by the International Monetary Fund shows (2008).
The total amount of euro kept as a reserve in the world at the end of 2008 stood at $1.1 trillion or €850 billion, with a share of 22% of all currency reserves in highly developed economies, but a total of 31% of all currency reserves in emerging and developing economies.
The likelihood of the euro turning out to be the first international reserve currency is now widely debated among economists. Former Federal Reserve Chairman Alan Greenspan pointed out on September 2007 that it is “absolutely conceivable that the euro will replace the US dollar as reserve currency, or will be traded as an equally important reserve currency”.
However, contrary to Greenspan’s 2007 assessment, the share of the euro’s expansion in worldwide currency reserve basket has slowed significantly since 2007 and since the beginning of the worldwide credit crunch resulting in recession and subsequent surfacing of European sovereign-debt crisis from 2009/10.
Currencies pegged to euro
There are 23 countries and territories that are not the member states of the European Union but have their currencies directly pegged to the euro. 14 countries among them are in mainland Africa. Some of the currencies pegged to euro include: Moroccan dirham, two African island countries’ Comorian franc and Cape Verdean escudo, three French Pacific territories using CFP franc and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, Sao Tome and Príncipe signed an accord with Portugal which will ultimately tie its currency to the euro.
Barring Bosnia (which pegged its currency against the Deutsche Mark) and Cape Verde (formerly pegged to the Portuguese escudo) all of these non-EU countries had a currency pegged to the French Franc before pegging their currencies to the euro.
Pegging a country’s currency to a widely traded currency is regarded as a safety measure, particularly for currencies of areas with unstable economies, as the euro is viewed as a stable currency, prevents sharp jump in inflation and encourages foreign investment owing to its stability.
Also in the EU, several currencies have pegged their currencies to the euro, in most instances as a precondition to joining the euroz one. The Bulgarian lev was earlier pegged to the Deutsche Mark; other EU member states have a direct peg due to ERM II: which includes the Danish krone, the Lithuanian litas and the Latvian lats.
In numerical terms, over 150 million people in Africa use a currency pegged to the euro, and 25 million people outside the euro zone in Europe while another 500,000 people on Pacific islands.
Economics
Optimal currency area
In the world of finance and economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which economic efficiency is maximized in the entire region trough sharing a single currency. There are two models, both proposed by noted economist, Robert Mundell: the stationary expectations model and the international risk sharing model.
Mundell himself favors the international risk sharing model and therefore argues in the favor of the euro. However, even before the adoption of the single currency, there were looming fears over diverging economies. Before the Late-2000s recession the probability of a state exiting the euro, or the chances that the whole zone would disintegrate, were considered extremely slim.
Nevertheless, the Greek sovereign -debt crisis drew sharp criticism from euro-pessimistic and former British foreign secretary Jack Straw claiming the Euro zone could not last in its current form.
The root cause of the euro zone crisis lies in the rules that were set up when the monetary union was created. John Lanchester, writing for The New Yorker explains sums it up by saying:
“The guiding principle of the currency, which opened for business in 1999, was supposed to be a set of rules to limit a country’s annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row.” (by 2012, Spain, Portugal, Greece, Netherlands, France all crossed the prescribed the debt to GDP limit)
Transaction costs and Risks
The most apparent benefit of adopting a common currency is to eliminate the cost of exchanging currency, thereby allowing businesses and individuals to consummate earlier unprofitable trades. For consumers, banks in the euro zone must charge the equal fees for intra-member cross-border transactions as in purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals).
The absence of different currencies also negates exchange rate risks. The risk of unexpected exchange rate movement has always put an additional risk or uncertainty for companies or individuals that invest or trade outside their own monetary zones.
Companies that hedge against this risk will no more require paying this additional cost. This is especially important for countries whose currencies had usually fluctuated a great deal, for instance, the Mediterranean economies.
Common currency has also increased the liquidity and flexibility in the financial markets- which was not the case in the past. The lowering of cross-border transaction costs will allow larger banking firms to offer a wider range of banking services that can compete across and beyond the euro zone.
Price parity
Another positive impact stemming from the adoption of 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 cause arbitrage, i.e. speculative trade in a commodity across borders simply to exploit the price differential. Consequently, prices on commonly traded goods are likely to converge, resulting in inflation in some regions and deflation in others during the transition. Some proof of this price differential has been observed in specific euro zone markets.
Macroeconomic stability
Low levels of inflation are the characteristic of stable and well governed economies having sound momentary policies. Since a high level of inflation acts as a tax and in theory discourages investment, it is universally viewed as undesirable. In spite of the shortcoming, many countries have been incapable or unwilling to deal with severe inflationary pressures.
