| unofficial_users = Andorra, Kosovo, Montenegro | inflation_rate = 1.8% | inflation_source_date = European Central Bank, September 2006 | inflation_method = HICP | pegged_by = BAM, BGN, CVE, KMF, XPF, XOF, XAF, EEK, LTL, LVL, MTL | subunit_ratio_1 = 1/100 | subunit_name_1 = cent | subunit_inline_note_1 = actual usage varies depending on language | symbol = € | plural = See Linguistic issues concerning the euro | plural_subunit_1 = See article | frequently_used_coins = 1, 2, 5, 10, 20, 50 cent, €1, €2
unless otherwise stated as rarely used | rarely_used_coins = 1 and 2 cent
(applies to Finland and the Netherlands only) | coin_article = Euro coins | frequently_used_banknotes = €5, €10, €20, €50 | rarely_used_banknotes = €100, €200, €500 | banknote_article = Euro banknotes | issuing_authority = European Central Bank | issuing_authority_website = www.ecb.eu | printer = | printer_override_with_original_text = Y | printer_website = }} The euro (currency sign: €; banking code: EUR) is the official currency of the Eurozone (also known as the Euro Area or the Euro Land), which consists of 13 European states (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain) and will extend to include Cyprus and Malta from 1 January 2008. It is the single currency for more than 320 million Europeans. Including areas using currencies pegged to the euro, the euro directly affects more than 480 million people worldwide. With more than €610 billion in circulation as of December 2006 (equivalent to US$802 billion at the exchange rates at the time), the euro is the currency with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar.
   The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in 2002. It replaced the former European Currency Unit (ECU) at a ratio of 1:1.
   The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the European System of Central Banks (ESCB) (composed of the central banks of its member states). As an independent central bank, the ECB has sole authority to set monetary policy. The ESCB participates in the printing, minting and distribution of notes and coins in all member states, and the operation of the Eurozone payment systems.
   While all European Union (EU) member states are eligible to join if they comply with certain monetary requirements, not all EU members have chosen to adopt the currency. All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty have pledged to adopt the euro in due course. Maastricht obliged current members to join the euro; however, the United Kingdom and Denmark negotiated exemptions from that requirement for themselves. Sweden turned down the euro in a 2003 referendum, and has circumvented the requirement to join the euro area by not meeting the membership criteria.
   On the other hand, several small European states (The Vatican, Monaco, and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro, and Kosovo have adopted the euro unilaterally, while not being EU members as well.
   

Characteristics of the euro

Coins and banknotes

Payments clearing, electronic funds transfer

The currency sign €

disputed

Economic and Monetary Union

History (1990–2007)

Current Eurozone (2007)

The term "fiscal transfers" refers to the transfer of money between areas. Regions that are economically worse off or suffer from negative economic shocks receive money, creating a counter cyclical effect that lowers the price, wage, and unemployment differentials between regions. Theoretically, Europe has no bail-out clause in the Stability and Growth Pact, meaning that fiscal transfers are not allowed, but it's impossible to know what will happen in practice. So while Europe scores well on some of the measures characterising an OCA, it has lower labour mobility than the United States and similarly can't rely on Fiscal federalism to smooth out regional economic disturbances.

Transaction costs and risks

The most obvious benefit of adopting a single currency is removing from trade the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. On the consumer side, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (for example credit cards, debit cards and cash machine withdrawals).
   The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals looking to invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. The reduction in risk is particularly important for countries whose currencies have traditionally fluctuated a great deal, particularly the Mediterranean nations.
   Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Eurozone.

Price 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, for example speculative trade in a commodity between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. Similarly, price transparency across borders should help consumers find lower cost goods or services. In reality, the effects of the euro over the level of the prices in Europe are disputable. Many citizens cite the strong perceived increase in prices in the years after the introduction of the euro, although numerous empirical studies have failed to find much real evidence of this. (External Link) It is speculated that the reason for this perception is that the prices of small, everyday items were rounded up significantly. For example, a cup of coffee that once cost two German Mark might now cost €1.50 or even €2.00—a 50–100% increase, although wages in many countries have also increased. At the same time, a large appliance or rent payment rounded up to the next obvious euro level would be a negligible proportional increase. The fact that the prices people see every day were affected more strongly might explain why so many people perceive the "euro effect" as being significant, while official studies—which look at the breadth of expenditures, in proportion—would downplay it.

Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a highly regressive tax (seigniorage) and theoretically discourages investment, it's 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, it's independent of the pressures of national governments and has a mandate to keep inflationary pressures low. Member countries join the bank to credibly commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels of expected inflation. The ECB (unlike the Federal Reserve in the United States of America) doesn't have a second objective to sustain growth and employment.
   National and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in legacy currencies. 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.

