8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 1/20

The international role of the euro: trends, advantages and risks

Speech presented by Christian Noyer, Vice-President of the European Central Bank, before theMonetary Commission of the European League for Economic Co-operation, Kronberg, 26November 1999

Introduction

First of all, I should like to thank the Monetary Commission of the European League forEconomic Co-operation for inviting me to address such a distinguished audience and to shedsome light on trends, advantages and risks, or rather challenges, with respect to the internationalrole of the euro.

Economic and Monetary Union (EMU) marks a historic step in the European integration processas sovereign states have replaced their national currencies with a common currency andtransferred their monetary policy competencies to a newly established supranational institution.

European integration, in the monetary sphere as well as in a number of other fields, is a processthat has been under way for several decades now and will continue well into the future.

EMU and the single monetary policy in the euro area are completing the single market for goods,services, people and capital in Europe, with a view to enhancing the welfare of citizens withinthe European Union. Moreover, the introduction of the euro and its prospectively increasinginternational role is likely to have far-reaching consequences for the world economy and theinternational monetary system. Against this background, the ECB shares with other policy-makers in Europe a particular responsibility in setting the right conditions for sustainable andnon-inflationary growth in the euro area so as to contribute to long-term economic welfare of theworld economy.

Today, I shall first concentrate on a few trends of the euro as an international currency, eventhough available statistical evidence only allows preliminary conclusions. Then, I shall discussthe main factors that may influence the international dimension of the euro in the future. Finally,I will turn to the consequences, in terms of advantages and possible challenges, that a greater useof the euro by international agents might bring about, both for the euro area itself and in theinternational context. As a general remark, it must be emphasised that the Eurosystem is taking aneutral stance regarding the international role of its currency. This means that we neither hindernor actively promote the international use of the euro, leaving future developments to bedetermined primarily by market forces.

1. The euro as an international currencyBy definition, a currency acquires an international dimension to the extent that private economicagents and official institutions use it outside its own jurisdiction. As in the domestic framework,in the international context economic agents need an instrument which fulfils the three basicfunctions of money, namely that of a unit of account, a medium of exchange and a store of value.Therefore, a currency can be characterised as international if it is used, first, for pricing goodsand services in international trade and commodity markets; second, as a vehicle for commercialand financial transactions in the trading of goods or of currencies in the foreign exchange; and

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 2/20

third, as a store of value for investment and financing purposes. There are even extreme cases,for example hyperinflation, where domestic economic agents may completely lose confidence inthe currency issued in the jurisdiction in which they operate and resort instead to an internationalcurrency to perform the internal functions of money.

Along the same lines, an international currency can be used as a reference in the official sectorfor pegging the domestic currency, as a tool for foreign exchange intervention purposes and as aninstrument for holding official reserves.

Even though all of the uses I have just mentioned are in part interdependent, this does notnecessarily imply that the internationalisation of the euro will proceed at the same pace in all itsdifferent functions. Two main conditions are necessary for a currency to acquire an internationalstatus: low risk and large size. While the euro has the potential to meet these two conditions,network externalities and economies of scale tend to create inertia underpinning the currentpredominance of the US dollar. These effects, linked to the size factor, are greater for the unit of account and the medium of exchange functions of money than for its function of a store of value.

Instead, for this function, the risk factor actually encourages diversification and thereforeprovides scope for the euro to grow more rapidly as an international currency.

On the basis of available information, it has turned out that the euro is today the second mostwidely used currency internationally, after the US dollar and ahead of the Japanese yen. This isin part a reflection of the significant international role already played in the past by some of theeuro's legacy currencies, primarily the Deutsche Mark. It is also related to the economic andfinancial weight of the euro area in the world economy. Euro area GDP amounts to almost EUR5,800 billion, representing over 15% of world GDP once differences in price levels acrosscountries are taken into account. The United States, with a GDP of EUR 7,600 billion, accountfor close to 21% of the world GDP. The GDP of Japan, the third largest economy in the world, is

much smaller, at EUR 3,400 billion and a share of 7% in world GDP. The size of financialmarkets reflects the same relative positions, even though - in this case - the fact must be borne inmind that the structure of the financial system of the euro area differs from that in the UnitedStates. Thus, the stock market capitalisation of the euro area amounted to 63% of GDP at the endof 1998, far below the level prevailing in the United States at 155% of GDP. On the other hand,the higher level of domestic credit, 130% of GDP in the euro area, compared with 81% of GDPin the United States, indicates that bank financing is more important in the former economic areathan in the latter.