Some countries though have successfully managed the rate of inflation by establishing largely independent central banks. One such bank was Germany’s Bundesbank; the European Central Bank is modeled on the Bundesbank, it is independent of the interferences of national governments and has an authorization to keep inflation low.
Member countries that are part of the euro hope to prosper in the macroeconomic stability associated with low levels of inflation. The ECB (unlike the Federal Reserve in the United States of America) does not have a second objective to maintain growth and employment.
Many sovereign and corporate bonds denominated in euro are invariably more liquid and carry lower interest rates (yields) than was traditionally the case when denominated in national currencies.
Even as increased liquidity may lower the nominal interest rate on the bond, denominating the bond in a currency with low levels of inflation unquestionably plays a much bigger role. A sound macro-economic management, committed to low levels of inflation alongside stable debt to GDP ratio reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, making possible to issue debt at a lower nominal interest rate.
Trade
A 2009 study shows that since the introduction of the euro, trade has increased within the euro zone by 5% to 10%,even though one study suggesting an increase of only 3%while another study put the growth rate at between 9 and 14%. However, a meta-analysis of all available studies points out that the dominance of positive estimates is caused by publication bias and that the fundamental affect in trade may be negligible.
Investment
Physical investment seems to have soared by 5% in the euro zone owing to the introduction of common currency. Concerning the foreign direct investment, a study found that the intra-euro zone FDI stocks have rose by about 20% within the first four years of the EMU.
With regard to the effect on corporate investment, there is validation that the adoption of the euro has resulted in an increase in investment rates and that it has made it simpler for firms to access financing in Europe. The euro has particularly stimulated investment in companies that come from countries that had weak currencies in the past. One study points out that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that earlier had a weak currency.
Inflation
Following the introduction of the euro, an extensive debate has emerged on possible rise in the level of inflation. In the short term, there was a common feeling in the population of the euro zone that the adoption of the euro had led to inflation; however, this notion was not established by general indices of inflation and other studies.
A study of this paradox, pointed out that this was owing to an asymmetric effect of the introduction of the euro on prices: while it had no impact on most goods, it had an inflationary effect on cheap goods which have seen their price soar after the adoption of the euro. The study observed that consumers based their beliefs on inflation of those cheap goods which are regularly purchased.
It has also been thought that the gains in prices of goods may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so.
Exchange rate risk
One of the advantages of the implementation of a common currency is the cutback of the risk associated with changes in currency exchange rates. It has been observed that the introduction of the euro created considerable reductions in market risk exposures for nonfinancial firms both in and outside of Europe. These significant reductions in the market risk were mainly found in firms domiciled in the euro zone and in non-Euro firms with a high proportion of foreign sales or assets in Europe.
Financial integration
The adoption of the euro seems to have had a very positive effect on European financial integration. According to one study on this matter, the introduction of the euro has significantly remodeled the European financial system, particularly with respect to the securities markets. Nevertheless, , the real and policy barriers to integration in the retail and corporate banking sectors stay significant large, even as the wholesale end of banking has been largely integrated.
Particularly, the euro has consistently reduced the cost of trade in bonds, equity, and banking assets within the euro zone. Concerning the entire global market, there is substantiation that the introduction of the euro has encouraged integration in terms of investment in bond portfolios, with euro zone countries lending and borrowing at an increased rate between each other than with other countries.
Impact on Interest Rates
The introduction of the euro has brought down the interest rates of several members countries, in particular those that had historically weak currency. As a result, the market value of firms from countries which earlier had a unstable currency has increased drastically.
The countries where interest rates dropped the most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy. The consequence of such low interest rates made it possible for banks within the countries borrow huge amount of money ( exceeding borrowing resulting in high spending , budget deficit crossing 3% of GDP which was initially imposed on the euro zone by ECB) and increase the levels of privately held consumer debt.
After the Late-2000s financial crisis, governments in these countries felt it very imperative to bail out or nationalize their privately held banks in order to avert systemic failure of the banking system.
This further exacerbated the situation as already huge levels of public debt reached to a level that market participants began to deem unsustainable, resulting in soaring of government bond interest rates laying the foundation for the ongoing European sovereign-debt crisis.
Price convergence
The validation on the convergence of prices in the euro zone with the adoption of the euro is mixed. Several studies failed to identify any evidence of convergence following the introduction of the euro after a period of convergence in the early 1990s. Other studies have found evidence of price convergence, particularly for cars. A possible cause for the divergence between the different studies is that the processes of convergence may not have been consistent, slowing down significantly between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009).
