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The Euro
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The Euro is Europe's pan-national currency. This guide will tell you how the Euro came into being, how the Euro works, how the Euro can work for you; whether you should have Euro bank accounts or even a Euro mortgage.
- When did the Euro come into being?
- What does the Euro look like?
- What happened to Europe's old currencies?
- Can I have a euro bank account?
- What does the single currency mean for prices?
- What happens to interest rates?
- Does the Euro make investing in Europe easier?
- Should I have a Euro mortgage?
- Does the Euro mean cheaper holidays?
- When will Britain join the single currency?
When did the Euro come into being?
European Monetary Union (EMU) began on January 1, 1999, but national currencies continued in circulation for another three years. The rates at which these currencies converted in Euros were fixed on the afternoon of December 31, 1998. On the financial markets, the Euro became a reality immediately.
Euro (E) notes and coins were not issued in Europe for another three years, until January 1, 2002, partly because of the mammoth printing and minting task actually involved in producing enough currency - some 50 billion new coins and 14.5 billion banknotes worth E664 billion!
What does the Euro look like?
The designs for the front side of the coins and bank notes are the same across Europe. The other side has a national design depending on which country has printed them. Bank notes of E5, E10, E20, E50, E100, E200 and E500 are available along with E1 and E2 coins. In addition, coins worth 1, 2, 5, 10, 20 and 50 cents are minted. There are 100 cents to a Euro.
What happened to Europe's old currencies?
Portugal, Spain, France, Ireland, Belgium, Luxemburg, the Netherlands, Germany, Austria, Italy and Finland signed up for the first wave of European Monetary Union. They were joined in January 2002 by Greece and in January 2007 by Slovenia.
The national currencies: francs, marks, etc., of the first group in the Euro were withdrawn by July 1, 2002, although the various national central banks continued to exchange them for Euros for some time afterwards. The old notes have now been shredded and the coins melted down. Monaco, San Marino and the Vatican City also use the Euro, as does Andorra.
Cyprus and Malta will join the Euro in January 2008 and Slovakia in January 2009. Other new members of the European Union are also working towards adopting the Euro but no firm dates have been agreed yet.
Thinking of buying abroad? Do you need to transfer currency overseas?
Can I have a euro bank account?
All the major banks in Britain offer Euro bank accounts. If you are a UK resident but are paid partly in Euros because of work you do in Europe, you might find it useful to set up a Euro account. Anybody planning on spending time in Europe, either at a second or holiday home or just making regular visits, which include travel between countries in the Euro zone, may also find a Euro bank account useful.
Euro bank services might also be appealing to the business traveller, those with property in Europe and anyone who makes or receives frequent payments in Euros. However, a Euro bank account is not a fundamental requirement to transact in Euros. Your existing sterling bank account will also accept electronic Euro payments although your bank may make a charge for doing so.
What does the single currency mean for prices?
The price of goods still varies widely around Europe. The classic example is cars. According to the European Commission, which carries out bi-annual reviews of car prices around Europe, price differences have stabilised with the average standard deviation of prices between the EU-25 national markets unchanged in May 2007 at 6.4%. Including newcomers Romania and Bulgaria, the deviation between the EU-27 rises slightly to 6.5%. Price dispersion in the Euro zone is smaller, but rose slightly with the accession of Slovenia to 4.5%.
However, price differences for particular models between the cheapest and most expensive EU states can still be substantial. Of the 10 top best selling cars in the EU in 2006, the widest price difference in the euro zone is for the Peugeot 307, which costs 31% more in France than in Finland. This difference represents a potential saving of 4700 (including VAT) for the French consumer buying in Finland.
In theory, over time, the single currency should iron out such price differences.
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What happens to interest rates?
The Euro zone, the countries taking part in EMU, have their own central bank. The European Central Bank (ECB), based in Frankfurt, was established to operate independently of political control with the sole aim of price stability. That means keeping inflation under control. The ECB's target is to keep consumer prices across Europe from rising by more than 2% a year.
