The single currency called the Euro became a reality on January 1, 2002 when Euro notes and coins replaced national currencies in Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.
Michael Dennis suggests that the creation of a common currency would tend to benefit EU member nations that had adopted the Euro because it would tend to simplify trade between participating EU member states, and would encourage companies in EU member nations to export when they enjoyed a comparative advantage. However, creation of the Euro does not address the issue of foreign exchange rate fluctuations between EU members participating in the European Monetary Union by sharing a common currency and the exchange rate fluctuations that characterize the relationship between two currencies.
Dennis writes that in export sales transactions, buyers and sellers rarely use the same currency, and the relative value of their respective currencies constantly changes. Depending on whether the sale is to be paid in the buyer's currency or the seller's currency, one party or the other incur additional risks and lost profits when foreign exchange rates are unfavorable to that party to the transaction. This is the result of changes in the relative value of two currencies between the time the goods are sold and the time they are paid for. Dennis writes that foreign exchange rate fluctuation is one of the risks of selling internationally. Currency exchange rates are influenced by a variety of factors including supply and demand; interest rate differentials; economic news; political events; and government intervention and there is no single entity that regulates or controls the foreign exchange market. There are a variety of ways to hedge against unfavorable changes in the value of foreign currency exchange rates, including these:
Call or put options allow the buyer of the option to purchase or sell a...
Unity for Europe thru Economic and Political Aspects. (2000, January 01). In LotsofEssays.com. Retrieved 21:58, November 27, 2014, from http://www.collegetermpapers.com/viewpaper/1303467693.html