How the European Single Currency Affects Currency Transfer Operations

The adoption of the single European currency in late 1999 had a mixed effect on currency transfer operations and the overall economic performance of the European Union (EU). It lowered some costs but spurred doubts about the ability of national governments to control financial markets in times of crisis. Doubts notwithstanding, the euro has already become a major world reserve currency and is bound to grow even stronger if it manages to replace the U.S. dollar as the oil trading currency.

Speaking about currency transfer operations within the EU, one must admit that the introduction of the single currency benefited individual and business clients because it brought the costs of currency conversion across the continent to naught, thus downsizing the cost of currency transfers. However, the adoption of the euro in the Eurozone resulted in a single monetary policy determined by the European Central Bank, which left little room for national governments to manoeuvre in times of trouble. Moreover, different levels of inflation and unemployment levels within the Eurozone and the EU as a whole were among the factors that have recently been fanning the fire of financial troubles in Europe.

Obviously, euro adoption was a factor to strengthen European financial markets in terms of liquidity because businesses and governments have more sources of funding and are not limited by local currency barriers to borrowing money and gave fresh start to European financial markets.

After its introduction in late 1999 the euro started to depreciate against the dollar and following a series of volatile moves in May 2009 it slid to an exchange rate tantamount to its initial trading value. Meanwhile, individual and institutional brokers around the world managed to heavily profit on these currency fluctuations, and transfers entailing conversion from one currency to another was a matter of survival for some companies. Later, the euro continued to gain against the U.S. currency but the recent recovery of the American economy helped the dollar restore its positions and now it is evident that it finally lost its leading role as the world’s reserve currency.

Many countries already switched to the euro as a reserve currency and even the oil-rich countries of OPEC are considering options to start trading oil in euro. Such a move will most likely initially shake the financial markets because many currency transfers denominated so far in U.S. dollars will be lastingly switching to the euro.

Euro adoption has its disadvantages, too. The major one is that at present national governments within the Eurozone can only rely on fiscal policy and public investment to adjust economic policy to the needs of specific regions and countries. In times of financial crisis and dangerously high budget deficits across Europe, countries like the United Kingdom, which is not a member of the Eurozone, have more room to act and manipulate the exchange rate of the pound to achieve better economic results. The Bank of England can take measures to devalue the British currency and ease access to cheaper credits, while countries like Greece, which belongs to the Eurozone, is not allowed to do so. On the other hand, positive effects outweigh negatives and most financial analysts are of opinion that the euro has a bright future ahead of it.