International status and usage of the euro
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The international status and usage of the euro has grown since its launch in 1999. When the euro formally replaced 12 currencies on 1 January 2002, it inherited their use in territories such as Montenegro and they replaced minor currencies tied to the pre-euro currencies such as in Monaco. Three small states have been given a formal right to use the euro, and to mint their own coins, but all other usage has been unofficial outside the eurozone (the EU states who have adopted the euro). With or without an agreement these countries, unlike those in the eurozone, do not participate in the European Central Bank or the Euro Group.
Its international usage has also grown in its usage as a trading currency, acting as an economic or political alternative to using the United States dollar. Its increasing usage in this sense has led to it becoming the only significant challenger to the US dollar as the world main reserve currency.
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[edit] International adoption
[edit] With formal agreements
Several states outside the EU have adopted the euro as their currency. For formal adoption, including the right to mint their own coins, a monetary agreement must be concluded. Agreements have been concluded with Monaco, San Marino, and Vatican City. All of these states previously used versions of yielded member state currencies. The Vatican and San Marino had their currencies pegged to the Italian lira (Vatican and Sammarinese lira) and Monaco used the Monegasque franc, which was pegged on a 1:1 basis to the French franc.[1][2]
| State/Territory | Adopted | Agreement | Population | |
|---|---|---|---|---|
 |
Mayotte | 1 January 1999 | 31 December 1998 | 186,452 |
 |
Monaco | 1 January 1999 | 31 December 1998 | 32,671 |
 |
San Marino | 1 January 1999 | 31 December 1998 | 29,615 |
|
Saint Pierre and Miquelon | 1 January 1999 | 31 December 1998 | 6,125 |
 |
Vatican City | 1 January 1999 | 31 December 1998 | 800 |
These countries concluded agreements with EU and member states: (Italy in the case of San Marino and Vatican City and France in the case of Monaco) allowing them to use and mint a limited amount of euro (with their own national symbols on the obverse side) to be valid throughout the Eurozone. They do not however print banknotes. A similar agreement is being negotiated with Andorra (see below).[1][2]
Agreements were also concluded for two overseas territories of France. Saint-Pierre-et-Miquelon off the coast of Canada, and Mayotte in the Indian Ocean are outside the EU but have been allowed to use the euro as their currency. However, they are not allowed to mint any coins.[2][3]
On 22 February 2007, Saint Barthélemy and Saint Martin were politically separated from Guadeloupe in order to form two new French overseas collectivities; they are in legal limbo until ratification of the Treaty of Lisbon.
[edit] Without formal agreements
| State/Territory | Adopted | Seeking | Population | |
|---|---|---|---|---|
 |
Akrotiri and Dhekelia | 1 January 2008 | None | 14,500 |
 |
Andorra | 1 January 1999 | Agreement | 82,000 |
 |
Kosovo[a] | 1 January 2002 | Membership | 2,100,000 |
 |
Montenegro | 1 January 2002 | Membership | 684,736 |
|
Saint Barthélemy | 1 January 1999 | None | 8,450 |
|
Saint Martin | 1 January 1999 | None | 33,102 |
Andorra does not have an official currency and hence no specific euro coins. It previously used the French franc and Spanish peseta as de facto legal tender currency. There has never been a monetary arrangement with either Spain or France; however, the EU and Andorra are currently in negotiations regarding the official status of the euro in Andorra. According to Andorran officials, Andorra would have minted its own euro coins for the first time in 2006; as of June 2008, this has not yet happened, partially due to stalling regarding banking secrecy in December 2005.[4]
Montenegro and Kosovo[a] have also used the euro since its launch, as they previously used the German mark rather than the Yugoslav dinar. This was due to political concerns that Serbia would use the currency to destabilise these provinces (Montenegro was then in a union with Serbia) so they received western help in adopting and using the mark (though there was no restriction on the use of the dinar or any other currency). They switched to the euro when the mark was replaced but have no agreement with the ECB; rather the country depends only on euros already in circulation.[5][6] Kosovo also still uses the Serbian dinar in areas mainly populated by the Serbian minority.[7]
