Euro

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This article is about the currency. For other uses, see Euro (disambiguation).

"EUR" redirects here. For other uses, see EUR (disambiguation).

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Euro

ευρώ (Greek)

евро (Bulgarian)

еwro (Maltese)

Banknotes Coins

Banknotes Coins

ISO 4217 Code EUR (num. 978)

Official user(s)

European Union Eurozone (17)[show]

* Austria

* Belgium

* Cyprus[note 5]

* Estonia

* Finland

* France[note 6]

* Germany

* Greece
 * Ireland

* Italy[note 7]

* Luxembourg

* Malta

* Netherlands[note 8]

* Portugal

* Slovakia

* Slovenia

* Spain

3 states with issuing rights[show]

* Monaco[note 9]

* San Marino[note 10]

* Vatican City[note 11]

4 territories outside the EU[show]

* United Kingdom Akrotiri and Dhekelia (UK)[note 12]

* France Clipperton Island (France)

* France French Southern and Antarctic Lands (France)

* France Saint Pierre and Miquelon (France)[note 13]

Unofficial user(s)

4 other users[show]
 * Andorra[note 1]

* Kosovo[note 2]

* Montenegro[note 3]

* ZWE[note 4]

Inflation 2.7%, March 2011

Method HICP

Pegged by

10 currencies[show]

* Bosnia & Herz. convertible mark

* Bulgarian lev

* Cape Verdean escudo

* Central African CFA franc

* CFP franc

* Comorian franc

* Danish krone (±2.25%)

* Latvian lats

* Lithuanian litas

* West African CFA franc

Symbol €

Nickname The single currency[1]

local names[show]
 * Ege (Finnish)

* Eumeln (German)

* Quid (Irish English)

* Teuro (German)

* Juró (Hungarian)

Plural See Euro linguistic issues

Coins

Freq. used 1c, 2c, 5c, 10c, 20c, 50c, €1, €2

Banknotes

Freq. used €5, €10, €20, €50, €100, €200, €500

Central bank European Central Bank

Website www.ecb.europa.eu

Printer

Several, click to

[show]

* Istituto Poligrafico e Zecca dello Stato

* Banco de Portugal

* Bank of Greece

* Banque de France

* Bundesdruckerei

* Central Bank and Financial Services Authority of Ireland

* De La Rue
 * Fábrica Nacional de Moneda y Timbre

* François-Charles Oberthur

* Giesecke & Devrient

* Royal Joh. Enschedé

* National Bank of Belgium

* Oesterreichische Banknoten- und Sicherheitsdruck GmbH

* Setec Oy

Website

Several, click to

[show]

* Istituto Poligrafico e Zecca dello Stato

* Banco de Portugal – Imprensa Nacional / Casa da Moeda

* Bank of Greece

* Banque de France

* Bundesdruckerei

* Central Bank and Financial Services Authority of Ireland

* De La Rue

* Fábrica Nacional de Moneda y Timbre

* François-Charles Oberthur

* Giesecke & Devrient

* Royal Joh. Enschedé

* National Bank of Belgium

* Oesterreichische Banknoten- und Sicherheitsdruck GmbH

 * Setec Oy

Mint

Several, click to

[show]

* Bayerisches Hauptmünzamt, Munich (Mint mark: D)

* Currency Centre

* Fábrica Nacional de Moneda y Timbre

* Hamburgische Münze (J)

* Imprensa Nacional Casa da Moeda SA

* Istituto Poligrafico e Zecca dello Stato

* Koninklijke Nederlandse Munt

* Koninklijke Munt van België/Monnaie Royale de Belgique

* Mincovňa Kremnica

* Monnaie de Paris

* Münze Österreich

* Rahapaja Oy/Myntverket i Finland Ab

* Staatliche Münze Berlin (A)

* Staatliche Münze Karlsruhe (G)

* Staatliche Münze Stuttgart (F)

Website

Several, click to

[show]
 * Munich mint

* Currency Centre

* Fábrica Nacional de Moneda y Timbre

* Hamburg mint

* Imprensa Nacional – Casa da Moeda SA

* Istituto Poligrafico e Zecca dello Stato

* Koninklijke Nederlandse Munt

* Koninklijke Munt van België/Monnaie Royale de Belgique

* Monnaie de Paris

* Münze Österreich

* Rahapaja Oy/Myntverket i Finland Ab

* Berlin mint

* Karlsruhe-Stuttgart mints

The euro (sign: €; code: EUR) is the official currency of the eurozone: 17 of the 27 member states of the
European Union (EU). It is also the currency used by the EU institutions. The eurozone consists of
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia and Spain.[2][3] The currency is also used in a further 5
European countries (Montenegro, Andorra, Monaco, San Marino and the Vatican) and the disputed
territory of Kosovo. It is consequently used daily by some 327 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 US$.[5][6] As of June 2010[update], with more than €800 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 IMF estimates of 2008 GDP 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 former European Currency
Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January 2002.[9]

Contents

[hide]

* 1 Administration

* 2 Characteristics

o 2.1 Coins and banknotes

o 2.2 Payments clearing, electronic funds transfer

o 2.3 Currency sign

* 3 Introduction of the euro

o 3.1 US economists on the euro, 1989–2002

* 4 Direct and indirect usage

o 4.1 Direct usage

o 4.2 Use as reserve currency

o 4.3 Currencies pegged to the euro

* 5 Economics

o 5.1 Optimal currency area

o 5.2 Transaction costs and risks

o 5.3 Price parity

o 5.4 Macroeconomic stability

+ 5.4.1 Trade

+ 5.4.2 Investment

+ 5.4.3 Inflation

+ 5.4.4 Exchange rate risk

 + 5.4.5 Financial integration

+ 5.4.6 Effect on interest rates

+ 5.4.7 Price convergence

+ 5.4.8 Tourism

* 6 Exchange rates

o 6.1 Flexible exchange rates

o 6.2 Against other major currencies

* 7 Linguistic issues

* 8 Alloys

* 9 Notes

* 10 References

* 11 Further reading

* 12 External links

[edit] Administration

Main articles: European Central Bank, Maastricht Treaty, and Euro Group

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 the
Eurosystem (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 turned down the euro in a 2003 referendum, and
has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary
requirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in due
course.

[edit] Characteristics

[edit] Coins and banknotes

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 as euro 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 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]
Some of the highest denominations such as the €500 are not issued in all countries due to criminal
use[citation needed], though they remain legal tender throughout the eurozone.

