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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 operation of the Eurozone payment systems. The official spelling of the euro according to the ECB, as it appears (in capitals) on the banknotes, is "euro" in the Latin script and "ευρω" in the Greek script. The proposed official spelling by the ECB in the Cyrillic script is "еуро", however the new EU member Bulgaria proposes "евро", the spelling that is currently used in Bulgaria.
Characteristics of the euroImage:Euro coins and banknotes.jpg Euro currency (coins from first issues) Coins and banknotesThe euro is divided into 100 cents (sometimes referred to as eurocents). All euro coins (including the €2 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.
Commemorative coins of various other denominations, not intended for circulation, have been issued. They are legal tender only in the nation which issued them. In addition, members have from time to time replaced the national side of the two euro coin with a commemorative design--as Greece did for the 2004 Summer Olympics. Such coins are legal tender throughout the eurozone. All euro banknotes have a common design for each denomination on both sides. Notes are issued in €500, €200, €100, €50, €20, €10, €5. Some of the higher denominations, such as €500 and €200, are not issued in a few countries, though they remain legal tender throughout the eurozone. The design for each of them has a common theme of European architecture in various artistic periods. The front (or recto) of the note features windows or gateways while the back (or verso) has bridges. Care has been taken so that the architectural examples do not represent any actual existing monument, so as not to induce jealousy and controversy in the choice of which monument should be depicted. Payments clearing, electronic funds transferThe ECB has set up a clearing system, TARGET, for large euro transactions.[4] All intra-Eurozone transfers shall cost the same as a domestic one. This is true for retail payments, although several ECB payment methods can be used. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as if they were domestic. The ECB has not standardized paper-based payment orders, such as cheques; these are still domestic-based. The currency sign €A special euro currency sign (€) 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. The glyph is (according to the European Commission) "a combination of the Greek epsilon, as a sign of the weight of European civilization; an E for Europe; and the parallel lines crossing through standing for the stability of the euro". The European Commission also specified a euro logo with exact proportions and foreground/background colour tones.[5] Although some font designers simply copied the exact shape of this logo as the euro sign in their fonts, most designed their own variants, often based upon the capital letter C in the respective font so that currency signs have the same width as Arabic numerals.[6] Placement of the currency sign varies from nation to nation. There are no official standards on where to place the euro symbol.[7] Generally, people in the euro countries have kept the placement of their former currencies.[citation needed] Another advantage to the final chosen symbol is that it is easily created on a typewriter, by typing a capital 'C', backspacing and overstriking it with the equal ('=') sign. 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. Economists that helped create or contributed to the euro include Robert Mundell, Wim Duisenberg, Robert Tollison, Neil Dowling and Tommaso Padoa-Schioppa. (For macro-economic theory, see below.) 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. Current Eurozone (2007)Image:European union emu map en.png
Future prospects (2008-)Pre-2004 EU membersFrom Greece's participation in 2001 until the EU enlargement in 2004, Denmark, Sweden and the United Kingdom were the only EU member states outside the monetary union. The situation for the three older member states also looks different from that of the newer EU members; all three have no clear roadmap for adopting the euro: Image:Anti.emu.sweden.jpg Swedish anti-euro poster from 2003 by the Green Party's youth organisation. The text translates as "EMU and the solidarity".
Post-2004 EU membersAs of 2007, 11 new EU member states had a currency other than the euro; however, all of these countries are required by their Accession Treaties to join the euro. Some of the following countries have already joined the European Exchange Rate Mechanism, ERM II. They and the others have set themselves the goal to join the euro (EMU III) as follows:
Too high an inflation rate postponed the entry of Lithuania as planned on 1 January 2007. Some of these currencies do not float against the euro, and a subset of those were unilaterally pegged with the euro before joining ERM II. See European Exchange Rate Mechanism, currencies related to the euro, and individual currency articles for more details. Originally, the Czech Republic aimed for entry into the ERM II in 2008 or 2009, but the current government has officially dropped the 2010 target date, saying it will clearly not meet the economic criteria. The new goal is 2012.[20] Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia have already finalised the design for their respective coins' obverse sides. Public opinion on secession from the euroAlthough the failure of the European Constitution to be ratified would have no direct impact on the status of the euro, some debate regarding the euro arose after the negative outcome of the French and Dutch referenda in mid 2005.
More recently, in April 2006, after the Italian elections, the subject once again came up. Again, the EU strongly refuted this, calling the suggestion "impossible". Economics of the euroOptimal currency areasImage:La2-euro.jpg The euro Light Sculpture in Frankfurt Economists typically cite four criteria, often called the optimum currency area (OCA) criteria, to evaluate the value of switching to a single currency. There are three economic criteria (labour and capital mobility, product diversification, and openness) and one political criterion (fiscal transfers). Since establishing a single currency over a region necessitates surrendering the ability to tailor monetary policy to local conditions, these four characteristics measure the ability of the economy to smooth local economic movements in the absence of monetary policy.
So while Europe scores well on some of the measures characterizing an OCA, it has lower labour mobility than the United States and similarly cannot rely on Fiscal federalism to smooth out regional economic disturbances. Transaction costs and risksThe most obvious benefit of adopting a single currency is removing from trade the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. On the consumer side, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g. credit cards, debit cards and cash machine withdrawals). The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals looking to invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. The reduction in risk is particularly important for countries whose currencies have traditionally fluctuated a great deal, particularly the Mediterranean nations. Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Eurozone. Price parityAnother effect of the 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 trigger arbitrage, i.e. speculative trade in a commodity between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. Similarly, price transparency across borders should help consumers find lower cost goods or services. In reality, the effects of the euro over the level of the prices in Europe are disputable. Many citizens cite the strong increase in prices in the years after the introduction of the euro, although numerous empirical studies have failed to find much real evidence of this. [2] It is speculated that the reason for this perception is that the prices of small, everyday items were rounded up significantly. For example, a cup of coffee that once cost two German Mark might now cost €1.50 or even €2.00 - a 50-100% increase. At the same time, a large appliance or rent payment rounded up to the next obvious euro level would be a negligible proportional increase. The fact that the prices people see every day were affected more strongly might explain why so many people perceive the "euro effect" as being significant, while official studies — which look at the breadth of expenditures, in proportion — would downplay it. Macroeconomic stabilityLow levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a highly regressive tax (seigniorage) and theoretically discourages investment, it is generally viewed as undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures. Some countries have successfully contained by establishing largely independent central banks. One such bank was the Bundesbank in Germany; as the European Central Bank is modelled on the Bundesbank, it is independent of the pressures of national governments and has a mandate to keep inflationary pressures low. Member countries join the bank to credibly commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels of expected inflation. The ECB (unlike the Federal Reserve in the United States of America) does not have a second objective to sustain growth and employment. National and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in legacy currency[citation needed]. While increased liquidity may lower the nominal interest rate on the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role. A credible commitment to low levels of inflation and a stable reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate. A new reserve currencyThe 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. 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. The possibility for the euro to become the first international reserve currency in a near future is now widely debated in economics. [3]
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