The use of the euro in Montenegro and Kosovo has helped stabilise their economies, and for this reason the adoption of the euro by small states has been encouraged by Finance Commissioner Joaquín Almunia. European Central Bank President Jean-Claude Trichet has stated the ECB - which does not grant representation to those who unilaterally adopt the euro - neither supports nor deters those wishing to use the currency. Some in the Turkish Republic of Northern Cyprus (TRNC) have called for the unilateral adoption of the euro by that state.[5]
With the adoption of the euro in Cyprus, the Sovereign Base Areas of Akrotiri and Dhekelia, which had previously used the Cypriot pound, also adopted the euro. The base areas are overseas territories of the United Kingdom, but are outside of the EU and under military jurisdiction. However their laws and currency have been aligned with those of the Republic of Cyprus, leading to the euro's adoption in the two areas.[8] North of the UN-administered buffer zone, the self-declared Turkish Republic of Northern Cyprus (TRNC) still uses the Turkish lira. The TRNC is unrecognised by any country aside from Turkey but governs the northern part of the island outside of the control of the EU. Despite not adopting the euro along with southern part of Cyprus, use of the euro is seen as a way to boost intra-Cypriot trade and reduce dependence on Turkey.[9] With the use of the euro across the border helping economic integration, the arrival of the euro has been hailed as a major advance in solidifying peace and unification on the island. The Cypriot euro coins, using the Greek and Turkish languages, have been designed to avoid any bias towards any particular area of the island.[10]
[edit] Trading currency
In 1998, Cuba announced that it would replace the U.S. dollar with the euro as its official currency for the purposes of international trading.[11] On 1 December 2002, North Korea did the same. (Its internal currency, the wŏn, is not convertible and thus cannot be used to purchase foreign goods. The euro also enjoys popularity domestically, especially among resident foreigners.) Syria followed suit in 2006.[12]
In 2000, President of Iraq Saddam Hussein began the sale of his country's oil denominated in euros rather than dollars since the majority of Iraqi oil trade was with the EU, India and China rather than the United States. Several other oil producing countries stated they would follow suit but when Iraq was invaded in 2003, the new US interim administration immediately switched all sales of oil back to the US dollar. Since then, Iran has maintained its policy of demanding euros from the sale of oil towards Europe and Asia, and plans to set up an oil exchange denominated in euro.
[edit] Pegged currencies
Currently there are several currencies pegged to the euro, some with fluctuation bands around a central rate and others with no fluctuations allowed around the central rate. This can been seen as a safety measure, especially for currencies of areas with weak economies, as euro is seen as a stable currency and therefore would prevent collapse of currencies pegged to it, unless the euro itself were to collapse or the country were to run out of euros to exchange for their currency.[citation needed]
| State |
Population |
Area |
Code |
National currency |
Central rate |
Pegged since |
Fluctuation band |
Formerly pegged to |
EMU |
|
|---|---|---|---|---|---|---|---|---|---|---|
 |
Bosnia and Hercegovina | 4,590,310 | 51,129 km² | BAM | B&H convertible mark | 1,955830 | 1999-01-01 | 0,00% | DEM (from 1995-11-21) | |
 |
Bulgaria | 7,385,367 | 110,910 km² | BGN | Bulgarian lev | 1,955830 | 1999-01-01 | 0,00% | DEM (from 1999-07-05) | |
 |
Comoros | 690,948 | 2,170 km² | KMF | Comorian franc | 491,9678 | 1999-01-01 | 0,00% | FRF (from 1979-11-23) | |
 |
Denmark | 5,475,791 | 43,094 km² | DKK | Danish krone | 7,460380 | 1999-01-01 | 2,25% | ERM2 | |
 |
Estonia | 1,324,333 | 45,226 km² | EEK | Estonian kroon | 15,64660 | 1999-01-01 | 15,0% (de facto 0%) | DEM (from 1992-06-20) | ERM2 |
 |
Cape Verde | 499,796 | 4,033 km² | CVE | Cape Verdean escudo | 110,2650 | 1999-01-01 | 0,00% | PTE (from middle of 1998) | |
 |
Latvia | 2,307,000 | 64,589 km² | LVL | Latvian lat | 0,702804 | 2005-01-01 | 15,0% (de facto 1%) | ERM2 | |
 |
Lithuania | 3,483,972 | 65,303 km² | LTL | Lithuanian litas | 3,452800 | 2002-02-02 | 15,0% (de facto 0%) | ERM2 | |