[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 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.
[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 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]

[edit] Introduction of the euro

Main article: History of the euro

Preceding national currencies of the Eurozone v · d · e Currency↓ Code↓ Rate↓ Fixed on↓
Yielded↓

Austria Austrian schilling ATS &000000000000001375999913.76 01998-12-31 31

December 1998 1999

Belgium Belgian franc BEF &000000000000004034000040.34 01998-12-31 31 December

1998 1999

Netherlands Dutch guilder NLG &00000000000000022000002.20 01998-12-31 31

December 1998 1999

Finland Finnish markka FIM &00000000000000059500005.95 01998-12-31 31 December

1998 1999

France French franc FRF &00000000000000065599996.56 01998-12-31 31 December

1998 1999

Germany German mark DEM &00000000000000019600001.96 01998-12-31 31 December

1998 1999

Republic of Ireland Irish pound IEP &00000000000000007900000.79 01998-12-31 31

December 1998 1999

Italy Italian lira ITL &Expression error: Unrecognised punctuation character ","1,936.27 01998-
12-31 31 December 1998 1999
Luxembourg Luxembourgian franc LUF &000000000000004034000040.34 01998-12-31 31
December 1998 1999

Monaco Monegasque franc MCF &00000000000000065599996.56 01998-12-31 31

December 1998 1999

Portugal Portuguese escudo PTE &0000000000000200479999200.48 01998-12-31 31

December 1998 1999

San Marino Sammarinese lira SML &Expression error: Unrecognised punctuation character
","1,936.27 01998-12-31 31 December 1998 1999

Spain Spanish peseta ESP &0000000000000166389999166.39 01998-12-31 31 December

1998 1999

Vatican City Vatican lira VAL &Expression error: Unrecognised punctuation character ","1,936.27
01998-12-31 31 December 1998 1999

Greece Greek drachma GRD &0000000000000340750000340.75 02000-06-19 19 June 2000

2001

Slovenia Slovenian tolar SIT &0000000000000239639999239.64 02006-07-11 11 July

2006 2007

Cyprus Cypriot pound CYP &00000000000000005900000.59 02007-07-10 10 July 2007

2008

Malta Maltese lira MTL &00000000000000004300000.43 02007-07-10 10 July 2007

2008

Slovakia Slovak koruna SKK &000000000000003012999930.13 02008-07-08 8 July 2008

2009

Estonia Estonian kroon EEK &000000000000001565000015.65 02010-07-13 13 July 2010

2011

The euro was established by the provisions in the 1992 Maastricht Treaty. To participate in the currency,
Member States are meant 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. 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, see below.) The name euro was devised on 4 August 1995 by Germain Pirlot, a
Belgian Esperantist and ex-teacher of French and history,[26] and officially adopted in Madrid on 16
December 1995.[8][27][citation needed]

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 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 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 seeing its implications as
ambiguous enough to permit a basically political decision. In the same vein, Jeffry Frieden, Political
Scientist at Harvard, points out that most US economists failed to systematically include political factors
in their analysis.[32] By focusing only on the pure economics of the matter, they led themselves to
unrealistic predictions. Charles Goodhart of the London School of Economics echoes a similar sentiment.
[33]

Some believed that a strong central state, which a sound euro seemingly required, would impede
European economic liberalization.[34] On the other hand, some credit the euro's success to the
European Central Bank's (ECB) ability to follow a stability-oriented monetary policy without undue
influence from national interests.[35] This would not be possible without a certain amount of
centralized power and decent incentives. George Selgin suggests that the ECB had an incentive to keep
inflation low out of a desire to secure for the euro a prominent position in the international monetary
market.[36]

[edit] Direct and indirect usage

Further information: Eurozone, International status and usage of the euro, and Enlargement of the
eurozone

Andorra
Bulgaria

Czech

Rep.

Denmark

Eurozone

Hungary

Kosovo

Latvia

Lithuania

Monaco

Monten.

Poland

Romania

San Marino

Sweden

United

Kingdom

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, Luxembourg, 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 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 German mark. The euro remains underweight as a
reserve currency in advanced economies while overweight in emerging and developing economies:
according to the IMF[40] the total of euro held as a reserve in the world at the end of 2008 was equal to
USD 1.1 trillion, 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 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

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 German 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 economies, as the
euro is seen as a stable currency, prevents runaway inflation and encourages foreign investment due to
its stability.
Within the EU several currencies have a peg to the euro, in most instances as a precondition to joining
the eurozone. The Bulgarian Lev was formerly pegged to the German mark, other EU memberstates
have a direct peg due to ERM II: the Danish krone, the Lithuanian litas and the Latvian lats.

In total, over 150 million people in Africa use a currency pegged to the euro, 25 million people outside
the eurozone in Europe and another 500,000 people on Pacific islands.

[edit] Economics

[edit] Optimal currency area

Further information: Optimum currency area

In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it
would maximize economic efficiency to have the entire region share a single currency. There are two
models, both proposed by Robert A. Mundell: the stationary expectations model and the international
risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes
in favour of the euro.[44] However, even before the creation of the single currency, there were concerns
over diverging economies. Yet the chances of a state leaving the euro, or the chances that the whole
zone would collapse, are extremely slim.[45]

[edit] Transaction costs and risks

Most traded currencies

Currency distribution of global foreign exchange market turnover[46] Rank Currency ISO
4217 code

(Symbol) % daily share

(April 2010)

United States United States dollar

USD ($)

84.9%

European Union Euro
EUR (€)

39.1%

Japan Japanese yen

JPY (¥)

19.0%

United Kingdom Pound sterling

GBP (£)

12.9%

Australia Australian dollar

AUD ($)

7.6%

Switzerland Swiss franc

CHF (Fr)

6.4%

Canada Canadian dollar

CAD ($)

5.3%

Hong Kong Hong Kong dollar

HKD ($)
 2.4%

Sweden Swedish krona

SEK (kr)

2.2%

10

New Zealand New Zealand dollar

NZD ($)

1.6%

Other 18.6%

Total[47] 200%

The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency,
theoretically allowing businesses and individuals to consummate previously unprofitable trades. For
consumers, 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 that
invest or trade outside their own currency zones. Companies that hedge against this risk will no longer
need to shoulder this additional cost. This is particularly important for countries whose currencies had
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.

