The Euro, mode of introduction and its impact

In this article we are covering the Euro as part of Financial Management introducing new currency, effect of business and how regional cooperation is achieved for positive business growth in the region. Euro, the common currency of the European Union, was launched by 11 of the 15 members of the Union, on January 1, 1999. The exchange rates per euro determined at the time of the Euro launch were about US $ 1.17; British pound 0.70: Yen 133; and German mark 1.96. One Euro was equivalent to about Rs. 49.

The Maastricht Treaty of 1991 which set the stage for the monetary union laid down certain eligibility criteria for member countries to join the EMU such as maintaining budget deficit, public debt, inflation, long term interest rates and exchange rate within defined limits.

Greece could not join the Euro launch as she could not satisfy criteria. Britain. Denmark and Sweden opted out, although they satisfied the eligibility criteria, due to domestic political reasons. The parties to the Euro were thus, Austria. Belgium, Finland. France, Germany, Ireland, Italy, Luxembourg the Netherlands, Portugal and Spain Greece joined in January 2001.

Euro currency and coins came into circulation until 2002 although banking and trading transactions in Euro have commenced since January 1, 1999. The national currencies of the 11 Euro nations will continue in circulation until 2002. The deadline for the withdrawal of national currencies and coins is July 1, 2002. Beyond this date they will not be legal tender.

At the time of the launch of the Euro its conversion ratio against other currencies internal and external were also decided. Internal conversion rates are the rates at which participating currencies will be converted into the Euro during the transition period, i.e. until the Euro will completely replace the national currencies of the Euro-land (the 12 countries) while the external exchange rates are the exchange rates against currencies outside the Euro-land. A key distinction is that the internal rates are irrevocably fixed while external values of the Euro will be market determined.

The monetary policy decisions for the Euro area are made by the European Central Bank (ECB), which along with the National Central banks (NCB) of all EU members comprise the European System of Central Banks (ESCB). The ECB is controlled by a Governing Council consisting of an Executive Board (with six members appointed by the heads of State or Governments of countries in the Euro area) and the governors of the NCB of the Euro-land. In designing the EMU, the architects laid great emphasis both on then independence of the ECB and on the simplicity as and severity of its anti-inflation objective. The Maastricht Treaty directs the ECB to support the general economic policies of the community, but, crucially, without prejudice to the objective of price stability.

The single currency will bring a single interest rate, eliminate currency risk and give equity and bond markets the necessary scope and liquidity to attract big investors. Europe will rank alongside the US as the deepest and most liquid market in the world.

Consumers will benefit in several ways. The single currency will impart price transparency throughout the Euro-land when there were many currencies price comparisons were not so easy. Price was now will tend to be equal throughout the Euro area.

The single currency saves a lot on the cost of hedging against exchange rate risks, estimated at $25 billion. Companies in the Euro land benefit from the ease of outsourcing, relocation of production bases, mergers and takeovers transportation, procedures, marketing etc., besides the savings on hedging costs. These would also help improve their global competitiveness.

It is generally felt that an important impact of the Euro will be the decline in the dominance of the US dollar in the global economy because the Euro will increasingly replace the dollar in several spheres. Before the launch of the Euro, about 60% of the foreign exchange reserves holding by central banks and governments were in US dollars. The corresponding share of the European currencies was about 20% (mostly D Mark). The share of the Euro would rise in future and that of dollar will fall. The EMU and Euro land would expand in size with more countries joining both. The Euro would also be accepted as a currency of peg by several nations. The dominance of dollar will also decline in the securities market with the increasing presence of the Euro.