Euro (EUR)

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This article describes a currency traded on the global foreign exchange market. View articles referencing this currency.

This article is about the currency of the the European Union. For the company with stock ticker EURO, see EuroTrust A/S (EURO).

The Euro is the official currency of 15 countries in the European Union, collectively known as the Eurozone. It is also the sole currency in 9 other countries European countries. Currently, it is the currency with the highest combined value of cash in circulation in the world, and the second most traded currency in the foreign exchange market behind the American dollar. It is denoted with a leading €. For example, €75 is read "Seventy-five Euros".

[edit] Economic History

The Euro traces its beginnings to the The Maastricht Treaty in 1992 in which the EU nations agreed to form a monetary and economic union. In order to participate in the common currency members had to meet certain budgetary (such as capping the budget deficit at 3% of GDP) and economic (e.g. maintaining an inflation rate close to the the EU average) conditions. In addition, member countries required to peg their currencies to each other for a certain period prior to the launch.

Not all EU members were able to adhere to these conditions and the Euro launched as an accounting currency in 1999 with 11 countries. Euro denominated notes and coins started circulating on January 1, 2002.

Currently the Euro is the official currency of fifteen member states of the European Union. The states are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain. They are collectively known as the Eurozone

It is also used in 5 other countries through official agreement. These countries are: Mayotte, Monaco, San Marino, Saint Pierre and Miquelon, and Vatican City.

Finally, 6 other countries have also adopted the Euro but do not have an official agreement with the European Union. These countries are: Akrotiri and Dhekelia, Andorra, Kosovo, Montenegro, Saint Barthélemy, and Saint Martin.

[edit] Euro Membership

Current Euro members are listed here in alphabetical order.

• Austria (1999) Oesterreichische Nationalbank (OeNB)
• Belgium (1999) National Bank of Belgium
• Cyprus (2008) National Bank of Cyprus
• Finland (1999) Bank of Finland
• France (1999) Banque de France
• Germany (1999) Deutsche Bundebank
• Greece (2006) Bank of Greece
• Ireland (1999) Central Bank of Ireland
• Italy (1999) Banca d'Italy
• Luxembourg (1999) Banque de Luxembourg
• Malta (2008) Central Bank of Malta
• Netherlands (1999) De Nederlandsche Bank
• Portugal (1999) Banco de Portugal
• Slovenia (2007) Banka Slovenije
• Spain (1999) Banco de Espana

[edit] Notable EU Exceptions

Several European nations do not use the Euro as their currency, despite membership in the EU. Notable examples include:

• The United Kingdom, which uses the Pound Sterling (£).
• Switzerland, which uses the Swiss Franc (CHF).
• Denmark and Norway, both of which use a national version of the Krone.
• Sweden, which uses the Swedish Krona (SEK).

[edit] Factors affecting the Value of the Euro

The Euro is a floating currency, which means that the value of the euro is not "pegged" to any other currency. Therefore, the value of the Euro is determined by the demand and supply of the currency.

[edit] Central Bank Policy and Interest rates

The supply of Euro is regulated by the European Central Bank (ECB). The ECB is responsible for managing the monetary policy of the Eurozone. The ECB has the exclusive right to set interest rates for the Eurozone. The primary objective of the ECB is "to maintain price stability" within the Eurozone, in other words to keep inflation low. The present target is to keep inflation below 2%, but close to it.^[1]

The ECB does not directly target to control exchange rates of the Euro. However, interest rates affect the demand for a currency. At high interest rates, the currency becomes more valuable as it offers a return on investment for investors. Therefore, demand for the euro, in part, is determined by the relative interest rates in Europe compared to other parts of the developed world.

The fact that the Euro is the currency of 15 different nations means that the national governments cannot manipulate the currency to suit its needs. Unlike Japan, European governments can not devalue the currency to help the export sector. This unique feature of the Euro has helped it become th

[edit] Balance of Trade

[edit] Inflation

Inflation in Europe.^[2]

Inflation is the result of rising prices in an economy over time. In other words, when inflation rate is positive a currency buys less goods than it did in the past.

The sole mandate of the ECB is to maintain inflation near 2%.

[edit] Status as Reserve Currency

The dollar has been the primary reserve currency of the world since World War II.

[edit] Investing in the Euro

An investor can invest in the euro by buying and holding it. Currencies, as an asset class, do not produce any returns by themselves. The currency is only useful if it is invested in another asset (such as equities or bond).

Investors can buy and sell euro futures traded at the Chicago Mercantile Exchange. Futures are better instruments for speculation since they are leveraged and hence are more sensitive to currency movements.

On the other hand, an US investor can buy an European stock ETF -- such as the Vanguard European ETF (VGK). The CurrencyShares Euro Trust (FXE) offers return on euro plus accrued interest. ETF's have the benefit of offering the return on the underlying asset class in addition to currency appreciation.

Finally, a stronger euro helps european imports by making them relatively cheaper and hurts exports by making them more expensive for foreign buyers. An investor could bet on the euro by taking positions in European exporters and in companies that trade heavily with an euro member.

[edit] Companies that benefit from a stronger euro

[edit] Companies that benefit from a weaker euro

• Greek shippers

[edit] Exchange Rates

[edit] U.S. Dollars per Euro

[edit] References

1. ↑ The Powers and Responsibilities of the European Central Bank, European Navigator, Retrieved November 14, 2008
2. ↑ European Central Bank, Retrieved November 11, 2008