[edit] Price parity

Another 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 across borders purely to exploit the price differential. Therefore, prices
on commonly traded goods are likely to converge, causing inflation in some regions and deflation in
others during the transition. Some evidence of this has been observed in specific markets.[48]

[edit] Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of
inflation acts as a 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 them by establishing largely
independent central banks. One such bank was the Bundesbank in Germany; as the European Central
Bank is modelled on the Bundesbank,[49] it is independent of the pressures of national governments
and has a mandate to keep inflationary pressures low.[citation needed] Member countries that join the
bank commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels
of expected inflation.[citation needed] The ECB (unlike the Federal Reserve in the United States of
America) does not have a second objective to sustain growth and employment.[citation needed]

Many 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 currencies.[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 debt 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.

[edit] Trade

The consensus from the studies of the effect of the introduction of the euro is that it has increased trade
within the eurozone by 5% to 10%.[50] On the lower bound, one study suggested an increase of 3%.[51]
A recent study estimates this effect to be between 9 and 14%.[52] Nevertheless, a recent meta-analysis
of all available studies suggests that the prevalence of positive estimates is caused by publication bias
and that the underlying effect may be negligible.[53]

[edit] Investment
Studies have found a negative effect of the introduction of the euro on investment as of 2008 economic
collapse and the continued currency speculation by Goldman Sachs . Physical investment seems to have
increased by 5% in the eurozone due to the introduction.[54] Regarding foreign direct investment, a
study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years
of the EMU.[55] Concerning the effect on corporate investment, there is evidence that the introduction
of the euro has resulted in an increase in investment rates and that it has made it easier for firms to
access financing in Europe. The euro has most specifically stimulated investment in companies that
come from countries that previously had weak currencies. A study found that the introduction of the
euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak
currency.[56] The effect is however less clear for firms coming from the strong currency countries; the
introduction has not been beneficial for most of them.

[edit] Inflation

The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the
short term, there was a widespread impression in the population of the eurozone that the introduction
of the euro had led to an increase in prices. Paradoxically, this impression has not been supported by
general indices of inflation, showing no major effect of the introduction of the euro. A study of this
paradox has found that it is due to an asymmetric effect of the introduction of the euro on prices: while
it had no effect on most goods, it had an effect on cheap goods which have seen their price round up
after the introduction of the euro. The study found that consumers based their beliefs on inflation of
those cheap goods which are frequently purchased.[57] It has also been suggested that the jump in
small prices may be because prior to the introduction, retailers made fewer upward adjustments and
waited for the introduction of the euro to do so.[58]

[edit] Exchange rate risk

One of the advantages of the adoption of a common currency is the reduction of the risk associated with
changes in currency exchange rates. It has been found that the introduction of the euro created
"significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe"[59]
These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro
firms with a high fraction of foreign sales or assets in Europe". These changes were however "statistically
and economically small".[citation needed]

[edit] Financial integration

The introduction of the euro seems to have had a strong effect on European financial integration.
According to a study on this question, it has "significantly reshaped the European financial system,
especially with respect to the securities markets [...] However, the real and policy barriers to integration
in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has
been largely integrated."[60] Specifically, the euro has significantly decreased the cost of trade in bonds,
equity, and banking assets within the eurozone. [61] On a global level, there is evidence that the
introduction of the euro has led to an integration in terms of investment in bond portfolios, with
eurozone countries lending and borrowing more between each other than with other countries.[62]

[edit] Effect on interest rates

The introduction of the euro has decreased the interest rates of most members countries, in particular
those with a weak currency. As a consequence the market value of firms from countries which
previously had a weak currency has very significantly increased.[63] The countries whose interest rates
fell most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy.[64]

[edit] Price convergence

The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed.
Several studies failed to find any evidence of convergence following the introduction of the euro after a
phase of convergence in the early 1990s.[65][66] Other studies have found evidence of price
convergence,[67][68] in particular for cars.[69] A possible reason for the divergence between the
different studies is that the processes of convergence may not have been linear, slowing down
substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009).
[70]

[edit] Tourism

A study suggests that the introduction of the euro has had a positive effect on tourism flows within the
EMU, with an increase of 6.5%.[71]

[edit] Exchange rates

This section requires authentication or verification by an expert. Please assist in recruiting an

expert or improve this article yourself. See the talk page for details. (January 2011)

Euro-US Dollar exchange rate, 1999–2011

Euro-Japanese Yen exchange rate, 1999–2011

Euro-Swiss Franc exchange rate, 1999–2011

See also: Exchange rate, Floating exchange rate, Exchange rate regime, Foreign exchange market, and
Reserve currency
[edit] Flexible exchange rates

The ECB targets interest rates rather than exchange rates and in general does not intervene on the
foreign exchange rate markets, because of the implications of the Mundell-Fleming Model which
suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously
because increasing the money supply results in a depreciation of the currency. In the years following the
Single European Act, the EU has liberalised its capital markets, and as the ECB has chosen monetary
autonomy, the exchange rate regime of the euro is flexible, or floating.

[edit] Against other major currencies

The Euro is one of the major reserve currencies together with the United States dollar, Japanese yen,
Pound sterling and Swiss franc. After its introduction in 4 January 1999 the exchange rate of the Euro
against the other major currencies fell reaching its historical lowest exchange rates in 2000 (25 Oct vs
the US Dollar, 26 Oct vs Japanese Yen, 3 May vs Pound Sterling). Afterwards the Euro regained and its
exchange rate reached its historical highest point in 2008 (15 July vs US Dollar, 23 July vs Japanese Yen,
29 Dec vs Pound Sterling). With the advent of the current global financial crisis the exchange rates of the
Euro initially fell, only to regain later (below its maximum value but above its lowest value).

