On 1 January 1999, the European single currency “Euro” was duly launched by eleven of the then fifteen European Union (EU) members. The creation of a single European currency was an official objective of the EU in 1969. With the Maastricht Treaty in 1993, the member states were legally bound to start the monetary union no later than 1 January 1999. The Euro remained an accounting currency until 1 January 2002, when euro notes and coins were issued and national currencies began to phase out in the Eurozone, which by then consisted of twelve member states.
At present the Euro is the official currency of 17 of the 27 member states of the EU. It is also the currency used by the Institutions of the EU. The Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. 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. 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 and the second most traded currency in the world after the U.S. dollar. 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. 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.
The name Euro was officially adopted on 16 December 1995. 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. The Euro is designed to help build a single market by, for example: easing travel of citizens and goods, eliminating exchange rate problems, providing price transparency, creating a single financial market, price stability and low interest rates, and providing a currency used internationally and protected against shocks by the large amount of internal trade within the Eurozone. It is also intended as a political symbol of integration and stimulus for more.
The Euro, and the monetary policies of those who have adopted it in agreement with the EU, are under the control of the European Central Bank (ECB). There are eleven other currencies used in the EU.
Administration
The European Central Bank (ECB) in Frankfurt, Germany, is in charge of the Eurozone's monetary policy. The Euro is managed and administered by the 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, however, not all states have done so. The United Kingdom and Denmark negotiated exemptions, 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.
Payments clearing, electronic funds transfer
All intra-EU transfers in Euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member States of the EU, even those outside the Eurozone providing the transactions are carried out in Euro. 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.
Eurocurrency
Currency deposited by national governments or corporations in banks outside their home market are called Eurocurrency. This applies to any currency and to banks in any country. For example, South Korean won deposited at a bank in South Africa, is considered Eurocurrency or Euromoney. Having "Euro" does not mean that the transaction has to involve European countries. However, in practice, European countries are often involved.
Eurocurrency Market
Eurocurrency market is the money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe. Thus, it is a market where financial and banking institutions provide banking services denominated in foreign currencies. The Eurocurrency market allows for more convenient borrowing and lending, which improves the international flow of capital for trade between countries and companies. For example, a Japanese company borrowing U.S. dollars from a bank in France is using the Eurocurrency market. Unlike Eurocredit markets, however, loans in this market are made short-term.
The Euro Crisis and its impact on India
The Euro was a great accomplishment of the EU. But there are further requirements to a Union than a common currency. Nothing was done about the other requirements like a unitary labour market, a common fiscal policy and ultimately a single political structure. And right now the world’s second largest currency is facing severe threat. The value of Euro is depreciating at a faster rate than ever before. This is the first Eurozone crisis since its creation in 1999. The source of the crisis is the sovereign debt crisis in Greece which developed in late 2009. The Greek debt crisis is spilling over to other European nations like Portugal, Spain and Ireland. With a budget deficit of 15.4 per cent of GDP, Greece’s debt amounts to over 340 million Euros and its unemployment rate has touched a historical high. The Greek crisis shows the inherent weakness in the Euro’s structure. While opting for the Euro, Greece had voluntarily surrendered its monetary policy to the European Central Bank. This has curtailed its scope to make changes in its interest and exchange rates as the ‘one size fits all’ rates guide all the Eurozone members. So Greece is willing to quit the Euro. Other Eurozone members are also thinking on similar lines. Though a host of bail-out measures have been carried out, the dangers of a monetary union are obvious to all and it has been suggested that for long term stability what is required is a common fiscal policy.
India exports about a quarter of its merchandise to the EU, amounting to about Rs 8.4 lakh crore. The European debt crisis will reduce India’s exports. With the depreciation of Euro’s value, Indian goods will become relatively costlier in the European market, affecting international competitiveness of Indian goods. Again, the downhill European market will reduce foreign investment in India. The worst prediction is that Greece could soar up crude oil prices even more, which would make inflation in India unmanageable.
(Written with references from various websites and newspaper articles)
