OK, back around the turn of the millennium, several European currencies were replaced with the euro. I notice that the vast majority of those currencies were wirth much less than 1 euro per unit. How did they decide to make the euro worth how much it is relative to the other currencies?
The value of the euro was determined to exactly the value of the ECU at the end of December 1998. The ECU was a sort of “pre-euro” valued as a basket of European currencies to be a unit of account in trade and whatnot.
Of course, they could have normalized that basket of currencies any way they chose. I’m guessing that it’s not a coincidence that the euro started off so close to the dollar.
It wasn’t. They wanted it to be close to, but slightly above, a dollar.
No, it’s not a coincidence. When the ECU was created around 1980 (It was used, for instance, to borrow money, since the ECU, being based on a basket of currencies, had a value stabler than any individual currency) its value was fixed at $ 1. Of course, this value fluctuated over time, but stayed in the same range.
When the Euro was created in turn, its value was fixed at 1 ECU, which was at the time worth a bit more than one US dollar.
As others have pointed out, the euro took its initial value from the preceding European Currency Unit. (On the start date, one ECU = one Euro.)
The ECU, in turn, took its value from the preceding European Unit of Account.
The EUA started off life as a unit used for certain transactions of the European Investment Bank. It was created in 1975, and its initial value was fixed to coincide with the value of an IMF Special Drawing Right.
The SDR was created in 1969, and was originally defined as the value of 0.888671 grams of gold, which at the time was the value of one US Dollar. With the breakdown of the Bretton Woods system in the early 1970s, the value of the SDR was redefined by reference to a basket of major currencies, one of which was the US dollar. (The others were the Deutschmark, the French Franc, the Pound sterling and the Yen.)
By 1975, when the EUA was created, one SDR was worth USD 1.21 or thereabouts; this reflects the decline of the US dollar relative to the other currencies in the basket.
The EUA therefore had an initial value of USD 1.21. That value has fluctuated up and down over time, of course, but is is the EUA which gave its value to the ECU, which in turn gave its value to the Euro.
It is hard to reconcile this with the claim that the value of the Euro was fixed to be slightly above the US dollar. That is simply the value which fell out of history of the USD/EUA/ECU exchange rate.
I doubt that the bankers and economists involved could have cared less; there is no particular advantage to a currency having a unit value which is greater than, or less than, the unit value of another currency. The politicians may have welcomed it as helping to make the euro more saleable to the less economically literate portion of the electorate; I don’t know. But, even if so, “welcomed it” and “designed the system to acheive that result” are not the same thing. If the system was designed to acheive that result, I can only say that it shows remarkable foresight on the part of those who established the EUA in 1975.
The Euro was set at parity with the European Currency Unit, an internal accounting unit of the European Community from 1979 to 1999. The ECU was used in international financial transactions, but its main purpose was as part of a system to minimize fluctuations between the currencies of member states. The ECU replaced (at parity) the European Unit of Account, which was used from 1975 to 1979 for international trade and investment by the European Development Fund and the European Investment Bank, and eventually other agencies. The EUA was initially set at the same value as Special Drawing Rights of the International Monetary Fund. As part of the Bretton-Woods fixed exchange rate system, an SDR was defined as 0.888671 grams of gold, the value of one US dollar at that time. That system collapsed after Nixon eliminated the gold standard for dollars in international exchange, and SDRs were redefined as a basket of major currencies – dollars, pounds, marks, francs, and yen; that, I think, was the situation when the EUA was created. SDRs are currently defined as a basket of dollars, euros, pounds, and yen. They haven’t been very important since dollars became more widely available, but during tight times for the dollar (like now), additional allotments of SDRs are still issued.
ETA: or, what UDS said.
The important part in selling it to the electorate, or rather, to the whole population, was not the dollar, but the old, pre-Euro currency. So the Euro is half of the DM or 1/14th of one Schilling or 1/6th of an Franc, and so when it seemed as if all the prices had doubled over night with the introduction of the Euro in Germany, people both grumbled about the price gouging merchants (some of whom did gouge by converting 1:1 instead of 2:1, some who did stay honest), and became convinced that switching to the Euro had been a bad move because it doubled the prices.
As for the dollar, at least the Germans are proud of the hard DM and don’t want to have anything to do with a currency as instable, volatile and soft as the dollar, so that would be an unwelcome association.