 |
Morocco, West Sahara | 33,657,259 | 712,550 km² | MAD | Moroccan dirham | ≈ 10,0 | 1999-01-01 | - | ||
        |
XOF currency union
|
70,931,986 | 3,269,077 km² | XOF | CFA franc | 658,90 | 1999-01-01 | 0,00% | FRF (from 1948-10-17) | |
      |
XAF currency union
|
38,750,133 | 2,757,528 km² | XAF | CFA franc | 655,9570 | 1999-01-01 | 0,00% | FRF (from 1948-10-17) | |
 |
XPF currency union
|
520,938 | 19,597 km² | XPF | CFP franc | 119,3317 | 1999-01-01 | 0,00% | FRF (from 1949-10-21) |
The Bulgarian Lev is pegged to the euro through a currency board.[citation needed] Estonia and Lithuania joined ERM II on 28 June 2004, Cyprus, Latvia and Malta joined on 2 May 2005; these currencies had been pegged to the Euro before joining ERM II.[citation needed] Malta was pegged to a basket of currencies where the Euro had a 70% weighting.[citation needed] As part of ERM II, the currencies have a fluctuation band of ±15%. However, some states have committed to a tighter fluctation band.[citation needed]
Convertible mark is the currency of Bosnia and Herzegovina and it was fixed to 1 German Mark when it was introduced on the basis of the Dayton agreement; consequently after introduction of the euro, the Convertible mark uses the German-mark-to-euro rate at 1.95583 BAM per euro.
[edit] Reserve currency status
The euro is a major global reserve currency, sharing that status with the U.S. dollar (USD), which continues to be the primary reserve of most commercial and central banks.[13]
Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The euro inherited this status from the German mark, and since its introduction, it has increased its standing, mostly at the expense of the dollar. The increase of 4.4% in 2002 is due to the introduction of euro banknotes and coins in January 2002.
The possibility of the euro's becoming the first international reserve currency is now widely debated among economists.[14] Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 that the euro could indeed replace the U.S. dollar as the world's primary reserve currency. He said it is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."[15] Additionally, there has been suggestion that recent weakness of the US dollar might encourage parties to increase their reserves in euro at the expense of the dollar.[16] In the second term of 2007, euro as a reserve currency had reached a record level of 25.6% (a +0.8% increase from the year before) - at the expense of US dollar which dropped to 64.8% (a drop of 1.3% from the year before).[17] By the end of 2007, shares of euro increased to 26.4% as the dollar slumped to its lowest level since records began in 1999, 63.8%.[18]
| '95 | '96 | '97 | '98 | '99 | '00 | '01 | '02 | '03 | '04 | '05 | '06 | '07 | '08 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| US dollar | 59.0% | 62.1% | 65.2% | 69.3% | 70.9% | 70.5% | 70.7% | 66.5% | 65.8% | 65.9% | 66.4% | 65.7% | 64.1% | 64.0% |
| Euro | 17.9% | 18.8% | 19.8% | 24.2% | 25.3% | 24.9% | 24.3% | 25.2% | 26.3% | 26.5% | ||||
| German mark | 15.8% | 14.7% | 14.5% | 13.8% | ||||||||||
| Pound sterling | 2.1% | 2.7% | 2.6% | 2.7% | 2.9% | 2.8% | 2.7% | 2.9% | 2.6% | 3.3% | 3.6% | 4.2% | 4.7% | 4.1% |
| Japanese yen | 6.8% | 6.7% | 5.8% | 6.2% | 6.4% | 6.3% | 5.2% | 4.5% | 4.1% | 3.9% | 3.7% | 3.2% | 2.9% | 3.3% |
| French franc | 2.4% | 1.8% | 1.4% | 1.6% | ||||||||||
| Swiss franc | 0.3% | 0.2% | 0.4% | 0.3% | 0.2% | 0.3% | 0.3% | 0.4% | 0.2% | 0.2% | 0.1% | 0.2% | 0.2% | 0.1% |
| Other | 13.6% | 11.7% | 10.2% | 6.1% | 1.6% | 1.4% | 1.2% | 1.4% | 1.9% | 1.8% | 1.9% | 1.5% | 1.8% | 2.0% |
| Sources: 1995-1999, 2006-2008 IMF: Currency Composition of Official Foreign Exchange ReservesPDF (80 KB) Sources: 1999-2005, ECB: The Accumulation of Foreign ReservesPDF (816 KB) |
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A currency is attractive for international transactions when it demonstrates stability, a well-developed financial market to trade the currency, and acceptability to others. While the euro has made substantial progress, a few challenges undermine the ascension of the euro as a major reserve currency. Persistent excessive budget deficits of some member nations, economically weak new members, conservatism of financial markets, and inertia or path dependence are important factors keeping the euro as a junior international currency to the U.S. dollar. However, at the same time, the USD has increasingly suffered from a double deficit and has its own concerns.