Until now, international market participants seem to have received the euro quite well after itslaunch at the beginning of this year, even though it might be too early to come to a meaningfulassessment. In particular, it is difficult to judge the extent to which one-off factors, such as thepostponement of issues after the launch of the euro or the desire to establish benchmark status,contributed to the strong rise of the euro in international bond financing.

However, in the first three quarters of this year, the share of euro-denominated announced issuesof international debt securities and money market instruments has been consistently higher thanthat of the euro's legacy currencies in the same period of 1998, as these shares amounted to 36%and 24%, respectively.

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 3/20

The shares of the three key currencies in terms of amounts outstanding are relatively lessaffected by recent developments even though the nature of this indicator is less forward-looking.At the end of September 1999, 46% of all outstanding international short and long-termsecurities were denominated in US dollar, 29% in euro and 10% in yen.

Data for international banking statistics are consistent with this ranking. At the end of June thisyear, cross-border bank lending extended by reporting banks from industrialised countries weredenominated as follows: 42% in US dollar, 35% in euro and 10% in yen. These figures, however,are not net of intra-euro area positions that can no longer be regarded as cross-bordertransactions.

In the foreign exchange markets, the last comprehensive survey on turnovers was carried out bythe Bank for International Settlements (BIS) in the spring of 1998, i.e. before the introduction of the euro. Available information seems to indicate that, in line with a contraction of foreignexchange market turnover, trading volumes in euro against the US dollar are lower than formeractivity involving the euro's legacy currencies.

Only very limited evidence is available on the use of the euro for international commoditypricing and trade invoicing. In the past, the euro's legacy currencies were not as widely used intrade invoicing as the US dollar. In 1992, 28% of world trade was invoiced in the main euro areacurrencies, compared with 48% in US dollar, which was a much larger share than that of theUnited States' exports in international trade, which amounted to only 16% last year. The USdollar is also predominant in use as a quotation currency and inertia effects will contribute tomaintaining its status in the future. However, the size of the euro area financial market and theweight of the euro area in international trade flows, given that 20% of all world exportsoriginated in the euro area in 1998, may bring about over time a greater weight of the Europeancurrency in trade invoicing patterns.

Turning to the official sector, two pieces of information are worth mentioning.

The first is related to the use of the euro as a reference currency in pegging arrangements or inthe management of the exchange rate by non-euro area countries. Apart from the exchange ratemechanism ERM II, in which Denmark and Greece currently participate, a substantial number of countries outside the EU have unilaterally adopted the euro, or one of its legacy currencies, as areference currency in a formal or informal way. Some countries, such as Bosnia-Herzegovina,Bulgaria and Estonia, have established currency boards. Others maintain pegging arrangementsto the euro - as in the case of Cyprus, the Republic of Macedonia and as many as 16 Africanstates, most of which belonging to the CFA zone - or to currency baskets in which the euro playsa predominant role, as in the case of Hungary, Iceland, Poland and Turkey. Some countries, suchas the Czech Republic, the Slovak Republic, Slovenia and Romania, have informally linked theexchange rates of their currencies to the euro.

In addition to its role as a reference currency, the euro is held for reserve management purposesby monetary authorities outside the euro area. The latest available data published by the IMF inits annual report provide an indication of the share of the euro in worldwide official reserves atthe end of 1998, just before its formal introduction. At that time, of the total worldwide official

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 4/20

reserves for which a currency breakdown is available (SDR 928 billion), 17% were held in theeuro legacy currencies, compared with a share of 71% for the US dollar and 6% for the yen.

