Europe’s major currencies are the euro, the U.S. dollar, the British pound, the Japanese yen and the Swiss franc. These are known as the Eurosystem. In a paper published in the Journal of International Finance, four institutions that work together to guide monetary and credit policies – the European Central Bank (ECB), the European Union (EU), the European banking organizations European Centralist (ECB’s and the EU’s commission) and the European banking associations – have come up with the euro to Rand. The euro to Rand is a theoretical concept that pertains to the possibility that a common international interest rate can be reached through a central clearing agency operating through banks in the currency of one member state while maintaining the characteristics and rules of the national central bank of each member state.
Theoretically, this would create a situation where the interest rate between the currencies of the EU and those of the other members of the EU would be the same. The problem arises when there is a different exchange rate between two other currencies. The theory goes that if the two rates are the same, then the net effect is that there will be a zero sum distribution of profits among members of the EU. So if the two currencies are set to have a different exchange rate, then this would mean that the net profit of a firm in one of the countries is going to be higher than the net profit of a firm in the country of origin. This can potentially lead to protectionism among member states which may lead to increased trade protectionism among other countries.
How would it be possible for the EU to reach a common interest rate? There are three possible scenarios which can be explained by the analysis. The first scenario is that the euro to rand exchange rate is determined before the common market rate is determined. This happens when there is no official exchange rate and there are no formal differences between the different currencies. This can actually give a rise to the risk premium or the price variation between the currencies and this can potentially result in a variety of problems.
The second scenario is when the official exchange rate is fixed and there is a clear indication when the final retail rate will be set. This is very important in the context of the euro torand trade. In order for firms to successfully operate in the absence of official rates, they need to make investments in a variety of currencies that do not follow the same conversion rates. In this scenario, there would be an increase in the number of currencies that firms can trade with. The danger with this situation is that it could lead to the introduction of a few inconsistencies across the different currencies which will make it difficult for traders to carry out their tasks in an efficient manner.
The third scenario is when the official exchange rates are set after the start of the trading season. There is a lot of uncertainty during the first quarter of a trading season because there is a lack of information regarding the changes that will occur across the board. There is also a possibility that the unexpected announcement of some currencies can cause a disturbance in the marketplace. For instance, the African Development Bank decided to change the rate of the African Reserve Currency (ADC) against the Euro after it published information about the intention to issue a new convertible bond. This move has caused a sharp drop in the value of the Euros and traders have responded by selling the EURO in a hurry to cover their losses.
The fourth scenario is when the official euro to rand exchange rate is fixed before the start of the year. Like the first scenario, this can be used by multinational companies which operate across different currencies. If a firm operates in currencies other than the ones it has its accounts in, then it would be pointless for it to invest in the currencies that it does not convert to. Hence, if the company has to open accounts in both the EURO and the USD, then it would be pointless to buy goods in the EURO while it is selling products in the USD. The same applies to banks that have their transactions made in several currencies.
The fifth scenario is where there is a sudden depreciation of the euro against the United States dollar. The main reason for this is that the United States is no longer a major force in the global economy and is no longer a trading partner for Europe. The fall of the euro against the dollar in late 2021 was caused by the US government imposing a ban on the European Central Bank buying certain bonds. This action hurt the euro as much as the dollar and since then the euro has lost ground against most of its major counterparts. An analysis of the last five decades will reveal that the rise of the euro has been mostly caused by four world political events.
The first was the collapse of the Swiss economy which left the country with no alternative but to re-establish its peg to the dollar. The second was the downfall of the Japanese economy which paved way for the Asian tigers to make inroads into the western world. The third was the financial crisis that swept through the world last summer wreaking havoc in the stock markets. Finally, the global economic slowdown which led to the devaluation of the dollar last year has made the Swiss currency a less viable option compared to the 1 euro torand.