Euro exchange rates: What does it take to become a part of the Single European Currency?

September 11th, 2012

In Europe money exchange is a quite remarkable thing. The exchange rate euro has grown as a currency and many states are adopting it. Euro exchange rates are constantly in flux and the Euro has been one of the most successful growth currencies since its introduction. However to many the criteria for joining the single European currency seems a bit confusing. Looking at Europe people will ask why the UK and Denmark have retained their own currencies and why other countries exist using the Euro.

The Euro convergence criterion, which is also often called the Maastricht criteria, are the sets of rules and guidelines different countries have to follow in order to peg their finances to euro exchange rates. With the nature of finances, money exchange in the international markets is becoming harder and harder for smaller currencies that do not have the backing of history in the way the UK Pound has. Especially true for the younger former soviet bloc countries; the exchange rate euro is an important target for them.

Inflation rates of countries wishing to take advantage of euro exchange rates are not allowed to be higher than 1.5% of the three best performing members of the Eurozone. The ratio of government deficit to gross domestic product must not exceed 3%in the year prior to joining the Euro, with only exceptional circumstances and a very close performance in these criteria allowing a nation state to break this rule. Similarly, government debt must not exceed 60%, or, at the very minimum, must be approaching acceptable levels of debt at a suitable pace.

Euro exchange rates are tied to a very specific mechanism when it comes to money exchange. Originally introduced in March of 1979 as a part of the new European Monetary System it aimed to maintain financial stability in Europe. Since the introduction of the Single European Currency we have what is known as the Exchange Rate Mechanism II (ERMII) which replaced the original. In order to join the Euro a nation must be subscribed to the ERMII for at least 2 years.

Long term interest rates of nations looking to join the exchange rates euro are not allowed to be more than 2% higher than the 3 best performing European states too. As we have seen, enlargement of the Eurozone has been an aggressively fast process with more and more nations looking to take advantage of euro exchange rates and pin their finances to a larger pool of resources.

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