Money and currencies
Since the euro was introduced, you can use it to pay in many European countries without having to change money. All countries that have the euro as their currency belong to the euro area.
When traveling to or doing business with countries outside the euro area, we still have to exchange euro for foreign currency. Read on to learn more about the role of the euro as the leading currency in Europe, about how exchange rates are calculated and what you need to be aware of when exchanging currencies at banks.
The euro as the currency of Europe
The introduction of the euro in 2002 was an important milestone on the way to a common and united Europe. The euro area comprises all EU countries that share the euro as their common currency, have a common central bank (the European Central Bank – ECB) and pursue a common monetary policy. Since the euro was introduced, the euro area has grown from 12 to 20 member countries. Its newest member is Croatia, which adopted the euro as its official currency on January 1, 2023.
With the euro, we can pay in many different European countries using just one currency. This is an advantage for both private individuals and companies. When people from euro area countries travel within the euro area, they do not have to change money. That means they do not have to pay currency exchange fees, either, and they can compare prices directly, without having to calculate what prices abroad would be in their own currency. The euro also makes it easy to order and buy goods from abroad. People have confidence in the euro because it is managed by the ECB. In general, you will enjoy a higher quality of life if you live in a country or economic area with a stable currency. Since there are no more currency exchange fees between euro area countries and prices can be easily compared, both traveling and trading have become easier in the euro area. Moreover, the common currency also has many advantages for trading outside the euro area. Because the euro area is rather large, the euro is an internationally recognized currency and, therefore, much more stable than the currencies of individual, smaller countries. Europe has become more competitive in international markets since the euro area acts as a joint economic force.
To join the euro area, EU countries must fulfill certain criteria. Some EU countries have their own, independent currency. Sweden, for example, uses the Swedish krona (SEK), Hungary the Hungarian forint (HUF) and Czech Republic the Czech koruna (CZK) (as of February 2024).
Foreign currencies
In Austria and throughout the euro area, the domestic currency is the euro. All other currencies are referred to as foreign currencies. There are over 160 different currencies worldwide. Foreign currencies are very important in international trade. Euro area companies, for example, need foreign currencies to do business with countries outside the euro area. Private individuals, on the other hand, mostly need foreign currencies when traveling outside the euro area or buying products from countries with a different currency.
Technically, foreign cash (banknotes and coins) is called foreign currency and foreign noncash (bank money like e.g. bank deposits, checks or transfers) is called foreign exchange. You would mainly use foreign currency when you go on a trip abroad. For example, if you are vacationing in Switzerland and want to pay in cash, you need banknotes and coins in Swiss franc. Foreign exchange, on the other hand, is used for international credit transfers or when paying abroad by debit or credit card. For example, if you order a book from an online shop based in the UK and pay by credit card, the amount debited to your account in euro needs to be converted into the equivalent amount in pound sterling before it is credited to the shop’s bank account. The euro amount debited to your bank account will depend on the exchange rate that applies. Please note: Your bank may also charge you currency exchange fees for converting the amount.
Not every currency is worth the same in international trade. People around the world have confidence in currencies of strong economic areas as these are particularly stable. That is why these currencies are often used in international trade. They are also called strong or hard currencies. Among the strongest currencies worldwide are the US dollar (USD), the euro (EUR), the pound sterling (GBP) and the Japanese yen (JPY). These currencies are also known as leading currencies or reserve currencies. Currencies that are weak compared to leading international currencies are called soft currencies. There are many reasons why currencies can be soft. One might be that the country in question is hit by high inflation, political unrest or war.
The following figure shows how foreign currency can be categorized.
Exchange rates
The value of a currency is determined by its exchange rates against other currencies. The exchange rate indicates at which rate one currency will be exchanged for another currency. It can be expressed in two ways (e.g. EUR-USD rate or USD-EUR rate).
Example: Exchange rate between the euro and the US dollar
The exchange rate between the euro (EUR) and US dollar (USD) can be expressed as the EUR-USD rate or the USD-EUR rate.
A EUR-USD exchange rate of 1.1000 means EUR 1 = USD 1.1000. In other words, you get USD 1.1000 for EUR 1 or you have to pay USD 1.1000 to get EUR 1. This means EUR 1 is worth USD 1.1000.
A USD-EUR exchange rate of 0.9090 means USD 1 = EUR 0.9090. In other words, you get USD 1 for EUR 0.9090 or you have to pay EUR 0.9090 to get USD 1. This means USD 1 is worth EUR 0.9090. In this case, EUR 0.9090 is the reciprocal value of the above EUR-USD rate (1/1.100 = 0.9090).