A new reserve currency

The euro is widely perceived to be a major global reserve currency, sharing that status with the U.S. dollar (USD), albeit to a lesser degree. The U.S. dollar continues to enjoy its status as the primary reserve of most commercial and central banks worldwide.
   Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The euro inherited this status from the German mark, and since its introduction, has increased its standing somewhat, mostly at the expense of the dollar. The possibility for the euro to become the first international reserve currency in the near future is now widely debated among economists. Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 by stating that the euro could indeed replace the U.S. dollar as the world's primary reserve currency. He said that it's "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."
   Additionally, there has been some suggestion that the recent weakness of the US dollar might encourage various parties to increase their reserves in euro at the expense of the dollar.
A currency is attractive for international transactions when it demonstrates a proven track record of stability, a well-developed financial market to trade the currency, and proven acceptability to others. While the euro has made substantial progress toward achieving these features, there are a few challenges that undermine the ascension of the euro as a major reserve currency. Persistent excessive budget deficits of some member nations, economically weak new members, conservatism of financial markets, and inertia or path dependency are all important factors keeping the euro as a junior international currency to the U.S. dollar. However, at the same time, the USD has increasingly suffered from a double deficit and consequently has its own concerns.
   As the euro becomes a new reserve currency, Eurozone governments will enjoy substantial benefits. Since money is effectively an interest-free loan to the issuing government by the holder of the currency—foreign reserves act as a subsidy to the country minting the currency (see Seigniorage). However, reserve status also holds risks, as the currency may become overvalued, hurting European exporters, and potentially exposing the European economy to influence by external factors who hold large quantities of euro.

Criticism

Some European nationalist parties oppose the euro as part of a more general opposition to the principle of a European union. A significant group of these include the members of the Independence and Democracy bloc in the European Parliament. Additionally the Green Party of England and Wales is opposed for anti-globalisation reasons but the rest of the European Green Party bloc in the European Parliament don't share their stances.
   In their view, the countries that participate in the EMU have surrendered their sovereign abilities to conduct monetary policy. The European Central Bank is required to pursue a policy that might be at odds with national interests and there's no guarantee of extra-national assistance from their more fortunate neighbours should local conditions necessitate some sort of economic stimulus package. Many critics of the EMU believe the benefits to joining the organisation are outweighed by the loss of sovereignty over local policy that accompanies membership.
   The euro is underpinned by the Stability and Growth Pact, which is designed to ensure even fiscal policy across the Eurozone. The SGP has been criticised for removing the ability of national governments to stimulate their own economies to a certain extent, in the only way left to them now that monetary policy is determined supranationally. The failure of some member states to observe the SGP, and its inherent problems have led to minor reforms, and further reforms are likely.

Euro exchange rate

Flexible exchange rates

US dollar/Euro 1999-2007>

Year		Date	Highest ↑		Date	Lowest ↓
1999		03 Dec	€0.9985		05 Jan	€0.8482
2000		26 Oct	€1.2118		06 Jan	€0.9626
2001		06 Jul	€1.1927		05 Jan	€1.0477
2002		28 Jan	€1.1658		31 Dec	€0.9536
2003		08 Jan	€0.9637		31 Dec	€0.7918
2004		14 May	€0.8473		28 Dec	€0.7335
2005		15 Nov	€0.8571		03 Jan	€0.7404
2006		02 Jan	€0,8456		05 Dec	€0.7501
2007		12 Jan	€0.7756		18 Oct	€0.6993

US dollar 1999-2007>

Year		Date	Lowest ↓		Date	Highest ↑
1999		03 Dec	$1.0015		05 Jan	$1.1790
2000		26 Oct	$0.8252		06 Jan	$1.0388
2001		06 Jul	$0.8384		05 Jan	$0.9545
2002		28 Jan	$0.8578		31 Dec	$1.0487
2003		08 Jan	$1.0377		31 Dec	$1.2630
2004		14 May	$1.1802		28 Dec	$1.3633
2005		15 Nov	$1.1667		03 Jan	$1.3507
2006		02 Jan	$1.1826		05 Dec	$1.3331
2007		12 Jan	$1.2893		18 Oct	$1.4299

The ECB targets interest rates rather than exchange rates and in general doesn't intervene on the foreign exchange rate markets, because of the implications of the Mundell-Fleming Model which suggest that a central bank can't 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. This explains why the exchange rate of the euro vis-à-vis other currencies is characterised by strong fluctuations. Most notable are the fluctuations of the euro versus the U.S. dollar, another free-floating currency. However this focus on the dollar-euro parity is partly subjective. It is taken as a reference because the European authorities expect the euro to compete with the dollar. The effect of this selective reference is misleading, as it gives observers the impression that a rise in the value of the euro versus the dollar is the effect of increased global strength of the euro, while it may be the effect of an intrinsic weakening of the dollar itself.

