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The euro: The second most traded currency in the world

The 19 countries that use the euro must work together to maintain growth and stability.

The euro (EUR, €) is a common currency shared by 19 European Union (EU) member states. Introduced in 1999, over 337.5 million EU citizens now use the euro, and it’s the second most traded currency in the world. Not all EU member states use the euro as their official currency, with the United Kingdom and Denmark opting out.

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Member’s of the EU that have adopted the euro include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain. There are four other European nations that use the euro, as do overseas territories of EU members.

The European Central Bank (ECB), along with euro nation central banks, hold responsibility for eurozone’s monetary policy making the Eurosystem. Individual national authorities have control over structural and fiscal policies, but they need to work together to maintain stability and growth of the euro. The Stability and Growth pact contains rules regarding fiscal discipline, and is important to the economic success.

Value and exchange rates of the euro

When the euro was first introduced, conversions between currencies of participating countries to the euro relied on a triangulation process. The value of the euro in terms of exchange rates of the currencies entering the euro is pictured below.

Currency CodeRate
Austrian schillingATS13.7603
Belgian francBEF40.3399
Cypriot poundCYP0.585274
Estonian kroonEEK15.6466
German markDEM1.95583
Finnish markkaFIM5.94573
French francFRF6.55957
Greek drachmaGRD340.75
Irish poundIEP0.787564
Italian liraITL1,936.27
Lithuanian litasLTL3.4528
Luxembourgish francLUF40.3399
Latvian latsLVL0.702804
Monégasque francMCF6.55957
Maltese liraMTL0.4293
Dutch guilderNLG2.20371
Portuguese escudoPTE200.482
Slovenian tolarSIT239.64
Slovak korunaSKK30.126
Spanish pesetaESP166.386
Sammarinese liraSML1,936.27
Vatican liraVAL1,936.27

The Council of the European Union relied on recommendations from the European Commission to arrive at these rates. These were set so one euro would equal one European Currency Unit (ECU). The ECU was not a currency, but an accounting unit that the EU used based on currencies of participating states.

The euro, since its introduction, has become the second most held international reserve currency, which is mainly built on the Deutsche Mark’s status of being in the same spot. The share of its currency reserve stood at 18% in 1999, and increased to 27% by 2008. During the same period, the US dollar’s share fell 7%, and the Japanese yen’s share dropped by 3.1%.

The International Monetary Fund views the euro as an overweight reserve currency in developing and emerging economies, and as underweight in advanced economies.

Over 20 countries and territories outside the eurozone peg their currencies against the euro, which include 15 African nations, three French Pacific territories, as well as Bosnia, Herzegovina, Bulgaria and Macedonia. By 2013, more than 180 million people in Africa, 27 million outside the eurozone in Europe, and around 545,000 in the Pacific islands used currencies pegged to the euro.

The ECB works in targeting interest rates as opposed to exchange rates, and doesn’t interfere in forex markets. After the implementation of the Single European Act, the EU worked in freeing capital markets. Since the ECB opted for control of its money, the euro follows a floating exchange rate system.

Since the ECB maintained noticeably low interest rates and succeeded in restricting the supply of money for around a decade, the euro went on to become more expensive when compared to the region’s main trading partners. Though this changed in 2010 when value of the euro began to drop. In 2008, the euro valued at USD1.60, and dropped to USD1.04 by 2015.

The value of the euro when traded against other major currencies has seen significant changes since its introduction. It got to its lowest point in 2000, and its highest point came in 2008. While the global financial crisis saw the euro dropping in value, it gained ground later. By November 2011, the euro traded almost as high as it was at before the financial crisis began in 2007.

The table below takes you through the value of the euro against other major currencies since its introduction in 1999.

19992000200520102015
US dollar1.06610.92341.24631.32731.1097
Pound sterling0.65890.60940.68450.68450.7261
Canadian dollar1.58461.37051.50951.36761.4189
Chinese renminbi yuan8.82527.645310.2108.98546.9727
Indian rupee45.88641.44754.69360.57871.149

These are yearly averages.

History of the euro

Provisions in the 1992 Maastricht Treaty led to the creation of the euro. As part of the the treaty, the United Kingdom and Denmark were exempt. Prominent economists Neil Dowling, Fred Arditti, Robert Mundell, Wim Duisenberg, Robert Tollison and Tommaso Padoa-Schioppa all worked together to create the euro.

While the name ‘euro’ came into effect as early as December 1995, introduction of the currency happened only on January 1, 1999. At this point, the use of the euro limited to non-physical forms like electronic transfers and traveller’s checks. Euro notes and coins saw light of day in January 2002. People could exchange their coins and notes from older currencies until the end of February 2002. National central banks continued to accept old currencies even after they stopped serving as legal tender, and while some national banks stopped doing this after a while, some still continue.

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Coins and banknotes of the euro

The euro is made up of 100 cents, often called to as “euro cents”. The coins come in denominations of €2, €1, 50c, 20c, 10c, 5c, 2c and 1c. Banknotes come in denominations of €5, €10, €20, €50, €100, €200 and €500.

All coins show their denomination, along with a map in the background. The other side is the national side, which shows images that are chosen by the countries that issue the coins.

2 Euro1 Euro50 Cent Euro
2-euro1-euro50_euro_cent

Every banknote is a different color, and relates to an artistic period from Europe’s architectural past. The fronts of these notes have gateways or windows, and the back display bridges to represent the link to the various European countries that use the euro.

100 Euro200 Euro500 Euro
100_euro200_euro500_euro
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