Tip
- When checking exchange rates on the internet, keep in mind that rates can be expressed in two ways, depending on which of the two currencies you want to sell or buy. If you want to sell euro and get US dollar in return, you can use the EUR-USD exchange rate to calculate the equivalent US dollar amount. Alternatively, you can use the reciprocal value of the USD-EUR rate.
Most exchange rates are flexible and change with the market situation. There are also fixed exchange rates, for example when the value of one currency is pegged to another currency. However, this is very rarely the case. The development of an exchange rate is represented graphically as a diagram, also known as an exchange rate chart. The chart below shows the EUR-USD exchange rate from February 2021 to February 2024.
Depending on the exchange rate trend, the EUR can strengthen or weaken against the USD. For example, if the EUR-USD exchange rate falls (depreciation), this means that the EUR has lost value against the USD. However, if the EUR-USD exchange rate rises (appreciation), this means that the EUR has gained in value against the USD. Depending on the situation, exchange rate fluctuations can be more or less favourable for private individuals and companies, as the following examples illustrate.
Example of exchange rates on holiday
Dario Purtic travelled to the USA at the beginning of February 2024. Using the dates marked on the chart, he considers whether the respective exchange rate would have been more or less favourable for his travel budget. Dario had to exchange EUR for USD for his trip. On 19/02/2021, he received USD 1.2119 for one EUR. On 26/09/2022 it was USD 0.9811 and on 19/02/2024 USD 1.0773. The exchange rate would be more favourable for Dario on 19/02/2021 and less favourable on 26/09/2022 than in February 2024.
Example of exchange rates and international transactions
Alpine Wonder’ GmbH exports Austrian traditional costume fashion to the USA. The company issues invoices in EUR. It is favourable for the company's export business if the EUR becomes less valuable in relation to the USD, as this makes it cheaper for American customers to import goods from Austria. A strong EUR against the USD, on the other hand, would mean that less can be exported to the USA because the goods are more expensive for customers there. Within the period shown in the exchange rate chart, the exchange rate on 26 September 2022 was therefore the best for the export company. On this day, only USD 0.9611 had to be paid for one EUR.
A brief recap
What are the advantages of the euro area?
The euro area has many advantages for all economic agents. The most important advantages are that there are no more currency exchange fees in the trade between euro area countries and that prices are more transparent. Moreover, the fact that the euro is managed centrally by the ECB creates confidence in the financial market and the common currency. Europe has also become more competitive in international markets because the euro area is a large economic area.
What is the difference between foreign currency and foreign exchange?
Foreign currency is foreign cash, e.g. banknotes or coins, and foreign exchange is bank money in a foreign currency. Foreign exchange is e.g. used for credit transfers or checks.
What is the exchange rate?
The exchange rate indicates at which rate one currency will be exchanged for another currency. It can be expressed in two ways, depending on which currency you want to buy or sell. For example, the exchange rate between the euro and the US dollar can be expressed as the EUR-USD rate or the USD-EUR rate. A EUR-USD exchange rate of 1.1000 means EUR 1 = USD 1.1000. In other words, you get USD 1.1000 for EUR 1 or you have to pay USD 1.1000 to get EUR 1. This means EUR 1 is worth USD 1.1000.
What is the effect of exchange rate fluctuations?
Exchange rate fluctuations can be advantageous or disadvantageous for private individuals, companies and countries. If your domestic currency is strong, traveling to countries with a weaker currency, for example, is cheaper. Imports from abroad are also cheaper when the domestic currency is strong. Exporting goods and services, on the other hand, is more difficult when the domestic currency is strong.
What is the difference between buying and selling rates?
Banks trade in exchange rates. When changing money, they distinguish between buying and selling rates. Banks' exchange rate tables show these two rates both for cash and noncash. If the bank sells foreign money to you and accepts euro in return, the selling rate applies. The selling rate is quoted under "We sell." If the bank buys foreign money from you and pays out euro in return, the buying rate applies. The buying rate is quoted under "We buy." The bank charges fees for changing money by setting the selling rate below and the buying rate above the actual exchange rate.
How do you convert euro into foreign currency?
The first thing to consider when converting currencies is whether you want to exchange cash or noncash. The next step will depend on which currency you want to buy or sell. If you want to change euro into foreign currency, the bank will sell foreign currency to you. So it will apply the selling rate. If you want to change foreign currency back into euro, the bank buys foreign currency from you. So it will apply the buying rate. The relevant rate is used to calculate the amount of euro or foreign currency you will get back. Multiplying the euro amount with the selling rate will give you the foreign currency amount you will get. Dividing the foreign currency amount by the buying rate will give you the euro amount you will get.
