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Euro Currency Markets

Euro (/tag/Euro), Foreign exchange market (/tag/Foreign-Exchange-Market), Monetary policy (/tag/Monetary-Policy)

By schmitalex (/profile/schmitalex-160383790/) Jan 19, 2010 1298 Words 7 Views

University of PhoenixJanuary 6, 2010Euro currency markets are composed of the markets that the euro is the dominant currency. These markets areprimarily composed of the 11 comprising members of the European Union, but extend to foreign exchange and online markets globally. By exploring thehistory of the euro, global financing, and exchange rate mechanisms, it will be much easier to identify the recent powerful impact of this "new" currency.

History of the EuroThe concept of a common market in Europe has been the goal of the six founding nations of the European Union, Belgium, France,Germany, Italy, Luxembourg and the Netherlands, since the end of the Second World War. The Treaty of Rome in 1957 created the European EconomicCommunity (EEC), and almost 20 years later Denmark, Ireland and the United Kingdom join the European Union (Europa, n.d.).

The following is an excerpt from the Europa website, which clearly summarizes the events leading to the enlargement and stabilization of the EU, andtherefore the euro.

In 1981, Greece becomes the 10th member of the EU and Spain and Portugal follow five years later. In 1987 the Single European Act is signed. Thisis a treaty which provides the basis for a vast six-year programme aimed at sorting out the problems with the free-flow of trade across EU borders and thuscreates the 'Single Market'. There is major political upheaval when, on 9 November 1989, the Berlin Wall is pulled down and the border between East andWest Germany is opened for the first time in 28 years, this leads to the reunification of Germany when both East and West Germany are united in October1990.

With the collapse of communism across central and eastern Europe, Europeans become closer neighbours. In 1993 the Single Market is completedwith the the 'four freedoms' of: movement of goods, services, people and money. The 1990s is also the decade of two treaties, the 'Maastricht' Treaty onEuropean Union in 1993 and the Treaty of Amsterdam in 1999. People are concerned about how to protect the environment and also how Europeans canact together when it comes to security and defence matters. In 1995 the EUgains three more new members, Austria, Finland and Sweden. A small village in Luxembourg gives its name to the 'Schengen' agreements that graduallyallow people to travel without having their passports checked at the borders. Millions of young people study in other countries with EU support.Communication is made easier as more and more people start using mobile phones and the internet.

The euro is the new currency for many Europeans. 11 September 2001 becomes synonymous with the 'War on Terror' after hijacked airliners are flowninto buildings in New York and Washington. EU countries begin to work much more closely together to fight crime. The political divisions between east andwest Europe are finally declared healed when no fewer than 10 new countries join the EU in 2004. Many people think that it is time for Europe to have aconstitution but what sort of constitution is by no means easy to agree, so the debate on the future of Europe rages on.

Europa, n.d.

The euro originated from different treaties and several changes in the governing of Europe's economy. In hopes of building up the credibility of the euroas a reserve currency and an international investment to the ranks of the US dollar, the European Central Bank allowed the euro to appreciate in valuemaking exports more expensive and imports less expensive, resulting in a trade deficit. This trade deficit is what makes global financing and exchangerates so important in global trading.

Global Financing and Exchange Rate MechanismsA monetary union means organizations can conduct business with minimal chance of disruption,creating a more stable economic environment, which creates attractive opportunities for foreign investors. According to Masatran (n.d.), the elimination ofexchange rate fluctuations within the euro area provides a more stable environment for trade by minimizing risks and uncertainties for internationalorganizations that previously had to factor currency risks into their costs. Furthermore, organizations are better able to forecast their investments becauseof reduced uncertainties. Transaction costs andcosts resulting from managing several currency accounts, foreign exchange operations, hedging operations, and cross-border payments in foreigncurrencies are also eliminated without the presence of exchange rate fluctuations. In addition to cutting costs, consumers can compare prices of goods and

