The Euro The European Union consists of 15 European member countries that

The Euro The European Union consists of 15 European member countries that

engage in European economic and political activities. In February 1992, the Treaty on European Union of 1992 established that monetary union would take place by January 1999. The treaty, also called the Maas- tricht Treaty because its terms were agreed to at the European Council meeting in Maastricht (Netherlands) in December 1991, called for a sin- gle currency and monetary policy for member countries in Europe. Monetary policy was to be administered by the European Central Bank. The Economic and Monetary Union (EMU) represents the member countries that are part of the European Union that have adopted the sin- gle currency and monetary policy.

At the time of the treaty, the single currency was to be the economic currency unit (ECU). This was the most widely used composite currency unit for capital market transactions. It was created in 1979 by the Euro- pean Economic Community (EEC). The currencies included in the ECU were those that were members of the European Monetary System (EMS). The weight of each country’s currency is figured according to the relative importance of a country’s economic trade and financial sector within the EEC. Exchange rates between the ECU and those countries not part of the EEC float freely. The exchange rate between countries in the EEC, however, may fluctuate only within a narrow range.

However, at a meeting of the heads of government in Madrid in December 1995, it was agreed that the name of the single currency would be called the euro. The reason that the ECU was not selected as the single currency was due to the opinion of Germans that the ECU was perceived to be a weak currency. For the countries of the European Union electing to be members of the EMU, there is a fixed conversion rate against their national currencies and relative to the euro. However, the value of the euro against all other currencies, including member states of the European Union that did not elect to join the EMU, fluctu- ate according to market conditions.

Members of the EMU are said to be part of “euroland” or the “euro zone” because the euro became the only legal currency. Initially, the member countries maintained their own physical currencies, although

1 There is a variation of purchasing power parity that states that changes in the rela- tive inflation rates between two countries is reflected in the change in the exchange

rate between the two currencies.

International Financial Management

they were fixed in value relative to the euro, and the euro had no physi- cal existence. The actual euro currency physically replaced the individ- ual currencies of the participating countries on January 1, 2002. The relevant authorities of each member country began to withdraw their old national currency from circulation and when this process is com- pleted, their old national currency will no longer be legal tender.

For corporations, the primary issuance of corporate debt denomi- nated in the euro has become large and liquid. Both European and U.S. investment banks play significant roles in these fundings.