* Current and historical exchange rates against 29 other currencies (European Central Bank)

* Current dollar/euro exchange rates (BBC)

* Historical exchange rate from 1971 until now

Current EUR exchange rates

From Google Finance: AUD CAD CHF GBP HKD JPY USD RUB CNY TWD

From Yahoo! Finance: AUD CAD CHF GBP HKD JPY USD RUB CNY TWD

From XE.com: AUD CAD CHF GBP HKD JPY USD RUB CNY TWD

From OANDA.com: AUD CAD CHF GBP HKD JPY USD RUB CNY TWD

[edit] Linguistic issues

Main article: Linguistic issues concerning the euro

The formal titles of the currency are euro for the major unit and cent for the minor (one hundredth) unit
and for official use in most eurozone languages; according to the ECB, all languages should use the same
spelling for the nominative singular.[72] This may contradict normal rules for word formation in some
languages; e.g., those where there is no eu diphthong. Bulgaria has negotiated an exception; euro in the
Cyrillic alphabet is spelled as eвро (evro) and not eуро (euro) in all official documents.[73]

[edit] Alloys

The euro 1 and 2 coins are two-toned. The "gold" is an alloy, 75% copper, 20% zinc and 5% nickel. The
"silver" is cupronickel, 75% copper, 25% nickel.[74] The 10, 20 and 50-cent coins are a proprietary alloy
known as "Nordic gold", consisting of 89% copper, 5% aluminium, 5% zinc and 1% tin.[75] The 1, 2 and
5-cent coins are copper-coated steel fourrées.[74]

No constituent metal is toxic to human beings. The copper alloys make the coinage antimicrobial. The
nickel alloy could cause contact dermatitis in sensitive people, but this condition could only be a
problem if a Euro-1 or 2 is worn next to the skin for an extended period, perhaps as jewelry. The alloys
are hypoallergenic.

[edit] Notes

1. ^ Andorra started negotiating a treaty with the ECB for becoming a State with issuing rights in 2003
but no treaty was signed since.

2. ^ "By UNMIK administration direction 1999/2". Unmikonline.org.

http://www.unmikonline.org/regulations/admdirect/1999/089%20Final%20%20ADE%201999-02.htm.
Retrieved 30 May 2010.

3. ^ By an internal act (references missing)

4. ^ Alongside Zimbabwean dollar (suspended indefinitely from 12 April 2009), US$, Pound Sterling,
South African rand and Botswana pula

5. ^ Except northern Cyprus that uses Turkish lira

6. ^ Including overseas departments

7. ^ Except Campione that uses Swiss franc.

8. ^ Only the European part of the country is part of the EU and uses the Euro. The Caribbean
Netherlands introduced the United States Dollar in 2011. Curaçao, Sint Maarten and Aruba have their
own currencies, which are pegged to the dollar.
 9. ^ "By monetary agreement between France (acting for the EC) and Monaco". http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2002:142:0059:0073:EN:PDF. Retrieved 30 May 2010.

10. ^ "By monetary agreement between Italy (acting for the EC) and San Marino". http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:209:0001:0004:EN:PDF. Retrieved 30 May 2010.

11. ^ "By monetary agreement between Italy (acting for the EC) and Vatican City". http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:299:0001:0004:EN:PDF. Retrieved 30 May 2010.

12. ^ By the third protocol to the Cyprus adhesion Treaty to EU and British local ordinance.

13. ^ "By agreement of the EU Council". http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?

uri=OJ:L:1999:030:0029:0030:EN:PDF. Retrieved 30 May 2010.

14. ^ As of 30 October 2009 (2009 -10-30)[update]:

Total EUR currency (coins and banknotes) in circulation 771.5 (banknotes) + 21.032 (coins) =792.53
billion EUR * 1.48 (exchange rate) = 1,080 billion USD

Total USD currency (coins and banknotes) in circulation 859 billion USD

* "Table 2: Euro banknotes, values (EUR billions, unless otherwise indicated, not seasonally
adjusted)" (PDF). European Central Bank.
https://stats.ecb.europa.eu/stats/download/bkn_notes_val/bkn_notes_val/bkn_notes_val.pdf.
Retrieved 13 December 2009. "2009, October: Total banknotes: 771.5 (billion EUR)"

* "Table 4: Euro coins, values (EUR millions, unless otherwise indicated, not seasonally adjusted)"
(PDF). European Central Bank.
https://stats.ecb.europa.eu/stats/download/bkn_coins_val/bkn_coins_val/bkn_coins_val.pdf. Retrieved
13 December 2009. "2009, October: Total coins: 21,032 (million EUR)"

* "Money Stock Measures". Federal Reserve Statistical Release. Board of Governors of the Federal
Reserve System. http://federalreserve.gov/releases/h6/current/h6.htm. Retrieved 13 December 2009.
"Table 5: Not Seasonally Adjusted Components of M1 (Billions of dollars), not seasonally adjusted,
October 2009: Currency: 859.3 (billion USD)"

* "Euro foreign exchange reference rates". European Central Bank.

http://www.ecb.europa.eu/stats/eurofxref/eurofxref-hist-90d.xml. Retrieved 13 December 2009.
"Exchange rate 2009-10-30: 1 EUR = 1.48 USD"

15. ^ In the quotation, the epsilon is actually represented with the Cyrillic capital letter Ukrainian ye (Є,
U+0404) instead of the technically more appropriate Greek lunate epsilon symbol (ϵ, U+03F5).

[edit] References
The global importance of the euro

Remarks by Lucas Papademos, Vice President of the ECB

at the Frankfurt European Banking Congress 2006

“Trade Center Europe”

Frankfurt am Main, 17 November 2006

I. Introduction

I would first like to thank the organisers for inviting me to this prestigious event. It is both a privilege and
a pleasure for me to participate in this year’s European Banking Congress.

Let me start with two general remarks. First, the international importance of the euro, and that of any
other currency, can be measured and assessed on the basis of several criteria, notably: the role it plays
in international trade and in global financial markets; the extent of its use by authorities as a reserve,
intervention and anchor currency; and its possible use by the public or firms outside the euro area as a
parallel currency, held for transaction purposes in the form of cash or bank deposits. The share of the
euro in global official reserves is an important criterion or indicator for judging its international role, but
it is not the only one.

The second general point I would like to make concerns the position of the ECB with regard to the
international role of the euro. As we have stressed in the past, the ECB considers the global use of the
euro as a market-driven process that reflects all the factors influencing the preferences of global market
participants and non-euro area authorities with regard to the functions it performs. So, we have a
“neutral” view on the international role of the euro. Nevertheless, we carefully monitor and analyse
pertinent developments in order to better understand the determinants of its global use and potential
implications for the ECB’s monetary policy.