Against other major currencies

After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. At its introduction in 1999, the euro was traded at 1.18 US$/€, but by October 26, 2000, it had fallen to an all-time low of 0.8228 $/€. The euro then began to recover, rising to nearly $0.96 by the beginning of 2001, but declined again (although less than previously), reaching a low of $0.8344 on July 6, 2001. After the appearance of the coins and notes in 2002 and the replacement of all national currencies, the euro then began steadily appreciating, and reached parity with the U.S. dollar on July 15, 2002. Since December 2002, the euro hasn't fallen below parity with the U.S. dollar. Since November 2003, it has remained above $1.15 and since August 2006 it didn't fall under $1.25 but broke an all time high in July 2007 topping $1.38. To put this record high into perspective, $1.38 equates to an increase of only $0.20 from the euro's initial trading price of $1.18, compared to the loss of about $0.35 when it hit its record low. A similar increase would result in an exchange rate of $1.53 for one euro. Later in 2007 the euro surpassed $1.40 in September, and in October the dollar fell below €0.70.
   On 23 May 2003, the euro surpassed its initial ($1.18) trading value for the first time. At the end of 2004, it reached a peak of $1.3668 (0.7316 €/$) as the U.S. dollar fell against all major currencies, fuelled by the so-called double deficit in the US accounts. But the dollar recovered in 2005, rising to $1.18 (0.85 €/$) in July 2005, and was stable throughout the second half of 2005. The steep increase in U.S. interest rates during 2005 had much to do with this trend. By early December 2006, the dollar had fallen below €0.75, hitting a low of 0.7495 €/$ (1.3340 $/€), slightly more than 3 cents above its record low, set in late 2004. On October 18, 2007, the dollar fell to an all-time low at $1.4299 against the euro.

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

Currencies pegged to the euro

There are a number of foreign currencies that were pegged to a European currency and are now currencies related to the euro: the Cape Verdean escudo, the Bosnia and Herzegovina convertible mark, the Bulgarian lev, the CFP franc, the CFA franc and the Comorian franc.
   In total, the euro is the official currency in 13 states inside the European Union, and 5 states/territories outside the European Union. In addition, 25 states and territories have currencies that are directly pegged to the euro including 14 countries in mainland Africa, 5 EU members that will ultimately join the euro, 3 French Pacific territories, 2 African island countries and another Balkan country, Bosnia and Herzegovina.

International role of the euro

While at the end of last year the value of dollar bank notes in circulation was surpassed by that of euro bank notes, the value of dollars circulating outside the U.S. was about four to six times as great as the value of euro bank notes outside the euro zone.
   Additionally, the euro's role in foreign-exchange markets has been slipping. Its share in daily security settlements fell to about 39% during 2006 from about 41% previously. At the same time, the dollar share was broadly stable at 92.5%, confirming that currency's dominant role. (The sum of the currency percentage shares is 200 percentage points as both currencies involved in the settlement of a foreign-exchange trade are counted individually.)
In the United Kingdom, although not a member of the Eurozone, many high-street banks report that as much as 90% of their international trade is conducted in euro. It is common therefore for them to use the euro as their 'core' currency on international business systems, only converting to Sterling for local accountancy purposes.

Name and linguistic issues

Several linguistic issues have arisen in relation to the spelling of the words euro and cent in the many languages of the member states of the European Union, as well as in relation to grammar and the formation of plurals. The official European Central Bank spelling of the euro is "euro" in the Latin script and "ευρω" in the Greek script.
   In 2007, the official EU-wide spelling of the word in the Cyrillic script was under diplomatic debate. Bulgaria, the only current EU member to use the Cyrillic script, uses the spelling евро (Latin-alphabet transliteration "evro"), and this was the form used in Bulgaria's 2005 Treaty of Accession. A 2007 EU-Montenegro Stabilization and Association Agreement used instead the form еуро (transliterated "euro" and thus preferred by the European Central Bank) in its Bulgarian translation, and on 12 October 2007 the Bulgarian government threatened not to sign the treaty on this basis. A temporary compromise was reached the next day to use the internationally recognized symbol €, or the abbreviation EUR and the agreement was signed. The issue was decisively resolved in favor of Bulgaria at the 2007 EU Summit in Lisbon, Portugal, allowing Bulgaria to use the Cyrillic spelling евро on all official EU documents.
   In each country except Greece, which uses λεπτό (lepto, singular) and λεπτά (lepta, plural) on its coins, the form "cent" is officially required to be used in legislation in both the singular and in the plural. Immutable word formations have been encouraged by the European Commission in usage with official EU legislation (originally in order to ensure uniform presentation on the banknotes), but the unofficial practice concerning the mutability (or not) of the words differs between the member states and their languages. The subject has led to much debate and controversy.

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