Tourism
A study points out that the adoption of the euro has had a fruitful effect on the amount of tourist travel within the EMU, with a tourism growth of 6.5%
European Debt Crisis
Since the beginning of the US financial crisis in 2008, fears of a sovereign debt crisis increased among fiscally conservative investors concerning some European states, with the situation becoming very tense in early 2010. These concerns were mainly on euro zone members such as Greece Ireland and Portugal and also some EU countries outside the area.
Iceland, the country which felt the maximum brunt following crisis in 2008, when its entire international banking system collapsed, has emerged less effected by the sovereign-debt crisis as the government was unable to bail the banks out.
In the EU, particularly, in countries where sovereign debts have reached at unsustainable levels, due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most specifically Germany.
To be eligible to enter the euro zone, the countries had to satisfy certain convergence criteria, however the meaningfulness of such criteria was ebbed by the fact they have not been applied to different countries with the same level of discipline.
In 2011, the Economist Intelligence Unit , pointed out that “[I]f the [euro area] is treated as a single entity, its [economic and fiscal] position looks no worse and in some respects, rather better than that of the US or the UK” and the budget deficit for the euro area as a whole is much lower and the euro area’s government debt/GDP ratio of 86% in 2010 was about the same level as that of the US. “Moreover, private-sector indebtedness across the euro area as a whole is markedly lower than in the highly leveraged Anglo-Saxon economies.” The authors conclude that the crisis “is as much political as economic” and the result of the fact that the euro area lacks the support of “institutional paraphernalia (and mutual bonds of solidarity) of a state”.
The crisis turned from bad to worse with S&P downgrading 9 euro-area countries, including France, and then downgrading the entire EFSF fund.
In May 2012, socialist Francois Hollande was elected as president of France and a month later the French socialist legislative position was strengthened, while German Chancellor Angela Merkel has appeared to be struggling and been badly let down by her advisers in recent months”, Marsh David, a commentator of business journal Marketwatch noted.
The same commentary also included, “serious discord between French and German monetary decision-makers was [comparable to that of] … 1992-93, at the height of the crisis over the European Monetary System, the forerunner to EMU” (European Monetary Union). “[H]hitherto relatively dormant signs of euro skepticism in German public opinion and throughout industry have been multiplying in recent months, making Hollande’s proposals increasingly unpalatable to a broad swath of German opinion. Although considerable controversy will continue to swirl over Greece and Spain, the real battle lines over the future of the euro will be drawn up between Germany and France.”
Exchange Rates
Flexible exchange rates
The ECB is more focused on interest rates rather than exchange rates and in most cases does not intervene on the foreign exchange rate markets, because of the implications of the Mundell–Fleming model. This model says that a central bank cannot maintain interest rate and exchange rate targets simultaneously, (the only exception being central banks applying capital controls) because increasing the money supply results in a depreciation of the currency.
After the implementation of the Single European Act, the EU has liberalized its capital markets, and since the ECB has chosen monetary autonomy, the exchange-rate regime of the euro is flexible, or floating.
Against other major currencies
The euro is one of the most favored reserve currencies along with the US dollar, Japanese yen, Pound sterling and Swiss franc and Australian dollar.
Since it was introduced in 4 January 1999, its exchange rate against the other major currencies weakened, reaching its lowest level in 2000 (25 Oct vs the US Dollar, 26 Oct vs Japanese Yen, 3 May vs Pound Sterling).
However, the common currency shoot up and its exchange rate touched historical highest point in 2008 (15 July vs US Dollar, 23 July vs Japanese Yen, 29 Dec vs Pound Sterling).
Then, with the outbreak of the global financial crisis the euro initially fell, only to recover later. In May 2012, amid heightening debt crisis in the euro zone and worsening baking sector health in Spain, the euro fell to almost 24 month low against the U.S. dollar.
Notwithstanding pressure due to the European sovereign-debt crisis, the euro has remained more or less stable. Back in November 2011, the euro’s exchange rate index – measured against basket of major traded currencies – stood almost two percent higher on the year, just about at the same level as it was before the crisis kicked off in 2007.
Language Issues
The prescribed titles of the currency are euro for the major unit and cent for the minor (one hundredth) unit and for official use in most euro zone languages; according to the ECB, all languages should use the same spelling for the nominative singular.
This may challenge normal rules for word formation in some languages; e.g., those languages where there is no eu diphthong. Bulgaria has negotiated an exemption; euro in the Cyrillic alphabet is spelled as eвро (evro) and not eуро (euro) in all official documents.
Official practice for English-language EU legislation is to use the words euro and cent as both singular and plural, even though the European Commission’s Directorate-General for Translation states that the plural forms euros and cents should be used in English.