The Euro wasn’t “half of the DM or 1/14th of on Schlling or 1/6th of a Franc”; other way around. The fixed conversion rate for the Euro was DEM 1.96, or FFR 6.56, or OSS 13.76. The euro was chunkier than most of the predecessor currencies, not less chunky, as the OP points out. (The only exceptions were Ireland, Malta and Cyprus, whose predecssor currency units were all chunkier than the Euro. And the UK, but they didn’t adopt the Euro.)
How is it the other way round? If 1 Eur = 2 DM or = 14 Schill. or =6 Franc, then dividing the old amount by 2 gives the new Euro price; doubling the Euro amount gives the old DM value. So “look that piece of pizza is only 2,- Euro” becomes “Wow, that piece is 4 DM! (And was 2.50 or 3,- DM before) Damn!”
What do you mean with “chunky”? I have never heard that as an adjective for a currency, only for coins which are big. Currencies are usually described as soft or hard, or instable / stable. Chocolate is chunky, or guys, but what about the Euro is chunky? (Or do you mean the penis that some people see on the 2 Euro coin in Scandinavia?)
One DM was worth half the amount one Euro was worth.
He means ‘chunky’ as a synonym for ‘high value’. Unusual usage, certainly, but obvious from context, I would have thought.
“The Euro is half of the DM” means that the euro has half the value of the DM, not that the price figure in euros is half the price figure in DM. If something worth 4 DMs is worth 2 euros, then the euro is twice the DM, not half.
I think that’s great. If I was opposed to my country* going with the Euro, and someone said “Ah, but it’ll be worth MORE than a dollar!”, I would’ve signed up right there and then.
*(y’know, my small Alpine principality. Maybe a suburb of Liechtenstein: the Duchy of Digs)
Hm. Can we get you a small alpine principality? Or just a micronation in Wisconsin?
Strangly no one asked me for a cite about my post above. Despite that, I’ll give one. Well, sort of one.
The info that they wanted the euro to be slightly more than a dollar comes from an article I read in some scurilous left-wing rag (a.k.a. The Economist) about 10 years ago. No doubt they were just making shit up.
But on the off-chance that they didn’t just make it up, perhaps they may have done something bizarre like talking with the people in charge of the ECB. Yeah, it’s hard to believe, but sometimes it just happens.
If they said that they were probably making some kind of joke.
You’ve been informed of the process by which the Euro eventually got its value.
How do you think they could have known what the various currency rates were going to do over all those years?
When you’ve been given a sensible, serious, explanation, why try and stick with a daft one?
Even if they had decided to pick a value that was ‘just a bit more than the dollar’, the chances are that within a short space of time it would be worth either a lot more than the dollar or less than the dollar. :rolleyes:
The way it was written didn’t seem like a joke to me. It’s possible that it may have been a post facto rationalization, though.
Yes, but as Chronos noted, they didn’t have to use a 1:1 conversion from the ECU to the euro. If they really had wanted a euro to be just over a dollar and the ECU was not at that point, they could have used a different ratio.
They obviously knew they would not stay at the same level indefinitely. These guys were knowledgeable in the ways of finance and economics, after all. However, they probably figured the two would be fairly stable currencies and would not vary much over time. However, even within a few years the two had moved much more than they had expected. (I seem to remember reading several later Economist articles to that effect.)
It’s not that they expected the euro to remain in that relationship with the dollar indefinitely. They just wanted to start at that point.
But there was an established practice, going back decades, of using a 1:1 conversion ratio - from the SDR to the EUA, from the EUA to the ECU. The natural default would be to use an 1:1 ratio again. We don’t really need to look further for an explanation of why 1:!1 was used. Why would they introduce needless complications into what is already a quite complicated exercise?
I’m willing to accept that some pollies may have been mildly pleased that the initial value of the Euro was slightly greater than that of the US dollar, but this would have been a pretty marginal issue. The fact remains that this was a coincidence, and if the coincidence hadn’t panned out that way, I seriously doubt that anybody would have done anything about it.
As both common sense and constanze’s posts suggest, what concerned the man or woman in the European street at the time was not whether the euro was as “good” as the US dollar, but whether it was as “good” as the Deutschmark, the French Franc, etc. The Germans in particular were very proud of their currency, and the fact that it had a lower unit value than the US dollar didn’t bother them in the least. Why would they have been fussed about the unit value of the euro relative to the US dollar?
Finally, it’s worth point out that even if, when the decision to confirm the 1:1 rationwas taken, the EUA was worth more than US$1, there would have been no reason to assume that it would still be worth that when the notes and coins were actually introduced, which was several years later. Consequently, whatever the “feelgood factor” of launching the currency at more than US$1 might be, those who decided on the 1:1 ratio had no way of knowing that they would benefit from it.