Facts and figures about the Euro
The euro (€) is the official currency of the eurozone, which consists of 17 of the 27 member states of the European Union. Today, euros are accepted in Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, with euro coins and banknotes entering circulation on 1 January 2002.
The euro was established by the provisions in the 1992 Maastricht Treaty and, 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.
The eurozone, ie the region that uses the euro as its sole currency, consists of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
The single currency is also used in other countries and regions and it is calculated that the euro is used by approximately 332 million people.
Some of these regions include:
- Monaco, San Marino and Vatican City, all having the right to mint their own coins
- Saint-Pierre-et-Miquelon off the coast of Canada, and Mayotte in the Indian Ocean are outside the EU but have been allowed to use the euro as their currency
- With the adoption of the euro in Cyprus, the Sovereign Base Areas of Akrotiri and Dhekelia also adopted the euro
- Andorra has been negotiating an agreement about having the euro as official currency and minting its own euro coins. An agreement was signed on 30 June 2011, which is planned to allow Andorra to mint coins from 2013 onwards
- Montenegro and Kosovo have also used the euro since its launch, as they switched to the euro when the mark was replaced but have no formal agreement with the ECB
- The single currency is also gaining increasing international usage as a trading currency in Cuba, North Korea and Syria.
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).
The ECB is an independent central bank and has sole authority to set monetary policy, much like the UK’s Bank of England. An example of monetary policy would be setting interest rates.
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.
Since 1 January 2002, the national central banks (NCBs) of the eurozone countries and the ECB have issued euro banknotes on a joint basis. Euro banknotes do not show which central bank issued them and NCBs are required to accept euro banknotes put into circulation by other Eurosystem members.
The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.
As of February 2012, with more than €890 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar.
Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.
European sovereign debt crisis
Setting the scene: The introduction of the euro has decreased the interest rates of most member countries, in particular those with a weak currency prior to joining the euro. The countries whose interest rates fell most as a result of the euro were Greece, Ireland, Portugal, Spain and Italy, thereby making it easier for the banks and the countries themselves to borrow significant amounts (above the 3% of GDP budget deficit imposed on the eurozone initially) and increase their public deficit and levels of privately held consumer debt.
Following the financial crisis in 2008, governments in these countries found it necessary to bail out or nationalise their privately held banks in order to prevent systemic failure of the banking system. This further increased the already high levels of public debt to a level the markets began to consider unsustainable, via increasing government bond interest rates, producing the ongoing European sovereign-debt crisis.
Where are we now?
Following the US and subsequent global financial crisis in 2008, fears of a sovereign debt crisis developed in 2009 among fiscally conservative investors concerning some European states. This included eurozone members Greece, Ireland and Portugal and also some EU countries outside the area.
In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.
To be included in the eurozone, the countries had to fulfil certain convergence criteria, but the meaningfulness of such criteria were diminished by the fact they have not been applied to different countries with the same strictness.
Sterling vs Euro: a view by charts
This section has recorded the performance of sterling (GBP) against the euro (EUR) in chart form, looking at different periods.
GBP/EUR - 1 YEAR*
Looking at the one year graph, sterling has made significant gains against the euro, climbing from a rate of €1.11 to almost €1.25 today*. This is a substantial rise and has mainly been caused by the ongoing debt crisis in the eurozone and investors flooding out of the single currency into currencies which are perceived to be safer. Accordingly, sterling has benefited from this exodus as the markets are more confident in the UK’s approach to dealing with the debt crisis.
GBP/EUR - 5 YEARS*
Over five years the remarkable thing to note is that, at one point, you could get nearly €1.5 for every pound. That meant if you were taking away £500 on your holiday for spending money, you would get €750. The value of sterling has dramatically decreased since these heady times and the main cause was the global financial crisis in 2008. The effects on sterling in the build up to the crash materialised towards the end of 2007 and it slowly damaged the rate of sterling against the euro at a steady rate up to November 2008.
However, December 2008 marks a low point for sterling as the rate dropped from €1.21 at the beginning of November to €1.04 at the start of December. Clearly the markets had fully factored in the debt crisis and its impact on the UK economy, with investors flooding out of sterling looking to invest into safer currencies.
Between January 2009 and May 2010, the rate between sterling and euro has traded between €1.1 and €1.2, sometimes dipping below and above these levels. We can look at interest rate cuts, the introduction of quantitative easing and general economic performance as a way of explaining this rise and fall. However, from September 2011 onwards, we have seen a vast improvement in sterling’s performance against the euro, explained by the fact that the markets were beginning to become more confidence in the UK’s approach to dampening the debt crisis. In contrast, the eurozone has been plagued by crisis in Greece and a lack of a coordinated approach to dealing with the debt crisis.
*Correct on 30/05/12. For more information, get in touch with our currency specialists or open your free account today.