Euro Currency (Part I)
The European Union consists of fifteen member countries that include France, Germany, Greece, Ireland, Italy, Luxembourg, Austria, Belgium, Denmark, Finland, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.
Only 12 common currency countries out of these above 15 countries constitute the European Monetary Union (EMU). These 12 countries share a single monetary policy dictated by the European Central Bank (ECB). All these above countries share the common currency Euro except Denmark, Sweden and United Kingdom.
After the United States, EMU is the worlds second largest economic powerhouse. EMU has a highly developed and efficient fixed income, equity and the futures market. This makes EMU the second most attractive investment market for domestic and international investors. Many hedge funds are based in EU countries.
In the past, the EMU had difficulty in attracting foreign direct investment or large capital inflows. The primary reason was the United States. Historically US assets have had solid returns. As a result, United States absorbs something like 70% of the total foreign savings.
However, the Euros importance is expected to increase with the introduction of the Euro and the EMU beginning to incorporate even more members in Eastern Europe. The capital flows to Europe is expected to increase.
EMU is in fact a trade driven and a capital flow driven economy. Trade is very important to the national economies within EMU. Demand for Euro is expected to continue rising with foreign central banks expected to diversify their Euro reserve holdings even further away from US Dollar. In fact Euro provides a hedge against US Dollar reserves. If the EUR/USD pair goes up, it means US Dollar is losing value and if it goes down, it means US Dollar is gaining strength.
EU exports comprise almost 20% of the world trade. While EU accounts for only 17% of the world imports! Because of the size of the EMUs trade with the rest of the world, it has significant power in the international trade arena. Unlike United States, EMU does not have large trade deficit or surplus.
International clout is one of the primary reasons in the formation of EU. The formation of EU allows individual member countries to group as one entity and negotiates on an equal playing field with the United States. United States is the largest trading partner of EU.
Leading export markets for EU are the United States, Switzerland, Japan, Poland and China. Leading import sources for EU are United States, Japan, China, Switzerland and Russia.
Manufacturing, mining and utilities account for around 20% of the EU economy while services account for more than 70% of the EU economy. EU is primarily a service oriented economy. While outsourcing most of their manufacturing to Asia, large numbers of EU based companies concentrate their research, design, innovation and marketing part of the activity in EU.
Most international trade transactions involve the British Pound, the Japanese Yen and the US Dollar. It is important for most of the countries to hold large amounts of reserve currencies to reduce exchange rate risk and transaction costs.
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try Strignano’s Forex Signals free. Discover a revolutionary Forex Robot Trading System!