II. The euro as reserve currency

After these preliminary remarks, let me focus on the importance of the euro in the global official
reserves held by central banks. The share of the euro in global official foreign exchange reserves
increased during the first few years following its introduction, but has remained relatively unchanged in
recent years. Specifically, the share of the euro rose from 18% in 1999 to 25% in 2003 and has been
relatively stable since then, reaching 25.4% at the end of June 2006.
There are four pertinent remarks that I would like to make concerning these figures. First, the current
share of the euro in global official reserves as calculated from the IMF statistics is higher than the share
of the sum of all legacy currencies of the euro – notably that of the Deutsche Mark – in global official
reserves at the end of 1998 before the euro was launched, which was about 18%. Second, the pertinent
IMF statistics cover only about two-thirds of global foreign exchange reserves, because a number of
countries with large holdings of reserves – mostly from Asia – do not fully participate in the IMF’s
survey. All countries, of course, provide figures for the total value of their reserves, but not all countries
report their composition by currency. Third, it is interesting to note that the share of the euro in the
total reserves held by those emerging market economies that do provide the relevant statistics rose
from around 19% in 1999 to almost 30% at the end of June 2006. Finally, it is worth keeping in mind that
the reported shares are influenced by valuation effects. Expressed in constant exchange rates (measured
at the first quarter of 1994), the increase in the share of the euro is somewhat less pronounced (the
share increased from 19% at the beginning of 1999 to 24% at the end of June 2006).

What are the main determinants of the currency composition of foreign exchange reserves? And how
can we explain the observed gradual evolution of the share of different currencies in total official
reserves? When discussing these questions, we need to distinguish, of course, between stocks and
flows. Changes in the currency composition of the existing stock of foreign exchange reserves therefore
might not only reflect a possible reallocation of part of the existing reserves held or the valuation effects
that I mentioned before. They could also be due to changes in the currency composition of the flows of
additional reserves. However, the latter – that is, the flow of additional reserves accumulated every year
– is relatively small, at about 500 billion US dollars per year. The outstanding stock of global reserves, by
comparison, amounts to about 4.6 trillion US dollars (at the end of June 2006). If we exclude large
valuation effects, the effects of changes in the currency composition of the flows of reserves on the
stock are likely to be relatively small and gradual.

A further important aspect in this discussion is that central banks’ decisions on the currency composition
of the stock of their reserves are mainly based on a number of criteria that are different than those that
guide the decisions of private investors. For example, central banks of emerging market economies
allocate their reserves only partly with a view to optimising the returns of their portfolio. Their decisions
mainly reflect other considerations, such as the choice of a currency as a nominal anchor for the conduct
of monetary policy, the currency composition of external debt or trade invoicing. In this context, allow
me to draw your attention to the fact that some 25 countries use the euro as a reference currency for
their exchange rate polices.[1] As those factors relate to long-term policy choices or economic
developments, they can be expected to result in strong inertia in the allocation and management of
reserves by central banks. There are, however, exceptions: for example, the authorities in Russia
announced in December 2005 that they had increased the share of the euro in foreign exchange
reserves to 40% (from 33% in mid-2005). To some extent, this decision may have been linked to a more
prominent role of the euro in the Bank of Russia’s currency basket for the management of exchange rate
volatility. At the same time, in some countries, notably oil- or other commodity-exporting countries, an
increasing proportion of the “official” foreign currency assets is held outside central banks by public
investment agencies. These agencies may invest in a wide spectrum of assets denominated in various
currencies, with the aim of maximising the expected return on their holdings.

III. Prospects for the further development of the international role of the euro

Given these observations, what can be expected with regard to the relative importance of the euro in
global official reserves in the future? As is well-known, prediction is very difficult, especially about the
future. And you will understand that I will not speculate on this. That said, I will explore, more generally,
the prospects for the further development of the international role of the euro. On this point, allow me
to make a general pertinent remark. Clearly, a necessary condition for fostering the international role of
a currency is its credibility, as determined by the stability of its internal value. The ECB, by preserving
price stability in the euro area, “sets the stage” and establishes a necessary condition for the wider
international use of the euro. But whether or not the international importance of the euro will further
increase depends on many other factors as well, in particular the investment decisions of private agents
and public authorities.

Traditionally, a key determinant of the international use of a currency – especially as a means of

exchange – has been trade, the very theme of this year’s European Banking Congress. From the drachma
in the kingdoms of the Hellenistic period, to the guilder during the heyday of the Dutch trading empire,
to sterling in the 19th century and the dollar over the past half century until today, trade and
international currency use went hand in hand: the larger the importance of a country or currency area in
world trade, the greater the international importance of its currency. Given Europe’s role as the world’s
largest trader, it is not surprising that the share of the euro in the invoicing and settlement of the euro
area’s trade with the rest of the world has increased significantly. The latest numbers collected by the
Eurosystem show that most euro area countries conduct more than half of their trade with partners
outside the euro area in euro. What is more striking is that trade taking place entirely outside the euro
area – for instance, between EU countries that have not yet adopted the euro as well as between
countries seeking to accede to the EU – is also being invoiced and settled in euro. As these
developments cannot be fully explained by increasing trade linkages of these countries with the euro
area, it would appear that the euro has started to become a vehicle currency in international trade. That
said, recent ECB research on this issue has also shown that the euro does not display one of the
characteristics typically associated with vehicle currencies – namely their use in the trade of
commodities.
An international currency is not only used for trade purposes, but also for financing and investment
purposes. And also in this respect, we observe wider use of the euro in international financial markets.
For example, over the past seven years, the share of the euro in the stock of international debt
securities gradually rose from 19% to slightly below 32%. Other market segments – for example the spot
foreign exchange market – are characterised by a high degree of stability, possibly reflecting the
importance of network externalities. However, market data (from the Continuous Linked Settlement
system) show that the euro is the second most widely used currency, accounting on average for almost
22% of all daily transactions.

The increase in the use of the euro as a financing currency in international bond markets, has been a key
feature of its international role. A geographical breakdown of the outstanding stock of international
debt securities issued in euro shows that European entities (public authorities and private firms) in the
vicinity of the euro area account for the largest share of such issues. What are the factors that influence
the choice of currency by firms when issuing bonds? Research undertaken at the ECB (based on the
analysis of 8,000 bonds issued by 1,500 companies in the United States, the euro area, Japan and the
United Kingdom) suggests that these decisions are influenced by both strategic and cost-related
considerations. The firm size and the investor base in the euro area affect a firm’s decision in which
currency to issue a bond. And a firm’s exposure to the euro area also has a bearing on the currency
choice for bond issuance. Thus, the increased use of the euro as a currency for bond issuance reflects
firms’ attempts to hedge their exposure to the euro area and to broaden their investor base by tapping
euro area financial markets. This finding brings me to my last remark.