2. Factors affecting the future international role of the euro

The international role of the euro is likely to evolve gradually in the future. Even the US dollar

required a very lengthy process to gain its present status, which took several decades and wasfully completed only in the 1950s. Growing importance of the euro as an international currencycould develop differently as EMU represents a one-off regime shift and as the emergence of aglobal financial market could speed up the internationalisation of the euro.

A first prerequisite for a significant use of the euro by foreign agents is confidence in thestability of its purchasing power in the long run. This is the primary objective of the Eurosystem.In this respect, the value of the euro is based on domestic price stability and on the medium-termorientation of the Eurosystem's monetary policy.

Other factors will also play a role.

One important aspect is the possible future enlargement of the euro area. Four EU countrieshave, for different reasons, not yet adopted the euro. Without elaborating on that, let me simplystate that I am confident that they may join in the coming years. If and when this happens, theeconomic and financial size of the euro area would be further enhanced, providing new impetusto the international role of the euro.

A greater challenge is the potential accession of new countries to the European Union.Negotiations are currently being conducted with six countries. Negotiations with another sixcandidates will start soon. When joining the EU, the new Member States will have to complywith all the requirements set out in the acquis communautaire which relate to Economic and

Monetary Union (EMU). Therefore, following their accession to the EU, the new Member Stateswill also - in a second step - become members of ERM II and will - in a third step, if and whenthe Maastricht convergence criteria are met - adopt the euro. The accession process entails that,over time, the exchange rate and monetary policies of candidate countries will becomeincreasingly focused on the euro with implications for its international use.

A second factor relates to the euro area financial market. The acceptance and use of the euro byforeign agents are to a large extent determined by the efficiency and integration of the euro areamoney and capital markets. In this regard, progress has been made, especially with regard tothose sectors of the financial system which are used as the primary channels for the operationand transmission of the single monetary policy. Thus, thanks to the TARGET system, money

markets are now close to perfect integration, given that the spreads amongst euro area countriesis extremely low and reflect different credit standings of counterparties rather than marketsegmentation.

In clearing, settlement and trading systems for securities, integration is not quite as complete asin money markets, but a process is underway to create an euro area-wide financial infrastructureby linking existing national systems. In government bond markets, segmentation may not beeliminated completely since, as you know, each Member State remains responsible for its own

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 5/20

fiscal and public debt management policy. Therefore, public bonds in the euro area will continueto be characterised by yield spreads which reflect mainly the differences in the credit standing of sovereign national issuers and in market liquidity conditions.

However, the ongoing integration of financial markets in the euro area as well as increasing

competition amongst intermediaries are likely to bring about greater liquidity, lower transactioncosts and the development of a wider array of financial products. As this process develops, theinternational use of the euro is likely also to benefit from it.

I would like to mention a last aspect of the internationalisation process of the euro. This refers tothe possibility that the large size of the euro area as well as its lower trade openness, as comparedwith the participating Member States, might contribute to reducing the vulnerability of itseconomy and financial markets to possible external shocks, making euro area developments lesscorrelated with trends prevailing abroad. Against this background, euro-denominated assetswould provide international investors with an opportunity to diversify their portfolios, enhancingthe risk-return profile thanks to the pooling of not closely correlated assets.

The development of the euro as an international currency is not likely to be a steady process. Thepossible increase in the international use of the euro may not be rapid in early years until acritical threshold is reached attracting more and more international agents. Besides, the euro isprobably going to develop faster as an international store of value than as an internationaltransaction and pricing instrument. Furthermore, the reaction of different international investorsto the introduction of a new currency might develop at different paces. In particular, this mighthold true of private vis-à-vis official investors: the former are usually inclined to pursue moredynamic investment strategies than is customary for central banks, whose investment behaviouris more conservative. Therefore, the evolution of the euro as an official reserve currency is notlikely to be as rapid as its use by the private sector, where data on international debt security

issues indicate a swift increase in the use of the euro as an investment and financing currency.

Let me now briefly turn to the possible impact that the internationalisation of the euro mighthave in areas of relevance to the Eurosystem.

3. Advantages and challenges of the international role of the euro

A greater international use of the euro both has advantages and poses possible challenges.