This does not mean that Europe will have permanently low interest rates but the track record of the Bundesbank in particular, the institution on which the ECB has been closely modelled, was of lower inflation and generally lower interest rates than those achieved elsewhere.
In January 1999 at the Euro's launch, the ECB set an interest rate for refinancing operations of 3%. This key interest rate is, as an instrument, broadly equivalent to base rate in the UK. Significantly, however, it was set at a level less than half the UK base rate at the time (6.25%). The differential between Euro zone and UK interest rates remains a substantial stumbling block to the prospect of UK participation in the Euro.
While the ECB's interest rate policy in its early years of operation has been more "hawkish" than that of the Bank of England, in absolute terms Euro zone interest rates remain well below those in the UK.
Does the Euro make investing in Europe easier?
All the Euro zone stock exchanges decided that shares were to be traded and deals to be settled in Euros from January 1, 1999. This means UK investors looking to invest money across Europe face a much smaller currency risk than previously, having to deal with only one foreign currency while being able to invest in a wide variety of national stock markets. It will also make it easier to compare corporate performance across sectors and across national boundaries.
The removal of currency risk for companies operating in and across different countries in the Euro zone eliminates a large chunk of companies' transaction costs. In theory, this should translate directly to improved profits and higher dividends for shareholders.
There have also been substantial moves towards the creation of a pan-European stock market. By the end of the first decade of the 21st century, it is not impossible that there may be only one stock market in Europe. In future it may also be easier to buy a supplementary pension from a fund provider based anywhere in the Euro zone but differences in the national tax treatment of pensions means there is no advantage in doing so yet.
Should I have a Euro mortgage?
You may think you can take advantage of lower European interest rates to have a mortgage in Euros. There is no certainty that you would benefit by doing so. While Britain remains outside EMU there is a still currency risk to take into account. Your home is an asset in sterling and you would be vulnerable to any depreciation in sterling against the Euro. Quite simply if the pound falls in value, the size of your outstanding loan will go up in sterling terms.
Over the medium term the value of the pound is expected to drop. UK interest rates are still more than twice as high as European interest rates. If UK rates fall towards European levels, the pound will fall in value. Secondly, the city is expecting and the government has intimated that it expects sterling to be at least 10% lower against the Euro within three to four years -- they believe sterling is too high and needs to fall before Britain can join EMU.
In theory, it should be easier to shop around for a cheap mortgage from anywhere in the Euro zone. However, in practice, different national tax breaks for home owners and differences in laws on repossessions mean this is only an option for highly financially skilled people with time on their hands!
Does the Euro mean cheaper holidays?
The single currency will certainly cut your holiday costs if you are travelling to more than one European country. Now, if you change money here you usually face commission charges from the banks and other money changers in addition to the buying and selling rates dealing spread. In the past you could lose as much as 10% of your money just in changing from sterling to another currency.
The introduction of the Euro also makes it easier for tourists to compare the cost of goods and services between European countries. There are no Euro credit cards available in the UK. As far as UK card issuers are concerned, the Euro is just another foreign currency.
When will Britain join the single currency?
Forests have died to produce vast quantities of coverage of this issue. It remains the largest non-event in UK economic policy. It is still a highly divisive and explosive political issue. It effectively destroyed the last Conservative government but was defused for New Labour thanks to the five economic tests set out in October 1997 by then Chancellor Gordon Brown.
The tests are:
- whether there is sustainable convergence between the UK and the Euro zone economies
- whether there is sufficient flexibility to cope with economic change
- whether the effect on investment is beneficial
- what the impact would be on the UK's financial services industry
- whether it is good for UK employment
These are, despite what Gordon Brown and his successor may continue to claim, subjective rather than objective criteria. In the summer of 2003 a review by the Treasury of whether those tests had been met decided that the time was not yet right for the UK to join the Euro. The prospect of a referendum on the single currency appears as distant as ever.
23 August 2007 © Moneyextra.com
Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.