Whether or not private agents use the euro as their currency of choice when seeking finance or
investment opportunities depends on the availability of large, integrated and liquid financial markets.
While – as I said in the beginning – the ECB neither encourages nor hinders the international use of the
euro, we do promote financial integration in Europe. We know from economic theory that more
integrated and efficient financial markets can help raise productivity, foster innovation and thus
enhance economic growth. But now we also have strong empirical evidence, based on ECB research
analysing the available evidence for many countries and sectors, that the size and depth of capital
markets have a significant positive impact on economic growth. For Europe, therefore, the creation of
larger and more liquid financial markets is, and should be, a desirable end in itself. At the same time,
more developed and efficient financial markets in the euro area will increase the attractiveness of our
currency for international investors, and thus enhance the euro’s global role.

IV. Concluding remarks

In market economies, people are free to choose among alternatives in line with their preferences. The
fact that many economic agents – be they private individuals, investors, savers, traders or public
authorities – outside the euro area increasingly choose the euro as their preferred currency testifies to
the trust which they place in its stability and credibility. This is a sign of distinction. At the same time, it
also serves as a constant reminder of the importance to preserve this confidence, by maintaining the
euro’s internal purchasing power, by enhancing the growth potential of our economy, and by further
integrating and deepening Europe’s financial markets.

Thank you very much for your attention.

[1] If we include the countries of the CFA Franc Zone in Western Africa, this number rises to 40 countries
which the IMF classifies as having exchange rate regimes that either use the euro as sole reference
currency or as part of a currency basket.

If we include the countries of the CFA Franc Zone in Western Africa, this number rises to 40 countries
which the IMF classifies as having exchange rate regimes that either use the euro as sole reference
currency or as part of a currency basket.

European Central Bank

Directorate Communications

Press and Information Division

Kaiserstrasse 29, D-60311 Frankfurt am Main

Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404

Internet: http://www.ecb.europa.eu

Reproduction is permitted provided that the source is acknowledged.

The euro & you

The international role of the euro International role of the euro Word doc 31 kbs
The single currency is designed to promote growth and economic stability in the economies of the
participating countries. A side effect has been the emergence of the euro as a new international
currency, "one which has important benefits for our external economic partners," Economic and
Monetary Affairs Commissioner, Pedro Solbes, points out. "For them, it means reduced volatility in
monetary relations and improved trade and investment conditions."

One of the most immediate signs that the euro has been accepted by the world at large is its importance
in international bond markets. This became immediately evident at the beginning of 1999 when for a
time the euro overtook the dollar as the most widely chosen currency for new bond issues. The
situation has stabilised since then, but the euro has remained popular. In 2001, 36.5% of all new issues -
so-called gross issuance - were in euro according to the Bank for International Settlements, compared to
49.1% in dollars. In 2002, the corresponding figures were 38.4% and 46.9%.

Moreover, while the dollar's market share of new has been stagnant at best, the euro's has increased
sharply. This has reversed the situation in the years prior to launch of the euro. At that time, the euro's
predecessor currencies were struggling to hold their own in competition with all other currencies.
Meanwhile, the dollar was gaining ground at the expense of the yen. Since the launch of the euro, the
US dollar has struggled to maintain its market share. The euro, on the other hand, has advanced in leaps
and bounds.

This was initially largely at the expense of the yen, but figures from the Bank for International
Settlements (BIS) show that the euro has not only continued to make strides in Europe, but has also
strengthened its position in the rest of the world. In 2002, of net issuance, i.e. gross issuance less the
amount of issues which have been redeemed, outside the euro area 14.9% was in euro, compared to
only 11.1% in 2001. In the United States, the euro increased its share of net issuance from 10.6% in
2001 to 11.3% in 2002. In the rest of the world outside the euro area, the figures were 14.1% and
22.7%, reflecting the growing interest in the euro in markets such as Asia. Overall, the euro's share of
total net issuance worldwide went from 44.3% in 2001 to 51.2% in 2002.

The main attraction of bonds issued in euro is that there is now a single hungry market of savers in the
euro area looking for low- to medium-risk investments in their own currency. For the issuers, it costs
much less to reach this market now than when it was fragmented because they can issue in one
currency for a large market. In addition, it is much easier to trade the bonds once they have been issued
because there are more potential buyers and sellers. This makes the market more competitive. At the
same time, the euro offers an opportunity to diversify sources of funding away from the US dollar. This
combination has proved very attractive, in particular, to multinational corporations and mortgage
agencies, such as 'Freddie Mac', the Federal Home Loan Mortgage Corporation in the United States.

As a rule of thumb, when issuers from outside the euro area see European investors as their primary
target, they denominate the issue in euro. If their market is global (including Europe), then the dollar is
still the currency of choice. This is something that is changing slowly but steadily.

As a transaction currency, the euro has started by building up its position on its domestic markets and by
making its mark on its immediate neighbours. "The international role of the euro has a strong regional
focus," the European Central Bank pointed out in a review of the international role of the euro late last
year.

For example, countries with strong institutional or trade links with the euro area are generally more
likely to use the euro in their financial markets, as a peg or anchor for their exchange rates, for invoicing
or as a parallel currency. The Lebanon, Egypt and Israel have all borrowed euro on international financial
markets. The euro represents a significant share of trading in bonds and over-the-counter derivatives in
the London financial markets, for example, but does not play the same role in New York or Far Eastern
financial markets.

Another straw in the wind is a small but significant shift from the dollar into euro in bank deposits in the
Middle East, Africa and emerging Europe. The Bank for International Settlements pointed out this year
that Russian banks have been significantly increasing their euro-denominated deposits with bank in
developed Europe. Deposit outside Russia have been on an upward trend since the end of 1998 "and
have continued to migrate from banks in the United States to banks resident in Europe."

The euro also circulates as a parallel currency in central and south-eastern Europe, parts of the Balkans
and around the Mediterranean. This is logical. The German mark and to a lesser extent other former
euro-area currencies like the Austrian schilling and the French franc had long circulated in these regions.
It was not self-evident in 2001, however, that when the time came to exchange this money, the euro
would be the currency of choice. The euro was weakening against the dollar and there was speculation
that the dollar would be regarded as a better 'safe haven' currency.