Concerning the positive repercussions for the euro area economy and financial markets, I shouldonly mention that an increased use of the euro by international market participants is bound toadd breadth and efficiency to the euro area financial markets. Higher trading volumes imply

increased liquidity, which helps to enhance the efficiency of the market in terms of both lowertransaction costs and asset price developments which are better aligned to fundamentals and newinformation.

However, more than a source of favourable developments, I take the internationalisation of theeuro primarily as anex-post sign of the progress made in creating a large and well-functioningfinancial market. As a matter of fact, international agents will increasingly resort to the euro onlyif the supporting financial infrastructure and capital markets are sufficiently integrated and

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 6/20

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 7/20

player to take up their respective responsibilities, the euro will - over time - contribute tofacilitating the process of international co-operation.

Conclusions

The euro acquired the status of an international currency from the time of its introduction as a

result both of the characteristics of some of its legacy currencies and of the large size of the euroarea economy and financial markets.

How and to what extent the international use of the euro will evolve in the future remains rathermore open. An increasing international role of the euro in the years to come can certainly beexpected, even though such a process will take time and will not affect the main internationaluses of the euro to the same extent.

The internationalisation of the euro will to a large extent depend on the creation of a large,unified and efficient capital market in the euro area. Its possible challenges appear to bemanageable, in particular those with regard to the Eurosystem's monetary policy.

From an international perspective, the euro as a stable currency opens up new opportunities forinternational agents, and maintaining price stability in the euro area is also the best contributionthe Eurosystem can make to global stability.

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 8/20

The euro (sign:  €; code: EUR) is the official currency of the eurozone: 17 of the 27 member

states of the European Union. It is also the currency used by the Institutions of the European

Union. The eurozone consists

of Austria, Belgium, Cyprus, Estonia, Finland,France, Germany, Greece, Ireland, Italy, Luxembo

urg, Malta, the Netherlands, Portugal,Slovakia, Slovenia, and Spain.[2][3] The currency is also

used in a further five European countries (Montenegro, Andorra, Monaco, San

Marino and Vatican City) and the disputed territory of Kosovo. It is consequently used daily by

some 332 million Europeans.[4]Additionally, over 175 million people worldwide use currencies

which are pegged to the euro, including more than 150 million people in Africa.

The euro is the second largest reserve currency as well as the second most traded currency in the

world after the United States dollar.[5][6] As of July 2011, with nearly €890 billion in circulation,

the euro has the highest combined value of banknotes and coins in circulation in the world,

having surpassed the U.S. dollar.[note 14]

 Based on International Monetary Fundestimates of 2008GDP and purchasing power parity among the various currencies, the eurozone is the second

largest economy in the world.[7] 

The name euro was officially adopted on 16 December 1995.[8] The euro was introduced to

world financial markets as an accounting currency on 1 January 1999, replacing the

formerEuropean Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered

circulation on 1 January 2002.[9] 

Since late 2009 the euro has been immersed in the European sovereign debt crisis which has led

to the state bonds of three eurozone states to be downgraded to "junk" status, and the creation of 

the European Financial Stability Facility. 

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 9/20

 

The ECB in Frankfurt, Germany, is in charge of the eurozone's monetary policy

The euro is managed and administered by the Frankfurt-based European Central Bank (ECB)

and theEurosystem (composed of the central banks of the eurozone countries). As an

independent central bank, the ECB has sole authority to set monetary policy. The Eurosystem

participates in the printing, minting and distribution of notes and coins in all member states, and

the operation of the eurozone payment systems.

The 1992 Maastricht Treaty obliges most EU member states to adopt the euro upon

meeting certain monetary and budgetary requirements, although not all states have done so. The

United Kingdom and Denmark negotiated exemptions,[10] while Sweden (which joined the EU in

1995, after the Maastricht Treaty was signed) turned down the euro in a 2003 referendum, and

has circumvented the obligation to adopt the euro by not meeting the monetary and budgetaryrequirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in

due course.

All euro coins have a common side, and a national side chosen by the issuing bank.

