Foreign Exchange And Economics For Business

1813 words - 7 pages

Economics for Business

The Euro is the common currency of the European Monetary Union (EMU). The national currencies of the participating countries were replaced with Euro coins and bills on January 1, 2002. The countries that participate in the Euro Monetary Union (EMU) are Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland (http://europa.eu.int/eoro/entry.html). These countries irrevocably established the conversion rates between their respective national currencies and the euro and created a monetary union with a single currency, giving birth to the euro. Euro banknotes and coins entered circulation on 1st January 2002. (http://europa.eu.int/comm/economy_finance/euro/origins/origins_main_en.htm). Euro area financial markets switched to the euro, including foreign exchange, share and bond markets. New euro area government debt was exclusively issued in euro as from that day. "Around 7.8 billion euro notes and 40.4 billion euro coins, together worth €144 billion, were put into general circulation by the central banks of the twelve participating countries of the euro area. Euro notes were distributed by bank machines and shops started to give customers change in euro cash. At the same time, each country started to withdraw national currency notes and coins from circulation. Each Member State adopted a transition period of dual circulation during which the public could spend their remaining national currency notes and coins in shops or exchange them for euros at banks" (http://europa.eu.int/comm/economy_finance/euro/origins/origins_main_en.htm).
Several other countries including the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungry, Malta, Poland, Slovenia, and Slovakia plan to enter into the EMU in the future. These countries have to meet the Maastricht convergence criteria before they can become members of the EMU and began use of the Euro.

The Maastricht Criteria
"The Maastricht Treaty stipulates five criteria that countries must meet to become eligible for the single European currency, the euro. These criteria must be achieved over the year before the date of examination. As membership will be determined in early 1998, the criteria thus apply to 1997. They are as follows:
Price Stability
To qualify, a country's inflation rate must not exceed the average inflation rate of the three best performing Member States by more than 1-1/2 percent. (Inflation is measured by means of the consumer price index.)
Fiscal Prudence
To qualify, a country must not exceed either of the following two reference values relative to its gross domestic product at market prices:
 3 percent for the ratio of the planned or actual government deficit to GDP;
 60 percent for the ratio of government debt to GDP.
Successful EMS Membership
To qualify, a country must have stayed within the normal fluctuation margins provided for by the Exchange Rate Mechanism...

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