What exactly happened is hard to establish because no one knows how much emerged from under the
mattresses in these countries and entered the banking system for the first time, but interest in the euro
was certainly strong. Euro-denominated deposits rose by more than €13.5 billion (around 40%) in 2001
and in many countries went on increasing strongly in 2002. The increases were particularly marked in
Croatia, Hungary, Poland, Turkey and Israel. Demand for euro banknotes was also strong and the shift
into domestic or other currencies appears to have been limited according to the European Central Bank.

There was further proof that the euro had 'arrived' as an international currency during the Iraq conflict.
The strengthening of the euro was clearly related to a view that the euro is now a 'safe haven' currency.

The ultimate accolade for a currency is to be a regular component of the world's foreign currency
reserves. This is an exclusive club. Four members - the dollar, the euro, the yen and the pound sterling -
account for 90% of the world's reserves. 68% of all reserves were held in dollars at end-2001, a figure
unchanged for three years. 13% were in euro. Since its launch, the euro has held pretty much the same
position, one not significantly different from the combined share of euro-area currencies in international
reserves before 1999. That in itself was a creditable performance because the value of the euro
weakened in the first couple of year's of existence.

Nevertheless, when the figures for 2002 become available in September this year, they will be eagerly
scanned by many in the euro-area for signs that the euro is entrenching its position in this club.

this page updated January 11, 2008

"The Importance of the Euro in a Rapidly Changing Environment: An Asian Perspective"

Speech By

Haruhiko Kuroda

President, Asian Development Bank

At the Brussels Economic Forum 2008: Economic and Monetary Union in Europe: 10 Years On
15 May 2008

Brussels, Belgium

I. Introduction

Mr. Strauss-Kahn, Mr. Regling, fellow panellists, distinguished guests, ladies, and gentlemen:

In less than 10 years, the euro has evolved into an international currency that can stand shoulder to
shoulder with the US dollar. Asia has been particularly interested to see how the euro has helped
promote prosperity and financial stability in Europe. The long process of regional initiatives that led to
its establishment can serve as a benchmark for the growing regionalism and economic integration we
are now experiencing in Asia.

Ten years ago several Asian countries were struggling to extricate their economies from the currency
and banking crises that shook the foundations of Asia's much-heralded economic expansion. Despite the
so-called Asian "miracle", the region's financial systems were largely underdeveloped and relied heavily
on bank financing. This source of financing was in turn too closely associated with vested interests and
government policies. At the same time, reliance on short-term foreign debt led to currency and maturity
mismatches. Speculators preyed on Asia's structural weaknesses, and the crises ensued. Some hard
lessons were learned in the process.

But recovery from the crisis was fast and market-based. With structural reforms in place and
competition intensifying, our region's international economic influence has surged. Today, Asia faces
new challenges arising from globalization and the rapidly changing global financial environment. The
euro has played an essential role in fostering harmony among diverse economies, which had conflicting
monetary and fiscal policies, tariffs, and other restrictions on trade and investment. This experience is
extremely useful for Asia as the region moves ever-more resolutely toward its own style of regionalism.

Today I will speak of the importance of the euro to Asia and our own experience with regional
cooperation and integration. Then, I will briefly touch upon the challenges facing Europe and Asia as the
current global financial turmoil continues to unfold.
II. The euro and Asia

There is little question that the international role of the euro has grown rapidly. When it replaced 12
European currencies-particularly as successor to the mark and the franc-many questioned if the euro
could challenge the pre-eminence of the dollar. Asia in particular relied on the dollar for trade and
financial transactions and the dollar covered a sizeable share of the US market for Asian goods. Since the
introduction of the euro, however, Europe has gained proportionally as a destination for Asian products,
while the dominance of the US market has waned. In 2000, East Asia's trade with the eurozone was 14%
of its global total, compared to 24% with the US. Today, exports to eurozone countries and the US are
almost equal, each comprising about 16% of the global total.

In its early days, the dollar was the preferred mode of payment in trade finance with Asia. Also, during
that time the euro was depreciating apace against the US dollar. But as US spending requirements
increased against the backdrop of rapid globalization and Asia's surging economic growth, the huge
global payments imbalances that ensued left international businessmen and traders looking for
alternative currencies. The euro as a currency for invoicing trade has been steadily on the rise. With the
rapid depreciation of the dollar in recent years, preference for the euro in financing trade between
Europe and Asia appears to have risen. Many exporters from China, for example, are now quoting and
demanding payment in euros for products shipped to the EU. Private businessmen have been seeking
alternatives to protect their export revenues from the rapid depreciation of the US dollar. And the euro
has provided just that alternative.

This is not to say that use of the USD as an international currency in Asia has fallen precipitously. But its
influence is relatively declining. And use of the euro as a component of international reserves is
increasing. Reserves held in euros worldwide increased from 14% of the world total in 2000 to 17% in
2007. Use of the US dollar for reserves fell 15 percentage points, from 56% in 2000 to 41% last year. And
the decline of US dollar assets in reserves was far more evident in surplus emerging markets, particularly
those in emerging Asia.

While still limited in terms of international transactions and reserve holdings in emerging Asia, use of
the euro is expected to increase further as the economic relationship between Europe and Asia
continues to strengthen.

So what can Asia learn from the euro experience? Let me now turn to how our region is managing the
process of economic cooperation and integration.
III. Progress and prospects for Asian monetary and financial integration

One of the foremost lessons derived from the 1997/98 Asian financial crisis was the importance of
regional cooperation in fostering financial stability. Today, varied intergovernmental forums in Asia
support cooperation among finance ministers, central bank governors, and capital market regulators.
The momentum for financial and eventual monetary integration has been growing within the
Association of Southeast Asian Nations, or ASEAN; and in particularly within ASEAN+3, the expanded
group that includes China, Japan and Republic of Korea.

In fact, the ASEAN+3 finance ministers recently reiterated their commitment to mutilateralize the Chiang
Mai Initiative to create a self-managed reserve pooling arrangement governed by a single contractual
agreement. The Chiang Mai Initiative was created to address short-term liquidity problems in the region
and to supplement existing international financial arrangements. Among the rigorous principles
governing the Initiative are economic surveillance through a stronger Economic Review and Policy
Dialogue, an activation mechanism, decision making rules and lending covenants, and timely
disbursement. The initial size of the new Chiang Mai Initiative will be at least $80 billion.

