The European Union (EU) is a brotherhood of 28-member states which started from a tiny gang of six neighboring states in 1951. By the magical powers of the Treaty of Maastricht, it then grew into a large economic and political bloc, making it the largest economic region in the world. Talk about playing a huge role in international trade and global economic affairs!
Among these EU member states, eighteen countries adopted the euro (EUR) as their common currency. These nations comprise the euro zone, which is also called the European Monetary Union (EMU) or Euroland.
Members of this elite club are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Euro zone: Facts, Figures, and Features
- Member Nations: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain
- Size: 1,691,658 square miles
- Population: 505,665,73
- Density: 300.9 people per square mile
- Head of European Commission: Jose Manuel Barroso
- Head of European Parliament: Martin Schulz
- Head of European Council: Herman Van Rompuy
- Currency: Euro (EUR)
- Main Imports: Machinery, vehicles, aircraft, plastics, crude oil, chemicals, textiles, metals
- Main Exports: Machinery, motor vehicles, aircraft, plastics, pharmaceuticals and other chemicals, Antonio Banderas, Penelope Cruz, Jean-Claude “The Muscles from Brussels” van Damme
- Imports partners: China 15.89%, U.S. 11.97%, Russia 11.22%, Norway 6.13%, Switzerland 5.14%
- Exports partners: U.S. 19.07%, Russia 8.03%, Switzerland 7.49%, China 6%, Turkey 4.14%
- Time Zones: GMT, GMT+1, GMT+2
- Website: http://www.europa.eu
The euro zone, which comprises more than half of the nations in the EU, ranks as the largest economy with a GDP of $18.45 trillion in 2011. Being a services-oriented economy, services account for a whopping 70% of its GDP!
Because the individual countries are grouped as one entity, it enables them to facilitate trade easier, mostly with its number one trade partner, the U.S.
Monetary & Fiscal Policy
The European Central Bank (ECB) acts as the governing body for the monetary policy of the EU. Led by the current ECB President Mario Andretti… errr, we mean Mario Draghi, the Executive Board also consists of the ECB Vice President and four other policymakers.
The main objective of the ECB is to maintain price stability in the entire region – quite a tall order! To achieve this goal, the euro zone signed the Maastricht Treaty which applied a certain set of criteria for the member nations. Here are some of the requirements:
- The nation’s inflation rate must not exceed the average inflation of the three best performing (lowest inflation rates) states by more than 1.5%.
- Their long-term interest rates must not exceed the average rates of these low-inflation states by more than 2%.
- Exchange rates must stay within the range of the exchange rate mechanism for at least a couple of years.
- Their government deficit must be less than 3% of their GDP.
If a nation fails to meet these conditions, they are penalized with a hefty fine. Yikes!
The ECB also makes use of their minimum bid rate and open market operations as their monetary policy tools. The ECB minimum bid rate or repo rate is the rate of return the central bank offers to the central banks of its member states. They make use of this rate to control inflation.
Open market operations, on the other hand, are used to manage interest rates, control liquidity, and establish monetary policy stance. Such operations are conducted through buying or selling of government securities in the market.
Other than making use of those monetary policy tools, the ECB can also opt to intervene in the foreign exchange market to further cap inflation. Because of this, traders pay close attention to comments from the Governing Council members since these could impact the EUR.
Getting to Know the euro
Aside from being dubbed the anti-dollar, the euro is also nicknamed “fiber.” Some say that this nickname was derived from the Trans-Atlantic fiber optic, which was used for communication, while some argue that it was from the paper used to print European banknotes way back then! Here are some of the other characteristics of the euro.
They call me the Anti-Dollar!
I’m busy during the London session…
The euro is most active during 8:00 am GMT, at the beginning of the London session. It often has little movement during the latter half of the U.S. session, around 5:00 pm GMT.
…and I’ve had a few relationships.
EUR/USD is often linked to the movement of capital markets, such as bonds and equities. It is negatively correlated to the movement of the S&P 500, which represents the performance of the U.S. stock market.
Important Economic Indicators for the euro
Gross Domestic Product – Gross domestic product is the central measure of economic growth in the region. Since Germany is the largest economy in the euro zone, its GDP tends to move the euro the most.
German Industrial Production – This measures the change in volume of output from Germany’s manufacturing, mining, and quarrying industries. Because of this, it reflects the short-term strength of German industrial activity.
German IFO Business Climate Survey – This is one of the country’s key business surveys. Conducted monthly, this takes into the account the current business situation of Germany as well as expectations for future conditions.
Budget Deficits – Recall that one of the criterias in the Maastricht Treaty requires that euro zone economies keep their debt-to-GDP ratio below 60% and their deficit less than 3% of its annual GDP. Failure to achieve these targets could result to fiscal instability in the euro zone.
Consumer Price Index – Since one of the goals of the ECB is to maintain price stability, they keep an eye on inflation indicators such as the CPI. If the annual CPI deviates from the central bank target, the ECB could make use of its monetary policy tools to keep inflation in check.
What Moves the EUR?
Euro zone Fundamentals
Reports of strong economic performance by the euro zone as a whole, or by its member nations, can boost the euro higher. For instance, better than expected GDP reports from Germany or France could encourage traders to be bullish on the euro.
Uncle Sam’s Groovy Moves
Differences in Rates of Return
Similar to bond yields, interest rate differentials also serve as an excellent indicator for the EUR/USD movement. For instance, traders usually compare the Euribor futures rate with the Eurodollar futures rate.
Just to clear things up: “Euribor” is an acronym that stands for Euro interbank offer rate, which is the rate Euro zone banks use for inter-bank transactions, while Eurodollars are deposits denominated in U.S. dollars.