 Main articles: Euro coins and Euro banknotes

The euro is divided into 100 cents (sometimes referred to aseuro cents, especially when

distinguishing them from other currencies, and referred to as such on the common side of all cent

coins). In Community legislative acts the plural forms of euro and cent are spelled without the s,

notwithstanding normal English usage.[11][12] Otherwise, normal English plurals are

recommended and used,[13] with many local variations such as 'centime' in France.

All circulating coins have a common side showing the denomination or value, and a map in the

background. For the denominations except the 1-, 2- and 5-cent coins, that map only showed the

15 member states which were members when the euro was introduced. Beginning in 2007 or

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 10/20

2008 (depending on the country) the old map is being replaced by a map of Europe also showing

countries outside the Union like Norway. The 1-, 2- and 5-cent coins, however, keep their old

design, showing a geographical map of Europe with the 15 member states of 2002 raised

somewhat above the rest of the map. All common sides were designed by Luc Luycx. The coins

also have a national side showing an image specifically chosen by the country that issued the

coin. Euro coins from any member state may be freely used in any nation which has adopted the

euro.

The common (top) and national sides of the €2 coin 

The coins are issued in  €2,  €1, 50c, 20c, 10c, 5c, 2c, and 1c denominations. In order to avoid 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).[14] This practice is discouraged by

the Commission, as is the practice of certain shops to refuse to accept high value euro notes.[15] 

Commemorative coins with €2 face value have been issued with changes to the design of the

national side of the coin. These include both commonly issued coins, such as the €2

commemorative coin for the 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. These coins are legal tender throughout the eurozone. Collector's coins with various

other denominations have been issued as well, but these are not intended for general circulation,

and they are legal tender only in the member state that issued them.[16] 

The design for the euro banknotes has common designs on both sides. The design was created by

the Austrian designer Robert Kalina.[17]Notes are issued in  €500,  €200,  €100,  €50,  €20,  €10,  €5. 

Each banknote has its own colour and is dedicated to an artistic period of European architecture.

The front of the note features windows or gateways while the back has bridges. While the

designs are supposed to be devoid of any identifiable characteristics, the initial designs by Robert

Kalina were of specific bridges, including the Rialto and the Pont de Neuilly, and were

subsequently rendered more generic; the final designs still bear very close similarities to their

specific prototypes; thus they are not truly generic.[18] 

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 11/20

[edit]Payments clearing, electronic funds transfer

 Main article: Single Euro Payments Area

Capital within the EU may be transferred in any amount from one country to another. All intra-

EU transfers in euro are considered as domestic payments and bear the corresponding domestic

transfer costs.[19] This includes all member states of the EU, even those outside the eurozone

providing the transactions are carried out in euro.[20] Credit/debit card charging and ATM

withdrawals within the eurozone are also charged as domestic, however paper-based payment

orders, like cheques, have not been standardised so these are still domestic-based. The ECB has

also set up a clearing system, TARGET, for large euro transactions.[21] 

[edit]Currency sign

The euro sign; logotype and handwritten

 Main article: Euro 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 design created by the

BelgianAlain 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.[22] 

Inspiration for the € symbol itself came from the Greek epsilon (Є)[note 15]  – a reference to the

cradle of European civilisation – and the first letter of the word Europe, crossed by two parallel

lines to ‘certify’ the stability of the euro. 

 — European Commission[11] 

The European Commission also specified a euro logo with exact proportions and

foreground/background colour tones.[23] While the Commission intended the logo to be a

prescribed glyph shape, font designers made it clear that they intended to design their own

variants instead.[24] Typewriters lacking the euro sign can create it by typing a capital 'C',

backspacing and overstriking it with the equal ('=') sign. Placement of the currency sign relative

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 12/20

to the numeric amount varies from nation to nation, but for texts in English the symbol (and

the ISO-standard "EUR") should precede the amount.[25] 