Through cooperation, Asian financial markets have become stronger and safer. Countries have
introduced greater competition, encouraged private sector ownership and foreign entry, and tightened
governance, disclosure, and prudential regulation. Financial institutions' capacity to assess and manage
risks has improved. Financial deepening has been faster in emerging East Asia than either in the EU or
US-though of course this comes from a substantially lower base. Interestingly, as a percent of GDP, Asia
now has larger capital markets than the EU. Capital markets have grown rapidly in absolute terms, as a
share of total financial assets, and relative to GDP.

Two important capital market initiatives are currently helping develop regional bond markets and
enhance financial resilience for the region. The first is the Asian Bond Markets Initiative, launched in
2004, which has helped strengthen the market infrastructure for local-currency bond development. At
their recent meeting, the ASEAN+3 finance ministers approved a new roadmap for the bond market
initiative, focusing on four key areas: i) promoting issuance of local currency-denominated bonds, ii)
facilitating the demand of local currency-denominated bonds; iii) improving the regulatory framework
and iv) improving related infrastructure for bond markets. The second initiative- the Asian Bond Fund,
which was launched by eleven central banks in 2003- supports development of regional bond funds.
ASEAN's subregional efforts provide a model for still deeper cooperation: in addition to conducting
regular surveillance, ASEAN itself also has a long-term roadmap for developing capital markets and
liberalizing capital accounts and financial services. Its work on capital market development, for example,
covers information sharing, harmonization, trading, clearing and settlement, and even the launch of an
exchange-traded fund.

In its move toward greater cooperation and integration, Asia is looking to Europe for practical
experience as well. Of course, some of that experience-for example its preference for a supranational,
rules-based structure-may not sit comfortably in Asia given its varied history, circumstances or stage of
development. Despite ASEAN's new Charter, finalized in November last year, which places greater
emphasis on a rules-based structure, Asia has yet little appetite for the kind of supranational institutions
that have been established in Europe to effect deeper economic integration.

There are, however, alternative routes to integrated markets and institutional convergence.
Cooperation through incentive-compatible agreements, for example on regulatory standards, is an
equally valid way of creating institutions for integrated markets. This is the so called 'open method of
coordination' in Europe, which allows for inter-governmental approaches to regulation, guidelines,
benchmarking and peer pressure for convergence in policy development.

The sequencing of regional initiatives will also differ. In fact, monetary integration in Asia might not
easily be achieved in the foreseeable future. Given the diverse socio-political background of Asia's
economies, mustering political support for delegating some autonomy to regional arrangements would
be much more difficult than it was in Europe.

Given these constraints, however, it is likely that a group of countries, say among ASEAN or ASEAN+3,
might choose to develop a common currency basket to measure exchange rate variations or move
toward greater exchange rate policy coordination. Given the rapid expansion of intra-regional trade
within Asia, and particularly emerging East Asia, it might be time to start instituting a framework that
can help monetary authorities coordinate their exchange rate policies. This will help reduce frictions in
trade flows and ease cross-border capital mobility. An appropriate and adjustable basket of regional
currencies, either trade-weighted or by using other methods, would help monetary authorities gauge
whether their currency value is optimal for their policy objectives. It could be used initially as a tool for
assessing where adjustments are advisable.
Greater intraregional exchange rate stability-and extra-regional exchange rate flexibility-could also help
countries manage the adverse effects of a deteriorating external environment. With an enhanced and
better coordinated regional strategy on exchange rate policy, regional currencies could adjust in an
orderly manner against the US dollar. This would help combat imported price-driven inflation while
mitigating unilateral appreciation pressures, thereby maximizing the benefits of strong intraregional
trade dynamics amid slowing external demand.

With this in mind, what are the challenges facing Europe and Asia amid current financial instability and
the outlook for softening global growth?

IV. Challenges amid Global Financial Turmoil

Heightened volatility in foreign exchange markets coupled with the recent financial turmoil is a major
concern for policy makers. The US economic recession and the aggressive US Federal Reserve interest
rate cuts have sent the dollar to historic lows particularly against the euro. Amid the recent financial
turmoil, the euro's ascent against the US dollar has been nothing short of phenomenal. Widening
interest rate differentials as the US Fed aggressively eased rates is one factor. But the appreciation may
also reflect the declining influence of the US dollar in foreign exchange markets.

Asian currencies have also appreciated over the past few years, as pressures from large capital inflows
and reserve accumulation mounted. This has helped create rather volatile exchange markets. Aside from
the impact on exports, for example, the current exchange rate volatility can hurt external funding
conditions for many emerging Asian economies. Volatility in the movement of foreign portfolio
investments-short-term funds placed in stocks, bonds and banks' overseas borrowing-has already
increased this year. Exchange rate instability in emerging markets often means hefty risk premiums for
investors to cover the increased exchange rate risk. Should the cost of capital and the level of
investment be severely affected-say by greater or continuing surrounding turmoil in the global credit
markets-economic performance and growth in emerging Asian countries could suffer significantly.

Any sudden unwinding of global payments imbalances also poses significant risks to macroeconomic
managers in Asia and Europe. A loss of confidence in US dollar assets could cause disorderly adjustments
in major international currencies given the speed of transmission in the global financial marketplace.
And this could have significant implications for Asian currencies. Since the financial crisis of the late-
1990s, many emerging Asian economies now use flexible exchange rate regimes, with multiple anchor
currencies. Increased volatility and uncertainty among foreign exchange markets requires greater and
closer cooperation and policy coordination to maintain currency stability. With Europe's and Asia's
growing economic influence in international forums-and their increasingly close ties together-greater
policy cooperation between the two regions would contribute significantly to global financial stability.

V. Conclusion

In closing, I expect that the euro will continue along its path as an alternative international currency to
the US dollar. This will benefit rapidly expanding emerging Asian economies, the region as a whole, and
the world. The euro will continue to grow in prominence in Asia as a tool for trade and financial
transactions.

The future of economic cooperation and integration in Asia will proceed pragmatically, and in step with
emerging opportunities. The region continues to learn a great deal from Europe and the euro
experience. But given its diversity, size, and varying stages of economic development, the path toward
monetary integration in Asia will naturally build upon market demands for increased cross-border
capital movement and the need for regional exchange rate stability amid a changing global financial
environment. Ultimately, Asia can learn valuable lessons from the experience of the euro in this regional
endeavor.

Thank you.