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The Euro (EUR) is the single currency of the European Union. The currency was introduced at midnight on January 1 1999, when eleven separate European currencies ceased to exist, and where replaced with the Euro. The Euro is the successor of the European Currency Unit (ECU). The notes and coins for the old currencies, however, continue to be used until new notes and coins are introduced on January 1 2002. The old currencies will continue as subdivisions of the Euro until they cease to be [legal tender]?.

The date on which the national currency will cease to be legal tender varies from member state to member state. The earliest date is in Germany, where the Deutsche Mark will cease to be legal tender on December 31, 2001. The latest is February 28, 2002, by which all national currencies will have ceased to be legal tender in their respective member states. (Note that some of these dates are 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 value 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)
1.95583 German Mark (DEM)
166.386 Spanish Peseta (ESP)
5.94573 Finnish Markka (FIM)
6.55957 French Franc (FRF)
0.787564 Irish Punt (IEP)
1936.27 Italian Lira (ITL)
40.3399 Luxembourg Franc (LUF)
2.20371 Dutch Guilder (NLG)
200.482 Portuguese Escudo (PTE)

The Euro was established by the provisions in the [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 on the size of public debt, and the size of budget deficits. Greece failed to meet these criteria intitially, so it did not join the common currency on January 1 1999. It however was admitted two years later, on January 1 2001, at an exchange rate of:

340.750 Greek Drachmas (GRD)

Denmark and the United Kingdom were granted derogations in protocols to the Treaty on European Union; they are not legally required to join the Euro until their governments decide otherwise. Sweden was not granted a derogation by any protocol; nonetheless the Swedish government has also decided against participation at this stage.

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

The Euro is administered by the [European System of Central Banks]? (ESCB), composed of the European Central Bank (ECB) and the national central banks of the member states participating in the Euro. The ECB (headquatered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB however participate in the printing, minting and distribution of notes and coins, and the operation of the Eurozone payment system.

The rates at which the initial currencies entered the Euro was 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, however, a currency in its own right.) These rates were set by Council Regulation 2866/98 (EC), of December 31 1998.

The procedure used to fix the irrevocable conversion rate between the Greek 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 before hand, in Council Regulation 1478/2000 (EC), of June 19 2000.

Decline in the Euro exchange rate

Since the introduction of the Euro, its exchange rate against other currencies, especially the US Dollar, has declined heavily. At its introduction, the Euro was worth USD 1.19; by late 2000 it had fallen to below USD 0.85. It then began what at the time was thought to be a recovery; and by the beginning of 2001 it had risen to USD 0.95. Since then it has declined again, and as of August 2001 has been hovering for some time around the USD 0.85-0.90 mark.

Most analysts agree that the Euro is undervalued compared to the US Dollar. Many explanations have been put forward to explain this, including: persistent negative market sentiment towards the Euro; better returns on investments in the US, causing capital flight from Europe to the US; increasing privatisation of pensions and superannuation in Europe, resulting in increased foreign investment; and organized crime and tax evaders attempting to dispose of large sums of local currency cash before the changeover. No one is really sure why the Euro is so low. In 2000 most people were expecting the Euro to regain ground against the US Dollar, sooner or later, back to nearer its original value; but the failure of the Euro to do so has made many fear the Euro may stay around its present value for a long time.

Euro symbol

The international three-letter code (according to ISO standard ISO 4217) for the euro is EUR. A special Euro currency symbol has been designed. It is the letter E, but looks like a capital C overwritten with an equals sign (=), see for example http://developer.apple.com/technotes/tn/tn1140.html

Advantages of the Euro

One should note that the euro has added great liquidity? to the financial markets in Europe. It has allowed governments and companies to borrow money in Euros instead of their local currency. This allows many more sources of funds to be borrowed.

[Someone should add more info on how this has allowed European countries/companies to become more multi-national within Europe.]

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Last edited November 23, 2001 6:27 am by Hagedis (diff)