Euro Vs Dollar: Differences Between the US and European Financial Systems

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Euro Vs Dollar: Differences Between the US and European Financial Systems

The Eurozone is a geographic and economic region that consists of all the European Union (EU) countries that have fully incorporated the euro as their national currency. As of 2019, the Eurozone consists of 19 countries in the EU: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

In 1992, the countries making up the European Community (EC) signed the Maastricht Treaty, thereby creating the EU. The creation of the EU had a few areas of major impact—it promoted greater coordination and cooperation in policy, broadly speaking, but it had specific effects on citizenship, security and defense policy, and economic policy. Regarding economic policy, the Maastricht Treaty aimed to create a common economic and monetary union, with a central banking system (the European Central Bank (ECB)) and a common currency (the euro). In order to do this, the treaty called for the free movement of capital between the member states, which then graduated into increased cooperation between national central banks and the increased alignment of economic policy among member states. The final step was the introduction of the euro itself, along with the implementation of a singular monetary policy, coming from the ECB. It also introduced convergence criteria, or requirements that countries must meet in order to use the euro as currency.

The EU introduced the euro in 1999, and physical euro coins and paper notes were introduced in 2002. The symbol ‘EUR’ is the abbreviation for the euro. The euro is the second-largest reserve currency as well as the second-most traded currency in the world after the United States dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. The value of the Euro is dependent on the performance of all 19 countries within the Eurozone. ‘The Good’ part is that smaller countries like Malta and Cyprus to have access to lower interest rates and increase investments throughout their countries. ‘The Bad’ part is that the value of the euro is reliant on strong performances of all the countries that are in the Eurozone. ‘The Ugly’ part is that if one country runs into economic instability it can bring the rest of the Eurozone down with them. For instance, the Greek Debt Crisis Financial markets can be divided into money and equity markets. The money market consists of the unsecured and secured ‘cash’ segments and derivatives segments. The money market in a broader sense also includes the market for short-term debt securities. New issuance of debt securities by euro area residents totaled EUR 749.9 billion in January 2019. Redemptions amounted to EUR 608.3 billion and net issues to EUR 141.6 billion. The annual growth rate of outstanding debt securities issued by euro area residents was 2.1% in January 2019, compared with 1.9% in December. Concerning the currency breakdown, the annual growth rate of outstanding euro-denominated debt securities was 2.9% in January 2019, compared with 2.7% in December. For debt securities in other currencies, this rate of change was – 2.3% in January 2019, compared with – 2.8% in December.

The market value of the outstanding amount of listed shares issued by euro area residents totaled EUR 7,483.6 billion at the end of January 2019. Compared with EUR 8,204.0 billion at the end of January 2018, this represents an annual decrease of -8.8% in the value of the stock of listed shares in January 2019, up from -11.7% in December.

New issuance of listed shares by euro area residents totaled EUR 2.9 billion in January 2019. Redemptions amounted to EUR 3.5 billion and net redemptions to EUR 0.6 billion. The annual growth rate of the outstanding amount of listed shares issued by euro area residents (excluding valuation changes) was 0.7% in January 2019, compared with 0.8% in December. The annual growth rate of listed shares issued by non-financial corporations was 0.4% in January 2019, the same as in December. For MFIs, the corresponding rate of change was -0.1% in January 2019, the same as in December. For financial corporations other than MFIs, this growth rate was 2.7% in January 2019, compared with 2.8% in December.

Major European stock exchanges in the Eurozone include Euronext – European stock exchange that is made up of 5 market places in Belgium, France, Ireland, Portugal, and the Netherlands. On this stock exchange, there are 1,300 companies listed with overall 4.36 trillion market cap and over 30 indices. Also, Deutsche Borse which operates Europe’s third largest stock exchange with 2.22 trillion market cap predominately listed by German companies.

As we all know, The U.S. Securities Market is self-reliant, subjected to one set of regulations ﬁscal policy, the market is not interdependent and the dollar is the haven currency. On the other hand, Eurozone financial markets perform harmonious, however local governments have different structures and regulations for their economies and every country has their own regulations and ﬁscal policy: same currency issued debt but with different interest rates.

It is important to understand the underlying differences between two systems. The fundamental difference in corporate funding between the U.S. and Europe is that European companies rely far more heavily on bank lending. Overall, some 80% of corporate debt in Europe is in the form of bank lending, with just 20% coming from the corporate bond markets – almost the inverse of the U.S. Data suggests that there is a shortfall in capacity of more than $1 trillion a year between what European companies raise in the capital markets and what they could potentially raise if capital markets were as developed as in the U.S. The structure of the European banking system, with a series of national champion banks traditionally operating within their own borders, allied with a strong local network of regional banks (and backed up by all of those deposits) has historically made bank lending the default option for most companies. A key difference with bank lending is that in the U.S. banks securitize or sell on many of their loans into the much more developed institutional loan market, whereas in Europe a far larger proportion of bank loans remain on bank balance sheets. In addition, alternative sources of funding such as capital markets have been fragmented across national borders and have only in the past few decades begun to catch up with the U.S. This is reflected in the significant gap in depth in most sectors of the capital markets.

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