What is the euro and why has it been created? How has its value changed relative to the U.S. dollar since its inception?

Question

What will be an ideal response?

Answer 1

The euro is the currency created by the Treaty of Maastricht for the European Union. It was the common currency for the eleven countries that participated in the first wave of European monetary unification; the number of participating countries has since risen to 16. It is one step beyond a system of fixed exchange rates among member states of the European Union. The euro was created to eliminate the problems associated with fluctuations in exchange rates among countries that trade heavily with one another. Exchange rate changes impose unavoidable costs on businesses engaged in international trade. Fixed exchange rate systems have not proven to be adequate solutions to fluctuating exchange rates. Fixed rate systems are subjected to several problems; among them are chronic payment imbalances created by overvalued or undervalued currencies and speculative attacks by capital movements seeking to profit from upcoming revaluations or devaluations . As long as separate currencies exist, there will be no permanent solution to exchange rate instability. Therefore, the members of the European Union decided that the only permanent solution to exchange rate volatility was to eliminate separate currencies among the member countries of the EU.The euro was introduced in January 1999 with a one-to-one value relative to the U.S. dollar, so that the exchange rate would have been equal to 1. The euro depreciated shortly thereafter, with 1.2 euros worth 1 U.S. dollar in February 2002. Beginning in 2002, the value of the U.S. dollar declined and the value of the euro rose to a high of 1 euro worth $1.60 in 2008.