Euro: the second most important currency - August 12, 2018

Euro: the second most important currency

The euro may only exist since 1999 but it instantly became the second most important reserve currency of the world behind the US dollar. In its success the Deutsche Mark had a key role, but there were other factors, too.

The US dollar may still be the most important reserve currency of the world, but the euro follows it closely. The euro is also the second most traded currency, only beaten by, again, the dollar. According to the data of European Central Bank, there’s approximately €1.46 trillion in circulation. Only the dollar beats that number.. But how did euro become so important in just 19 years?

How was the euro born?

First, the euro was long planned before its launch. The virtual basket currency of the European Community preceded it. The ECU was used since 1979. As integration became tighter between the members and the European Union was born, the idea of a common currency also surfaced.

This was established in 1992 in the Maastricht Treaty. To be part of the eurozone, countries had to comply with strict criteria (like they had to have a deficit less than 3% of the GDP). It was also decided back then that although the UK and Denmark were part of the EU, they didn’t have to join the euro area.

The name, euro, was chosen in 1995. Three years later it was also decided that one euro would worth exactly one ECU. On 1 January 1999, the euro was officially introduced but notes and coins only came later. The national currencies were used until 1 January 2002, when euro as a legal tender was launched in the euro area member states.

How come the euro is so important?

After World War 2 Deutsche Mark soon became one of the most important reserve currencies of the world. Germany is the biggest economy of the European Union (and 4th in the world), so it’s not surprising that their (new) official currency is still an important global reserve currency.

Currency composition of foreign exchange reserves

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But the euro’s past isn’t only about the Mark. French franc was also an important reserve currency. France also holds its place as the 7th biggest economy globally. The euro in the meanwhile also represents the strength of 17 other nations, many of them are at top spots in global economy.

This also means that, according to the International Monetary Fund, the European Union is the second largest economy of the world with a GDP of $17 trillion. Again, only the United States beats the EU, with its $19.3 trillion GDP. The Euro is also the sixth highest valued currency of the whole world, with a 1:1.15 exchange rate against the dollar at the time of the writing of this post.

What does the future hold?

The factors above all make the euro important. Some analysts even expected it to dethrone the US Dollar as the main reserve currency of the world, but that haven’t happened so far, and at the moment it’s hard to see how that could happen. Its share gain as a reserve currency slowed down a bit lately, but it still holds its place strong.

Looking at the global economy, it’s safer to say that the euro will remain among the most important global currencies. Some analysts believe that others may join the elite club in the meanwhile, and reduce the power of the US dollar. Many also expect that there will be more important reserve currencies in the future, euro being one of them.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.