Introduction of the euro Main article: History of the euro

Preceding national currencies of the Eurozone v · d · e

Currency Code Rate[26] Fixed on Yielded

Austrian schilling ATS 13.7603 31 December 1998 1999

Belgian franc BEF 40.3399 31 December 1998 1999

Dutch guilder NLG 2.20371 31 December 1998 1999

Finnish markka FIM 5.94573 31 December 1998 1999

French franc FRF 6.55957 31 December 1998 1999

Deutsche Mark  DEM 1.95583 31 December 1998 1999

Irish pound IEP 0.787564 31 December 1998 1999

Italian lira ITL 1,936.27 31 December 1998 1999

Luxembourgish franc LUF 40.3399 31 December 1998 1999

Monegasque franc MCF 6.55957 31 December 1998 1999

Portuguese escudo PTE 200.482 31 December 1998 1999

Sammarinese lira SML 1,936.27 31 December 1998 1999

Spanish peseta ESP 166.386 31 December 1998 1999

Vatican lira VAL 1,936.27 31 December 1998 1999

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 13/20

Greek drachma GRD 340.75 19 June 2000 2001

Slovenian tolar SIT 239.64 11 July 2006 2007

Cypriot pound CYP 0.585274 10 July 2007 2008

Maltese lira MTL 0.4293 10 July 2007 2008

Slovak koruna SKK 30.126 8 July 2008 2009

Estonian kroon EEK 15.6466 13 July 2010 2011

The euro was established by the provisions in the 1992Maastricht Treaty. To participate in the

currency, member states are meant to meet strict criteria, such as a budgetdeficit of less than

three per cent of their GDP, a debt ratio of less than sixty per cent of GDP (both of which were

ultimately widely flouted after introduction), low inflation, and interest rates close to the EU

average. In the Maastricht Treaty, the United Kingdom and Denmark were granted exemptions

per their request from moving to the stage of monetary union which would result in the

introduction of the euro.

Economists who helped create or contributed to the euro include Fred Arditti, Neil

Dowling, Wim Duisenberg, Robert Mundell, Tommaso Padoa-Schioppa and Robert

Tollison.[citation needed ] (For macro-economic theory, seebelow.)

The name "Euro" was officially adopted in Madrid on 16 December

1995.[8] Belgian Esperantist Germain Pirlot, a former teacher of French and history is credited of 

naming the new currency by sending a letter to then President of the European Commission,

Jacques Santer, suggesting the name "Euro" on 4 August 1995.[27] 

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,[28] based on a recommendation

from the European Commission based on the market rates on 31 December 1998. They were set

so that one European Currency Unit (ECU) 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

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 14/20

a currency in its own right. 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 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 beforehand.[29] 

The currency was introduced in non-physical form (traveller's cheques, electronic transfers,

banking, etc.) at midnight on 1 January 1999, when the national currencies of participating

countries (the eurozone) ceased to exist independently. 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 euro 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, where the mark officially ceased to be legal tender on 31

December 2001, though the exchange period lasted for two months more. Even after the old

currencies ceased to be legal tender, they continued to be accepted by national central banks for

periods ranging from several years to forever (the latter 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.

[edit]US economists on the euro, 1989 – 2002

A survey of US economists and their views on the EMU and euro from 1989 – 2002 found that

the euro had gone much better than many expected.[30] Academic economists, overall, were more

skeptical than Federal Reserve economists who adopted a more pragmatic approach. The

skepticism appears to have resulted from the strong influence of the optimum currency

area theory; other reasons include similar skepticism of monetary unification as an evolutionary

process as opposed to a political project that ignored fundamental elements of economics and a

distrust of pegged currency exchange rates (as opposed to floating exchange rates) as a basis and

an alternative to a single European currency.

Fred Bergsten of the Peterson Institute for International Economics in Washington DC was one

of a few American economists optimistic about the euro.[31] His analysis focused on European

political economy rather than technical considerations like the theory of optimum currency area

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 15/20

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 16/20

CzechRep.

Denmark 

E U R O Z O N E  

Hungary

Kosovo

Latvia

Lithuania

Monaco

Monten.

Poland

Romania

San Marino

Sweden

UnitedKingdom

Vatican

A&D

Eurozone

ERM II members

unilaterally adopted

other EU members

via treaty

special adoption agreement

[edit]Direct usage

The euro is the sole currency of 17 EU member

states: Austria,Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,Ireland, Italy, Luxe

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 17/20

mbourg, Malta, the Netherlands, Portugal, Slovakia,Slovenia and Spain. These countries

comprise the "eurozone", some 326 million people in total.