As the euro becomes a new reserve currency, Eurozone governments will enjoy substantial benefits. Since money is an interest-free loan to the issuing government by the holder of the currency, foreign reserves act as a subsidy to the country minting the currency (see Seigniorage). However, reserve status also holds risks, as the currency may become overvalued, hurting European exporters and potentially exposing the European economy to influence by external factors who hold large quantities of euros.[citation needed]
[edit] See also
[edit] Notes and references
Notes:
| a. | ^ Kosovo is the subject of a territorial dispute between Serbia and the local Albanian majority. The Assembly of Kosovo declared its independence on 17 February 2008, a move that is recognised by 60 UN member states and the Republic of China (Taiwan), but not by Serbia, which claims it as part of its sovereign territory. |
References:
- ^ a b "Agreements on monetary relations (Monaco, San Marino, the Vatican and Andorra)". European Communities. 2004-09-30. http://europa.eu/scadplus/leg/en/lvb/l25040.htm. Retrieved on 2006-09-12.
- ^ a b c The euro outside the euro area, Europa (web portal)
- ^ Agreements concerning the French territorial communities
- ^ Boldt, Hans H. and Sant Julià de Lòria (2006-11-15). "Andorranische Euros nicht zu jedem Preis" (in German). Andorra-Intern. http://www.andorra-intern.com/news_2006/andorraeuros.htm. Retrieved on 2007-01-03.
- ^ a b Euro used as legal tender in non-EU nations International Herald Tribune (2007-01-01)
- ^ KOUCHNER SIGNS REGULATION ON FOREIGN CURRENCY, UNMIK
- ^ Kosovo - Economic profile, Europa (web portal)
- ^ Theodoulou, Michael (2007-12-27Euro reaches field that is for ever England, Times Online
- ^ Hadjicostis, Menelaos (2007-12-30) In north Cyprus, the Turkish lira is the official currency, but euro is embraced, International Herald Tribune
- ^ Smith, Helena (2008-01-02) Arrival of euro boosts Cyprus peace hopes, The Guardian
- ^ "Cuba to adopt Euro in foreign trade". BBC News. 1998-11-08. http://news.bbc.co.uk/1/hi/world/americas/210441.stm. Retrieved on 2008-01-02.
- ^ "US row leads Syria to snub dollar". BBC News. 2006-02-14. http://news.bbc.co.uk/1/hi/business/4713622.stm. Retrieved on 2008-01-02.
- ^ Currency Composition of Official Foreign Exchange Reserves (COFER)
- ^ "Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency?" (PDF). http://www.wage.wisc.edu/uploads/Working%20Papers/chinnfrankel_NBER_eurotopcurrency.pdf.
- ^ "Reuters". Euro could replace dollar as top currency - Greenspan. http://www.reuters.com/article/bondsNews/idUSL1771147920070917. Retrieved on 17 September 2007.
- ^ ""American Gangster's Wad of Euros Signals U.S. Decline"". http://www.bloomberg.com/apps/news?pid=20601109&sid=azto7U.TmGX0&refer=exclusive.
- ^ ""Euro Rises on Speculation ECB's Trichet to Signal Higher Rates"". http://www.bloomberg.com/apps/news?pid=20601101&sid=afEneKf3hgw8&refer=japan.
- ^ Dollar's Share of Currency Reserves Falls, IMF Says (Update1) Bloomberg
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