Technical Terms

Euro is the most lately introduced currency in the world. It is the official currency of the European Union countries lying in the Euro zone. There are 12 countries as now to which the Euro belongs to namely Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxemburg, the Netherlands, Austria, Portugal and Finland. This number would increase by one more country i.e. Slovenia which will be adopting euro as its national currency with effect from January 1st, 2007. Apart from these countries, the currency is also used in some countries lying outside the euro zone.

Euro came into existence in the year 1999 when it was launched as an accounting currency. In the year 2002, banknotes and coins of the currency were introduced in the European Union countries with certain conditions to be complied with if any country wants to use the currency parallel to the domestic currency. The currency is symbolized with "€" sign and has a currency code EUR and numeric code 978 according to the ISO 4217 standard.

Overview

The introduction of euro as a currency for 11 countries was the biggest monetary transformation in the history of world economy. This change was readily accepted by the world and euro earned a strong position in a real short span of time. Euro now is providing stiff competition and has threatening the supremacy of United States dollar. Launching a single currency for several distinct countries had many advantages such as lowering the risk that exist in the exchange rates, abolishment of the currency conversion fee, more liquid and more flexible financial markets, consistency in price levels, stability in macroeconomic factors. As already stated, euro is the official currency of the countries present in the Euro zone as well of some other, below mentioned, economies outside the zone as they have officially dollarized the currency

• Kosovo

• Monaco

• Andorra

• San Marino

• Vatican city

• Montenegro

Euro has made a mark among the top reserve currencies in the world and had a share of around 25% in the identified foreign exchange reserves in the world with the well-established United States dollar on the top with around 66% at the start of the year 2006. As a currency for commodities especially oil, euro is getting much deserved recognition. The currency is attracting the attention and tempting the OPEC nations to price their oil in terms of euro as on now oil is being priced in terms of dollar. The basic reason for it is that the nations in the Euro zone import oil on a much larger extent as compared to United States.

Though there are some drawbacks also to the introduction of a common currency to separate countries like the European monetary policy cant be fine tuned according to the different economic situations of different member countries, euro has been a successful introduction till now enhancing Europe’s international role in the world.

Though euro as a currency is quite a new development, the conceptions that history behind the currency would be from recent past are totally wrong. As a matter of fact, the thought of introduction of single currency for several separate European nations developed half a decade back. The treaty of Rome initiated the development of euro in 1957 that laid stress on the rise in economic prosperity and revealed the objective of having a union among the people of Europe.

The history of euro may be termed as a history of treaties and agreements, which is divided into three stages. The foundation of having a common currency was laid in the first stage when two of the agreements were signed that is Single European act in 1986 and the treaty on European union in 1992 latter one establishing an economic and monetary union. The first stage also involved the establishment of European Monetary system in 1979. The goal that had to be achieved before the conclusion of the first stage in January 1,1994 was the elimination of the barriers in the capital flow between the member countries and between the union and the other countries. But this goal was not considered as achieved.

In the second stage of the development of euro, European monetary Institute (EMI) was set in Germany that had to be transformed into the European Central Bank (ECB) in the future. The goals of the second stage were modest enough to be achieved as compared to the goals in the first stage. The third stage began in the year 1999 when the common currency euro was launched as an electronic money and the 11 member countries fixed the exchange rate between euro and their domestic currencies and were provided with a three year transition period with in which the use of the domestic currencies were to be discontinued. The EMI was converted into the ECB and a common monetary policy was resolved.

The 12th country i.e. is Greece joined in the Euro zone on January 1,2001 making it a 12 member group. The euro coins and banknotes were issued and all the currencies of the respective members were phased out with effect from January 1, 2002. The sign "€" was selected to denote the euro currency among ten other designs after a public survey as according to the European Commission it has an E that stands for Europe, a Greek epsilon that depicts the sign of European civilization and two horizontal parallel lines symbolizing stability.

The volatility in the foreign exchange rates depends upon a numerous macro economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends

• Flow of imports and exports between the countries
• Flow of capital between the countries
• Relative inflation rates
• Fluctuation limits on exchange rate imposed by the governments of the countries
• Merchandise trade balance
• Rate of inflation in the country
• Flow of funds between the countries for the payment of stock and bond purchases
• Relative growth
• Short term and long term interest rate differentials
• Cost of borrowings