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services and more easily because they are expressed in the same currency, and investors can compare companies more quickly. Companies, wholesalers,and consumers, would buy more from the cheapest source, therefore pressuring organizations to compete for lower prices, which results in decreasedinflation rates. "Euro area annual inflation was 1.7% in September 2006, down from 2.3% in August. A year earlier the rate was 2.6%. Monthly inflation was0.0% in September 2006. EU25 annual inflation was 1.9% in September 2006, down from 2.3% in August. A year earlier the rate was 2.5%. Monthlyinflation was 0.0% in September 2006. EICP annual inflation was 1.9% in September 2006. (Euro-Indicators, 2006)."Price stability is the primary objectivepursued by the European System of Central Banks (ECB) (Masatran, n.d.). The mission statement of the ECB states, "The European Central Bank and thenational central banks together constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is tomaintain price stability: safeguarding the value of the euro. We at the European Central Bank are committed to performing all central bank tasks entrustedto us effectively. In so doing, we strive for the highest level of integrity, competence, efficiency and transparency (ECB, n.d.)." Price stability helps to createa positive environment for lower interest rates and productive investments for the long-term, in addition to maintaining the value of income and saving in theeuro market.

According to Leitl (2006), the level of interest rates benefits from low inflation expectations, improved control of government debt, and the increasedsize of exchange rate fluctuations. This has a positive impact on European trade and a further downward impact on the level of inflation rates. Price stabilityand low interest rates constitute ideal conditions to foster economic growth, investment, and employment creation within the euro zone. The euro zone isfar more equipped than the previous national currencies to withstand external economic shocks or fluctuations because of the size of the euro zoneeconomy and the fact that the majority of itstrade takes place inside this area.

ConclusionWith the integration of the euro and its market the EU, the idea of a unified economic union with a single market currency brings the worldcloser to realizing full-scale globalization, and will usher the era of a single world currency. But at the present time, opportunities for cross borderinvestments will create increased competition in the financial sector of the EU. Without currency matching rules and exchange rate risk, financing costshave been reduced. A single currency zone results in greater access for financial operators, such as banks, insurance companies, investment funds, andpension funds also resulting in wider and more diversified offers of saving and investment opportunities. Companies continuing to use the financial marketscan expect to market their securities and share to a wider pool of investors.

ReferencesECB. (n.d.). The mission of the European Central Bank. Retrieved from http://www.ecb.int/ecb/html/mission.en.htmlEuropa. (n.d.). The EUat a glance. Retrieved from http://europa.eu/abc/history/index_en.htmEuro-Indicators, . (2006, October 17). Euro area annual inflation down to 1.7%.eurostat. Retrieved from http://docs.google.com/viewer?a=v&q=cache:1fhKosuEvHsJ:europa.eu/rapid/pressReleasesAction.do%3Freference%3DSTAT/06/137%26format%3DPDF%26aged%3D1%26language%3DEN%26guiLanguage%3Den+Euro+area+annual+inflation+was+1.7%25+in+September+2006,+down+from+2.3%25+in+August&hl=en=us&pid=bl&srcid=ADGEESiXpZK05eNYGgUwqbirP_noNidT_IWMBKhG_yUZJOYWIDjm7oxSUdlBdQ9xGH-avMPTFgyyD5-pMFL-5OprCWZeryF8e2vPluvWRaqrtyGSA_flCUwMN5JXEqwgtRuqvKEnFQtK&sig=AHIEtbRoQq41x-i0bemlYeApsHK98VC_VQLeitl, C. (2006, May 11).Experience with and preparations for the Euro opening speech [Austrian Federal Economic Chamber, SME Union]. Message posted tohttp://www.oenb.at/de/img/leitl_tcm14-41742.pdfMasatran. (n.d.). European Union. Retrieved from http://researchweb.iiit.ac.in/~masatran/eu/

TOPICS IN THIS DOCUMENT

Euro (/tag/Euro), Foreign exchange market (/tag/Foreign-Exchange-Market), Monetary policy (/tag/Monetary-Policy), Exchange rate (/tag/Exchange-Rate), Balance of payments (/tag/Balance-Of-Payments), Balance of trade (/tag/Balance-Of-Trade), Foreign-exchange reserves (/tag/Foreign-Exchange-Reserves), European System of Central Banks (/tag/European-System-Of-Central-Banks), Collective investment scheme (/tag/Collective-Investment-Scheme), Financial market (/tag/Financial-Market), Government debt (/tag/Government-Debt), Inflation (/tag/Inflation), Interestrate (/tag/Interest-Rate), European Central Bank (/tag/European-Central-Bank), Eurozone (/tag/Eurozone), European Union (/tag/European-Union), European Economic Community(/tag/European-Economic-Community), Enlargement of the European Union (/tag/Enlargement-Of-The-European-Union), Finance (/tag/Finance), Member state of the European Union(/tag/Member-State-Of-The-European-Union)

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