With all but two of the remaining EU members obliged to join, together with future members of 

the EU, the enlargement of the eurozone is set to continue further. Outside the EU, the euro is

also the sole currency of Montenegro and Kosovo and several European micro states

(Andorra, Monaco, San Marino and the Vatican City) as well as in three overseas territories of 

EU states that are not themselves part of the EU (Mayotte, Saint Pierre and

Miquelon and Akrotiri and Dhekelia). Together this direct usage of the euro outside the EU

affects over 3 million people.

It is also gaining increasing international usage as a trading currency, in Cuba,[37] North Korea

and Syria.[38] There are also various currencies pegged to the euro (see below). In 2009

Zimbabwe abandoned its local currency and used major currencies instead, including the euro

and the United States dollar.[39] 

[edit]Use as reserve currency

Since its introduction, the euro has been the second most widely held international reserve

currency after the U.S. dollar. The share of the euro as a reserve currency has increased from

17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to

64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%). The euro inherited and

built on the status of the second most important reserve currency from the Deutsche Mark. The

euro remains underweight as a reserve currency in advanced economies while overweight in

emerging and developing economies: according to the International Monetary Fund[40] the total

of euro held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion or €850

billion, with a share of 22% of all currency reserves in advanced economies, but a total of 31%

of all currency reserves in emerging and developing economies.

The possibility of the euro becoming the first international reserve currency is now widely

debated among economists.[41] Former Federal Reserve Chairman Alan Greenspan gave his

opinion in 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."[42] In

contrast to Greenspan's 2007 assessment the euro's increase in the share of the worldwide

currency reserve basket has slowed considerably since the year 2007 and since the beginning of 

the worldwide credit crunch related recession and sovereign debt crisis.[40] 

[edit]Currencies pegged to the euro

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 18/20

 

Worldwide use of the euro and the U.S. dollar:

Eurozone

External adopters of the euro

Currencies pegged to the euro

Currencies pegged to the euro within narrow band

United States

External adopters of the US dollar

Currencies pegged to the US dollar

Currencies pegged to the US dollar within narrow band

Note that the Belarusian ruble is pegged to the Euro, Russian ruble and US$ in a currency basket.

 Main article: International status and usage of the euro

Outside the eurozone, a total of 23 countries and territories that do not belong to the EU have

currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA

franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean

escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and

Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, São Tomé and

Príncipe signed an agreement with Portugal which will eventually tie its currency to the euro.[43] 

With the exception of 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

peg to the French Franc before pegging their currencies to the euro. Pegging a country's currency

to a major currency is regarded as a safety measure, especially for currencies of areas with weak 

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 19/20

8/4/2019 jhdjsgjg

http://slidepdf.com/reader/full/jhdjsgjg 20/20

What is the difference between the Euro and the dollar?

The Euro is the currency used by 17 of the 27 countries that are part of the European Union and

5 countries of Europe that are not part of this organization. It is the second largest trading

currency in the world after the US dollar. The exchange rate between the two fluctuates

depending on market conditions. The Euro and the dollar are the two most important currenciesin the world and play an important role in the economy of the world. Of the two, the dollar is the

more established currency because it has been in use a lot longer.

About the Euro

The Euro came into use in December 2005 as the currency of the European Union but countries

have the option to retain their own currency. It is administered by the European Central Bank,

which is based in Frankfurt, Germany. This bank is the authority for all the financial matters

related to the Euro along with other factors such as interest rates. This currency has been

instrumental in strengthening and stabilizing the economy of Europe.

About the dollar

The US dollar is the currency to which all other currencies are compared on the market. There

are two governing bodies for this currency – the Federal Reserve, which is the central bank of the

US, and the Federal Open Market Commission. The dollar has been very instrumental in making

the US economy one of the most important economies in the world.

The Euro and the dollar are the largest reserve currencies and are used all over the world.

Products are either priced in Euros or priced in US dollars. Recently the dollar is depreciating in

value against the Euro. The exchange rate has remained stable for the past few months with the

US dollar trading at $1.44 for 1 Euro.