The recent divisions over the eurozone’s rescue plan demonstrate how different views are held across the member nations. With no political body behind the euro, it may be impossible to maintain its unity. The Eurozone’s budget deficit is relatively small compared to other advanced economies, but the lack of a unified currency may have negative consequences for the foreign exchange value of the euro. Here are four potential consequences. Weigh the pros and cons. Let’s face it, the euro’s problems are far from over.
The first thing to know about the euro is its history. The currency has been used as a worldwide payment system since 1999. The euro was introduced as an accounting currency in 1999, and physical euro banknotes and coins entered circulation in 2002. Its value is the highest of any single currency in circulation. The currency began to decline on 18 July 2008, when Greece defaulted on its debts, causing the EU to establish the European Financial Stability Facility to step in.
Another currency that varies in value is the U.S. dollar. For example, if the EUR/USD exchange rate is 1.1250, EUR1 would buy $1.250 USD. The currency pairs are listed in both European and American terms. In American terms, a currency is quoted with the base currency first, followed by a quote currency. In European terms, the other currency occupies the terms position. The Euro is the largest currency in the European Union and is used in many European countries.
Another popular cross-currency pair is the EUR/CHF currency pair. This pair is traded for CHF directly. It is similar to the USD/CHF currency pair, and is colloquially known as the Dollar Swissy. While Switzerland is not a member of the European Union, it is a long-term trading partner with the EU. The EUR/CHF pair is a great way to profit from currency trades.
Another common use of the forex market is as a hedge against a weaker euro. A Greek shipowner might sell his euro and buy U.S. dollars if he thinks that the dollar will strengthen and thus buy more euros. Similarly, an American company with European operations could use the forex market as a hedge to protect its profits against a weaker euro. If the euro weakens, his income will decrease as well.
The Euro was introduced to the financial markets on 1 January 1999. It became legal tender on that date. The nation-state currencies that participated in the EMU continued to be legal tender until the year 2002. The Euro was also adopted by eleven nations. However, the UK and Denmark negotiated exemptions. Although Greece rejected the EMU in a referendum, it was later admitted to the EU. It’s possible that the euro will eventually be adopted by all members of the EU.
Although the Euro is the official currency of the European Union, it is also used by several countries outside of the EU. The British Overseas Territories of Dhekelia and Akrotiri use the euro. Montenegro and Kosovo also use the euro. The euro is also the official currency of several special territories of EU members. It is the second most traded currency in the world after the U.S. dollar. The crisis threatens the future of the entire Eurozone.
The European Community’s Maastricht Treaty was signed in 1992. The treaty also required member states to meet strict criteria to join the eurozone. These included a minimum budget deficit of three percent of GDP, a debt ratio no greater than 60% of GDP, and interest rates that were close to the average of the EU. Only Denmark and the United Kingdom were exempted from the monetary union. And the euro has a mixed history of success.