The History of FX: Part 4

Maastricht Treaty

On February 7th 1992 the Maastricht Treaty was signed. This was an international agreement approved by the heads of government of the states of the European Community (EC) in Maastricht, Netherlands. The Treaty was entered into force on November 1, 1993. The treaty established a European Union (EU), with EU citizenship granted to every person who was a citizen of a member state. EU citizenship enabled people to vote and run for office in local and European Parliament elections in the EU country in which they lived, regardless of their nationality. The treaty also provided for the introduction of a central banking system and a common currency (EUR), committing members to implementing common foreign and security policies.

A new currency is born: EUR

Prior to a single European Currency being created there were many accounting criteria to be met by each country; control of the rate of inflation and the debt to GDP ratio. Most countries met these criteria in 1998 and were permitted to join the European Monetary Union and with it the Euro was born in 1999. At its inception the EUR replaced the ECU at a ratio of 1:1 which was USD $1.1743 at that time.
There are 28 members of the European Union — which spans most of Europe, from Ireland in the west to the Russian border in the East. However, only 19 EU member states are also part of the Eurozone. These are the European Union states that have adopted the Euro as their sole currency. Some have not yet been allowed to join because their economies are weak (for example, Romania and Bulgaria); other nations have chosen not to for political and domestic reasons (for example, The United Kingdom and Norway).

EUR Timeline

Jan. 1, 1999 the euro became an official currency;
1999-2002: existing national currencies and the euro operate side by side at fixed rates. The euro is not imposed as currency, but inter-bank transfers were made in euros.
By Jan. 2002, new euro notes and coins were circulated;
By July 2002, at the latest, local currencies were completely phased out and no longer allowed. Only euro transactions (cash or transfer) were possible.

So why create a single currency?

· Create a genuine single market by ending barriers to trade caused by transaction costs and fluctuating currencies
· Enhance competition by forcing companies to concentrate on price, quality, and production instead of hiding behind weak currencies
· Benefit SMEs and consumers by making it easier for the former to enter “foreign” markets, and allowing the latter, increasingly via the Internet, to shop in the lowest priced markets
· Bring inflation and interest rate stability via the new European Central Bank
· Lower the costs of doing business through lower prices, lower interest rates, no transaction costs, and the absence of exchange rate fluctuations.

As big as USD?

Today, more than 325 million people in multiple countries use the Euro, which now rivals the importance of the US Dollar in the world economy. In fact the EUR is the second most widely held reserve currency after USD. Over 1 Trillion EUR are held as currency reserves globally. In addition the ECB (European Central Bank) is responsible for setting interest rate targets and not exchange rates (but can intervene in the markets to stabilize both the EUR and other currencies) thus creating a truly “floating” currency. However, you may recall that prior to the SNB removing the EURCHF floor on Jan 15th of 2015 the ECB, along with other Central Banks, regularly bought EUR to assist our Swiss friends.

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