EU- European Union EMU- Euro Monetary Union ECB- European Central Bank
EU has 15 member countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK
All use the EURO as their currency except- Denmark, Sweden, and UK
The largest members are Germany, France, and Italy.
EUR/USD is the most liquid currency pair in the world.
The Euro has unique risks in that the ECB is untested central bank .
The spread between 10 year US T-bills, and 10 year German bunds can be used to gauge sentiment. If the bund has higher interest rates, the Euro is bullish. If the T-bills have higher interest rates, the USD is bullish,

EMU is second largest economic power:
GDP is $12million (USD) in 2004
EMU accounts for 45% of total capital outflows (money leaving), yet only 19% of capital inflows (this amount is growing).
Some central banks shifting some of their reserve capital from USD to the Euro. This amount may increase in the future.
Germany is largest economy in Eurozone. Germany GDP is over 30% of total Euro GDP .

The EU has fairly balanced trade; no large surplus or deficit:
EU exports account for 19% of world trade.
EU imports account for 17% of world trade.

Largest Markets EU exports to- Largest Markets EU imports from-
1. US 1. US
2. Switzerland 2. Japan
3. Japan 3. China
4. Poland 4. Switzerland
5. China 5. Russia

The EMU is primarily a service economy. Services account for 70% of GDP
Formulated from the Maastricht Treaty in 1992
EMU criteria to join-
1. Inflation of no more than 1.5% above the average of the 3 best performing member countries
2. Long term interest rates no more than 2% above the average low interest countries
3. Exchange rates that fluctuate within the normal margins of the exchange rate mechanism (ERM) for at least 2 years.
4. Government Debt/ GDP ration of not more than 60%
5. Government deficit not exceeding 3% of GDP

ECB is responsible for determining monetary policy of the countries in the EMU.
The primary tools the ECB uses to control monetary policy are open market operations and ECB minimum bid rate (Repo Rate).

Open market operations:
The ECB has 4 categories of open market operations to steer interest rates, manage liquidity, and signal monetary policy stance:
1. Main refinancing operations.
Regular liquidity providing reverse transactions. These are conducted weekly with a maturity of 2 weeks. These provide the bulk of refinancing to the financial sector.
2. Longer term refinancing operations.
Regular liquidity providing reverse transactions. These are conducted monthly with a maturity of 3 months.
3. Fine tuning operations
Executed when the need arises to both manage liquidity and steer interest rates, mainly to smooth the effects unexpected liquidity problems have on interest rates.
4. Structural operations
Issuing debt certificates, reverse transactions, and outright transactions whenever the ECB wishes to adjust the structural position of the Eurosystem.

Minimum Bid Rate (Repo Rate):
The minimum bid rate is the key policy target for the ECB. It is the interest rate that the ECB offers the central banks of the EMU countries.
Since inflation is a big concern for the ECB, it is more likely to keep interest rates higher.
The ECB can do market interventions (buy or sell Euros to change the exchange rate) so comments from the ECB are very important.
The ECB publishes a monthly bulletin analysis of economic conditions; this bulletin is important to follow.

Important Euro Indicators

Preliminary GDP :
Preliminary gdp is issued when the Eurostat has collected enough data from a sufficient enough countries to produce an estimate.
This usually includes France, Germany, and the Netherlands.

German Industrial Production:
Season adjusted, and broken down into 4 major subcategories: mining, manufacturing, energy, and construction.
The manufacturing section includes 4 groups- basic and producer goods, capital goods, consumer durables, and consumer non-durables.

Harmonized Index of Consumer Prices (HICP):
The HICP is a weighted average of 100 indexes from EMU countries used to determine inflation.
The ECB attempts to keep inflation between 0-2%.

M3 is a broad measure of money supply including the growth rate of the money supply. It includes everything from cash to bank deposits.
Like the HIPC, the M3 is used to measure inflation.

German Unemployment:
Monthly report that contains both Seasonally Adjusted (SA) and Non Seasonally Adjusted (NSA) figures.
The day before the report is released, there is often a leak of the official data from a trade union source.

Individual Country Budget Deficits:
The Stability and Growth Pact states that country deficits must be kept below 3% of GDP .
Countries also have targets set to further reduce their deficits.
Failure to meet these goals is highly watched by the market.

IFO- Information and Forschung Research Survey:
Monthly survey of over 7000 German Firms who give their opinion of the German business climate.
The report range is typically between 80 and 120, with a higher number indicating higher business confidence.